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
        December 31, 2007
 
 or
 
  ̈  TRANSITION
        REPORT PURSUANT TO SECTION
        13 OR 15 (d)
 OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission
        file number:
        000-25391
 _________________
 
 Capitol
        Federal
        Financial
 ( Exact
        name of registrant as
        specified in its charter)
 
 United States  48-1212142
 (State or other jurisdiction of
        incorporation                                               (I.R.S.
        Employer
 or
        organization)                                                                             
 Identification No.)
 
 700
        Kansas Avenue, Topeka,
        Kansas                                                66603
 (Address
        of principal executive
        offices)                                          (Zip
        Code)
 
 Registrant’s
        telephone number,
        including area code:
 (785)
        235-1341
 
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports) and (2) has been subject to such requirements for the
        past
        90 days. Yes þ No  ̈
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        definition of “accelerated filer, large accelerated filer, and smaller reporting
        company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
        accelerated filer þ Accelerated
        filer  ̈ Non-accelerated
        filer  ̈ Smaller
        Reporting Company  ̈
 (do not check if a smaller
 reporting
        company)
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange
        Act).     Yes  ̈ No þ
 
 As
        of January 28, 2008, there were 74,048,809 shares of Capitol Federal Financial
        Common Stock outstanding.
 
 
 
  1
   PART
                  I -- FINANCIAL INFORMATION
              Page
                NumberItem
                  1.  Financial Statements (Unaudited):Consolidated
                  Balance Sheetsat
                  December 31, 2007 and September 30, 2007
              3Consolidated
                  Statements of Incomefor the three months endedDecember
                  31, 2007 and December 31, 2006
              4Consolidated
                  Statement of Stockholders’ Equityfor the three months endedDecember
                  31, 2007
              5Consolidated
                  Statements of Cash Flowsfor the three months endedDecember
                  31, 2007 and December 31, 2006
              6Notes
                  to Consolidated Interim Financial Statements
              8Item
                  2.Management’s
                  Discussion and Analysisof
                  Financial Condition andResults
                  of Operations
              10Item
                  3.Quantitative
                  and Qualitative Disclosure about Market Risk
              38Item
                  4.Controls
                  and Procedures
              45PART
                  II -- OTHER INFORMATIONItem
                  1.Legal
                  Proceedings
              45Item
                  1A.Risk
                  Factors
              45Item
                  2.UnregisteredSales of Equity Securities and Use of Proceeds
              46Item
                  3.Defaults
                  Upon Senior Securities
              46Item
                  4.Submission
                  of Matters to a Vote of Security Holders
              47Item
                  5.Other
                  Information
              47Item
                  6.Exhibits
              47Signature
                  Page
              48INDEX
                  TO EXHIBITS
              49
 
  2
  PART
        I -- FINANCIAL
        INFORMATION
 Item
        1. Financial
        Statements
 CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        BALANCESHEETS
 (Dollars
        in thousands except per share data and amounts)
 December
                  31,
              
              September
                  30,2007
              
              
              2007ASSETS:
              
              
              (Unaudited
              )Cash
                  and cash equivalents
              
              $
              253,725
              
              $
              162,791Investment
                  securities:Available-for-sale
                  ("AFS") at market (amortized cost of $37,644 and $102,331)
              
              
              37,743
              
              
              102,424Held-to-maturity
                  ("HTM") at cost (market value of $461,634 and $418,940)
              
              
              462,302
              
              
              421,744Mortgage-related
                  securities:AFS,
                  at market (amortized cost of $641,676 and $400,705)
              
              
              646,660
              
              
              402,686HTM,
                  at cost (market value of $959,516 and $995,415)
              
              
              962,237
              
              
              1,011,585Loans
                  receivable held-for-sale, net
              
              
              2,556
              
              
              2,184Loans
                  receivable, net
              
              
              5,310,296
              
              
              5,291,426Mortgage
                  servicing rights ("MSR")
              
              
              5,483
              
              
              5,606Bank-owned
                  life insurance (“BOLI”)
              
              
              50,648
              
              
              50,027Capital
                  stock of Federal Home Loan Bank ("FHLB"), at cost
              
              
              139,380
              
              
              139,661Accrued
                  interest receivable
              
              
              31,207
              
              
              35,869Premises
                  and equipment, net
              
              
              26,309
              
              
              26,610Real
                  estate owned, net
              
              
              2,023
              
              
              2,097Income
                  taxes receivable
              
              
              --
              
              
              6,620Deferred
                  income taxes, net
              
              
              233
              
              
              543Other
                  assets
              
              
              14,784
              
              
              15,657TOTAL
                  ASSETS
              
              $
              7,945,586
              
              $
              7,677,530LIABILITIES:Deposits
              
              $
              3,981,449
              
              $
              3,922,782Advances
                  from FHLB
              
              
              2,746,532
              
              
              2,732,183Other
                  borrowings, net
              
              
              303,538
              
              
              53,524Advance
                  payments by borrowers for taxes and insurance
              
              
              18,637
              
              
              51,397Income
                  taxes payable
              
              
              1,302
              
              
              --Accounts
                  payable and accrued expenses
              
              
              31,549
              
              
              50,013Total
                  liabilities
              
              
              7,083,007
              
              
              6,809,899STOCKHOLDERS'
                  EQUITY:Preferred
                  stock ($0.01 par value) 50,000,000 shares authorized; none
                  issued
              
              
              --
              
              
              --Common
                  stock ($0.01 par value) 450,000,000 shares authorized, 91,512,287shares
                  issued; 74,042,185 and 74,258,977 shares outstanding
              
              
              915
              
              
              915as
                  of December 31, 2007 and September 30, 2007, respectivelyAdditional
                  paid-in capital
              
              
              440,350
              
              
              438,964Unearned
                  compensation, Employee Stock Ownership Plan ("ESOP")
              
              
              (11,594
              )
              
              (12,098
              )Unearned
                  compensation, Recognition and Retention Plan ("RRP")
              
              
              (613
              )
              
              (630
              )Retained
                  earnings
              
              
              748,530
              
              
              750,186Accumulated
                  other comprehensive gain
              
              
              3,165
              
              
              1,287Less
                  shares held in treasury (17,470,102 and 17,253,310 shares as
                  ofDecember
                  31, 2007 and September 30, 2007, at cost)
              
              
              (318,174
              )
              
              (310,993
              )Total
                  stockholders' equity
              
              
              862,579
              
              
              867,631TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              7,945,586
              
              $
              7,677,530
 
 See
        accompanying notes to consolidated interim financial statements.
 <Index>
 
 3
  CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        STATEMENTS OF INCOME (Unaudited)
 (Dollars
        and share counts in thousands except per share data and amounts)
 
 For
                  the Three Months EndedDecember
                  31,2007
              
              2006INTEREST
                  AND DIVIDEND INCOME:Loans
                  receivable
              
              $
              76,263
              
              $
              73,192Mortgage-related
                  securities
              
              
              17,127
              
              
              19,521Investment
                  securities
              
              
              4,130
              
              
              6,684Capital
                  stock of FHLB
              
              
              2,080
              
              
              2,699Cash
                  and cash equivalents
              
              
              1,428
              
              
              3,070Total
                  interest and dividend income
              
              
              101,028
              
              
              105,166INTEREST
                  EXPENSE:Deposits
              
              
              38,033
              
              
              35,469FHLB
                  advances
              
              
              34,161
              
              
              40,741Other
                  borrowings
              
              
              2,207
              
              
              1,129Total
                  interest expense
              
              
              74,401
              
              
              77,339NET
                  INTEREST AND DIVIDEND INCOME
              
              
              26,627
              
              
              27,827RECOVERY
                  FOR LOAN LOSSES
              
              
              --
              
              
              (280
              )NET
                  INTEREST AND DIVIDEND INCOMEAFTER
                  RECOVERY FOR LOAN LOSSES
              
              
              26,627
              
              
              28,107OTHER
                  INCOME:Retail
                  fees and charges
              
              
              4,489
              
              
              4,488Income
                  from BOLI
              
              
              621
              
              
              --Loan
                  fees
              
              
              598
              
              
              661Insurance
                  commissions
              
              
              478
              
              
              441Gain
                  on trading securities
              
              
              --
              
              
              34Interest
                  income on income tax refund
              
              
              194
              
              
              --Gain
                  on sale of loans receivable held-for-sale
              
              
              77
              
              
              6Loss
                  on sale of available-for-sale securities
              
              
              --
              
              
              (47
              )Other,
                  net
              
              
              654
              
              
              832Total
                  other income
              
              
              7,111
              
              
              6,415OTHER
                  EXPENSES:Salaries
                  and employee benefits
              
              
              10,435
              
              
              10,121Occupancy
                  of premises
              
              
              3,157
              
              
              2,870Regulatory
                  and other services
              
              
              1,619
              
              
              1,643Deposit
                  and loan transaction fees
              
              
              1,355
              
              
              1,050Advertising
              
              
              831
              
              
              889Other,
                  net
              
              
              2,054
              
              
              1,258Total
                  other expenses
              
              
              19,451
              
              
              17,831INCOME
                  BEFORE INCOME TAX EXPENSE
              
              
              14,287
              
              
              16,691INCOME
                  TAX EXPENSE
              
              
              5,174
              
              
              6,440NET
                  INCOME
              
              $
              9,113
              
              $
              10,251Basic
                  earnings per common share
              
              $
              0.12
              
              $
              0.14Diluted
                  earnings per common share
              
              $
              0.12
              
              $
              0.14Dividends
                  declared per public share
              
              $
              0.50
              
              $
              0.59Basic
                  weighted average common shares
              
              
              72,956
              
              
              72,627Diluted
                  weighted average common shares
              
              
              73,018
              
              
              72,835
 
 See
        accompanying notes to consolidated interim financial statements.
 
 
 4
  CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY
 (Unaudited)
 (Dollars
        in thousands except per share data and amounts)
 
 
 AccumulatedAdditional
              
              Unearned
              
              Unearned
              
              
              
              OtherCommon
              
              Paid-In
              
              Compensation
              
              Compensation
              
              Retained
              
              Comprehensive
              
              TreasuryStock
              
              Capital
              
              (ESOP)
              
              (RRP)
              
              Earnings
              
              Gain
                  (Loss)
              
              Stock
              
              TotalBalance
                  at September 30, 2007
              
              $
              915
              
              $
              438,964
              
              $
              (12,098
              )
              $
              (630
              )
              $
              750,186
              
              $
              1,287
              
              $
              (310,993
              )
              $
              867,631Cumulative
                  effect of Financial AccountingStandards
                  Board Interpretation No. 48 adoption
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (339
              )
              
              
              
              
              
              
              
              (339
              )Balance
                  at October 1, 2007
              
              $
              915
              
              $
              438,964
              
              $
              (12,098
              )
              $
              (630
              )
              $
              749,847
              
              $
              1,287
              
              $
              (310,993
              )
              $
              867,292Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,113
              
              
              
              
              
              
              
              
              9,113Changes
                  in unrealized (gains) losses onmortgage-related
                  securities available-for-salenet
                  of deferred income taxes of $1.1 million
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,878
              
              
              
              
              
              1,878Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,991Tax
                  benefit of market value change in vestedRRP
                  shares
              
              
              
              
              
              5
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5Common
                  stock committed to be released forallocation
                  - ESOP
              
              
              
              
              
              1,152
              
              
              504
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,656Acquisition
                  of treasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,245
              )
              
              (7,245
              )Stock
                  options exercised
              
              
              
              
              
              56
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              40
              
              
              96Treasury
                  stock activity related to RRP, net
              
              
              
              
              
              54
              
              
              
              
              
              (80
              )
              
              
              
              
              
              
              
              24
              
              
              (2
              )Amortization
                  of unearned compensation - RRP
              
              
              
              
              
              
              
              
              
              
              
              97
              
              
              
              
              
              
              
              
              
              
              
              97Stock
                  based compensation expense
              
              
              
              
              
              119
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              119Dividends
                  on common stock to publicStockholders
                  ($.50 per public share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (10,430
              )
              
              
              
              
              
              
              
              (10,430
              )Balance
                  at December 31, 2007
              
              $
              915
              
              $
              440,350
              
              $
              (11,594
              )
              $
              (613
              )
              $
              748,530
              
              $
              3,165
              
              $
              (318,174
              )
              $
              862,579
 
 
 See
        accompanying notes to consolidated interim financial statements.
 
 
 
 5
 <Index>
 
  CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Dollars
        in thousands)
 For
                  the Three Months EndedDecember
                  31,2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              9,113
              
              $
              10,251Adjustments
                  to reconcile net income to net cash provided byoperating
                  activities:FHLB
                  stock dividends
              
              
              (2,080
              )
              
              (2,699
              )Recovery
                  for loan losses
              
              
              --
              
              
              (280
              )Originations
                  of loans receivable held-for-sale
              
              
              (7,631
              )
              
              (252
              )Proceeds
                  from sales of loans receivable held-for-sale
              
              
              7,224
              
              
              277MSR
                  activity, net
              
              
              123
              
              
              409Amortization
                  and accretion of premiums and discounts on mortgage-related
                  securities and investment securities
              
              
              164
              
              
              33Principal
                  collected on trading securities
              
              
              --
              
              
              7,729Proceeds
                  from sale of trading securities
              
              
              --
              
              
              389,209Change
                  in cash surrender value of Bank Owned Life Insurance
              
              
              (621
              )
              
              --Depreciation
                  and amortization of premises and equipment
              
              
              1,272
              
              
              747Amortization
                  of deferred debt issuance costs
              
              
              14
              
              
              14Deferred gain on termination of interest rate swap
              
              
              1,620
              
              
              --Common
                  stock committed to be released for allocation - ESOP
              
              
              1,656
              
              
              1,892RRP
                  shares sold, net of forfeitures
              
              
              (2
              )
              
              (10
              )Stock
                  based compensation - stock options and RRP
              
              
              216
              
              
              152Other,
                  net
              
              
              37
              
              
              (123
              )Changes
                  in:Accrued
                  interest receivable
              
              
              4,662
              
              
              2,184Other
                  assets
              
              
              873
              
              
              (2,089
              )Income
                  taxes payable/receivable
              
              
              6,767
              
              
              5,858Accounts
                  payable and accrued expenses
              
              
              (4,383
              )
              
              1,407Net
                  cash provided by operating activities
              
              
              19,024
              
              
              414,709CASH
                  FLOWS FROM INVESTING ACTIVITIES:Proceeds
                  from maturities or calls of investment securities AFS
              
              
              64,782
              
              
              45,000Purchases
                  of investment securities AFS
              
              
              --
              
              
              (1,520
              )Proceeds
                  from maturities or calls of investment securities HTM
              
              
              125,108
              
              
              12,000Purchases
                  of investment securities HTM
              
              
              (165,590
              )
              
              (469,620
              )Principal
                  collected on mortgage-related securities AFS
              
              
              44,882
              
              
              56,298Purchases
                  of mortgage-related securities AFS
              
              
              (286,168
              )
              
              --Proceeds
                  from sale of mortgage-related securities AFS
              
              
              --
              
              
              15,237Principal
                  collected on mortgage-related securities HTM
              
              
              50,361
              
              
              56,710Purchases
                  of mortgage-related securities HTM
              
              
              (1,033
              )
              
              (108,135
              )Proceeds
                  from the redemption of capital stock of FHLB
              
              
              12,361
              
              
              --Purchases
                  of capital stock of FHLB
              
              
              (10,000
              )
              
              --Loan
                  originations, net of principal collected
              
              
              (22,892
              )
              
              (26,578
              )Loan
                  purchases, net of principal collected
              
              
              3,232
              
              
              18,173Net
                  deferred fee activity
              
              
              (111
              )
              
              120Purchases
                  of premises and equipment, net
              
              
              (974
              )
              
              (1,870
              )Proceeds
                  from sales of real estate owned, net
              
              
              976
              
              
              1,423Net
                  cash used ininvesting
                  activities
              
              
              (185,066
              )
              
              (402,762
              )
 (Continued)
  
 6
 CASH
                  FLOWS FROM FINANCING ACTIVITIES:Dividends
                  paid
              
              
              (10,430
              )
              
              (12,055
              )Dividends
                  in excess of debt service cost of ESOP, net
              
              
              --
              
              
              669Deposits,
                  net of withdrawals
              
              
              58,667
              
              
              34,276Proceeds
                  from advances/line of credit from FHLB
              
              
              200,000
              
              
              --Repayments
                  on advances/line of credit from FHLB
              
              
              (200,000
              )
              
              --Proceeds
                  from repurchase agreements
              
              
              250,000
              
              
              --Change
                  in advance payments by borrowers for taxes
                  and insurance
              
              
              (34,112
              )
              
              (32,527
              )Acquisitions
                  of treasury stock
              
              
              (7,245
              )
              
              (41
              )Stock
                  options exercised
              
              
              96
              
              
              1,387Excess
                  tax benefits from stock options
              
              
              --
              
              
              581Net
                  cash provided by (used in) financing activities
              
              
              256,976
              
              
              (7,710
              )NET
                  INCREASEIN
                  CASH AND CASH EQUIVALENTS
              
              
              90,934
              
              
              4,237CASH
                  AND CASH EQUIVALENTS:Beginning
                  of period
              
              
              162,791
              
              
              183,242End
                  of period
              
              $
              253,725
              
              $
              187,479SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Income
                  tax refund, net of payments
              
              $
              (1,594
              )
              $
              -Interest
                  payments, net of interest credited to deposits
              
              $
              35,031
              
              $
              44,009SUPPLEMENTAL
                  DISCLOSURE OF NON-CASHINVESTING
                  AND FINANCING ACTIVITIES:Loans
                  transferred to real estate owned
              
              $
              901
              
              $
              650Market
                  value change related to fair value hedge:Interest
                  rate swaps hedging FHLB advances
              
              $
              (12,729
              )
              $
              (1,420
              )
 
 (Concluded)
 See
        accompanying notes to consolidated interim financial statements.
 <Index>
  7
  Notes
        to Consolidated Interim
        Financial Statements (Unaudited)
 
 1.   Basis
        of
        Financial Statement Presentation
 The
        accompanying consolidated financial statements of Capitol Federal Financial
        (“CFFN”) and subsidiary (the “Company”) have been prepared in accordance with
        generally accepted accounting principles in the United States of America
        (“GAAP”) for interim financial information and with the instructions to Form
        10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
        of
        the information and footnotes required by GAAP for complete financial
        statements. In the opinion of management, all adjustments (consisting of
        normal
        recurring adjustments) considered necessary for a fair presentation have
        been
        included. These statements should be read in conjunction with the consolidated
        financial statements and notes thereto included in the Company’s 2007 Annual
        Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).
        Interim results are not necessarily indicative of results for a full
        year.
 
 In
        preparing the financial statements, management is required to make estimates
        and
        assumptions that affect the reported amounts of assets and liabilities as
        of the
        date of the balance sheet, and revenues and expenses for the period. Significant
        estimates include the allowance for loan losses, impairment of securities,
        valuation of MSR, and the fair values of derivative instruments. Actual results
        could differ from those estimates. See “Item 2- Management’s Discussion and
        Analysis of Financial Condition and Results of Operations - Critical Accounting
        Policies.”
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiary, Capitol Federal Savings Bank (the “Bank”). The Bank has
        a wholly owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a
        wholly
        owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Significant
        intercompany accounts and transactions have been eliminated.
 
 2.   Earnings
        Per
        Share
 The
        Company accounts for the 3,024,574 shares acquired by its ESOP in accordance
        withStatement
        of Position(“SOP”)
        93-6 and the shares awarded pursuant to its RRP in a manner similar to the
        ESOP
        shares. Shares acquired by the ESOP and shares awarded pursuant to the RRP
        are
        not considered in the basic average shares outstanding until the shares are
        committed for allocation or vested to an employee’s individual account. The
        following is a reconciliation of the numerators and denominators of the basic
        and diluted earnings per share calculations.
 For
                  the Three Months EndedDecember
                  31,2007(1)
              
              2006(Dollars
                  in thousands, except per share amounts)Net
                  income
              
              $
              9,113
              
              $
              10,251Average
                  common shares outstanding
              
              
              72,955,067
              
              
              72,626,122Average
                  committed ESOP shares outstanding
              
              
              548
              
              
              548Total
                  basic average common shares outstanding
              
              
              72,955,615
              
              
              72,626,670Effect
                  of dilutive RRP shares
              
              
              6,789
              
              
              7,869Effect
                  of dilutive stock options
              
              
              55,183
              
              
              200,480Total
                  diluted average common shares outstanding
              
              
              73,017,587
              
              
              72,835,019Net
                  earnings per share:Basic
              
              $
              0.12
              
              $
              0.14Diluted
              
              $
              0.12
              
              $
              0.14
 
 (1) Options
        to purchase 185,300 shares of common stock at prices between $33.69 per share
        and $38.77 were outstanding as of December 31, 2007, but were not included
        in
        the computation of diluted EPS because they were anti-dilutive for the three
        months ended December 31, 2007.
 
  8
  3.  Recent
        Accounting Pronouncements
  The
        SEC
        issued Staff Accounting Bulletin (“SAB”) 109, “Written Loan Commitments Recorded
        at Fair Value Through Earnings.” SAB 109 supersedes SAB 105, “Miscellaneous
        Accounting - Loan Commitments Accounted for as Derivative Instruments.” SAB 109
        requires a company to include the value of the MSR asset in the estimated
        fair
        value of the commitments on loans to be sold. SAB 105 had stated that this
        treatment was inappropriate. The new guidance should be applied prospectively
        to
        commitments accounted for at fair value that are issued or modified in fiscal
        quarters beginning after December 15, 2007, which for the Company is January
        1,
        2008. The adoption of SAB 109 is not expected to have a material impact to
        the
        financial statements.
  The
        SEC
        issued SAB 110, codified as part of SAB Topic 14.D.2, “Share-Based Payment:
        Certain Assumptions Used in Valuation Methods - Expected Term.” SAB 110 permits
        companies, under certain circumstances, to continue to use the simplified
        method
        when calculating the expected term of “plain vanilla” share options. Originally,
        the simplified method was due to expire on December 31, 2007. A company may
        use
        the simplified method if it concludes that it is not reasonable to base its
        estimate of expected term on its experience with exercising historical share
        options. Included in SAB 110 are examples of situations where it may be
        appropriate to use the simplified method and required disclosures for those
        companies continuing to use the simplified method. There is no expiration
        date
        for SAB 110, but companies should be aware that the SEC staff believes that
        more
        detailed external information about exercise behavior will, over time, become
        readily available. The effective date for SAB 110 is January 1, 2008. Management
        is in the process of assessing whether the Company will continue to use the
        simplified method for stock option grants after January 1, 2008.
  The
        FASB
        issued FASB Statement No. 141(R) “Business Combinations” and Statement No. 160,
“Noncontrolling Interests in Consolidated Financial Statements - an amendment
        of
        ARB No. 51.” These statements change the way companies account for business
        combinations and noncontrolling interests (minority interests in current
        GAAP)
        and continues the FASB’s push toward more fair value in financial statements.
        These Statements should both be applied prospectively for fiscal years beginning
        on or after December 15, 2008, which for the Company is October 1, 2009.
        However, Statement No. 160 requires entities to apply the presentation and
        disclosure requirements retrospectively to comparative financial statements,
        if
        presented. Both Statements prohibit early adoption. Management is assessing
        the
        impact of the adoption of FASB Statements No. 141(R) and No. 160.
 
 4.
        Interest Rate
        Swaps
 During
        the quarter ended December 31, 2007, management terminated interest rate
        swaps
        with a notional amount of $575.0 million that were scheduled to mature during
        fiscal year 2010. As a result of the termination, the Bank received cash
        proceeds and recorded a deferred gain of $1.7 million. The gain will be
        amortized to interest expense on FHLB advances over the remaining life of
        the
        FHLB advances that were originally hedged by the terminated interest rate
        swap
        agreements. As
        of
        December 31, 2007, the Bank had one remaining interest rate swap agreement
        with
        a notional amount of $225.0 million that is scheduled to mature in May
        2008 .
 
 5.
        Income Taxes
 The
        Company adopted FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty
        in Income Taxes, an Interpretation of FASB Statement No. 109” on October 1,
        2007. The interpretation clarifies the accounting for uncertainty in income
        taxes recognized in financial statements in accordance with Statement of
        Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”
The interpretation prescribes a process by which the likelihood of a tax
        position is gauged based upon the technical merits of the position, and then
        a
        subsequent measurement relates the maximum benefit and the degree of likelihood
        to determine the amount of benefit to recognize in the financial statements.
 
 As
        of
        October 1, 2007 (the date of adoption), the Company had unrecognized tax
        benefits of $3.8 million as a result of tax positions taken during prior
        periods, $531 thousand of which would affect the Company’s effective income tax
        rate if recognized. Of the total $3.8 million increase in liability for
        unrecognized tax positions, $339 thousand was accounted for as a decrease
        to the
        October 1, 2007 balance of retained earnings, and the remaining $3.5 million
        was
        accounted for as an increase to net deferred tax assets.
  As
        of
        December 31, 2007, the Company had a total of $3.9 million of unrecognized
        tax
        benefits, which included accrued penalties and interest of $579 thousand.
        Estimated penalties and interest of $62 thousand are included in income tax
        expense in the consolidated statements of income. Included in Other income
        in
        the consolidated statements of income is $194 thousand of interest income
        related to a tax refund on our amended September 30, 2005 federal tax return.
        It
        is reasonably possible that a decrease in unrecognized tax benefits of
        approximately $1.4 million may occur within the next twelve months as a result
        of lapses in applicable statutes of limitations.
  9
  We
        file
        income tax returns in the U.S. federal jurisdiction and the states of Kansas
        and
        Missouri. In many cases, uncertain tax positions are related to tax years
        that
        remain subject to examination by the relevant taxing authorities. With few
        exceptions, the Company is no longer subject to US. Federal and state
        examinations by tax authorities for years before fiscal year 2004.
 
 
 Item
        2.   Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations
 
 The
        Company and its wholly-owned subsidiary, the Bank, may from time to time
        make
        written or oral “forward-looking statements”, including statements contained in
        the Company’s filings with the SEC. These forward-looking statements may be
        included in this Quarterly Report on Form 10-Q and the exhibits attached
        to it,
        in the Company’s reports to stockholders and in other communications by the
        Company, which are made in good faith by us pursuant to the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
 
 These
        forward-looking statements include statements about our beliefs, plans,
        objectives, goals, expectations, anticipations, estimates and intentions,
        that
        are subject to significant risks and uncertainties, and are subject to change
        based on various factors, some of which are beyond our control. The words
“may”,
“could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”,
“intend”, “plan” and similar expressions are intended to identify
        forward-looking statements. The following factors, among others, could cause
        our
        future results to differ materially from the plans, objectives, goals,
        expectations, anticipations, estimates and intentions expressed in the
        forward-looking statements:
 
 ·  our
        ability to continue to maintain overhead costs at reasonable levels;
 ·  our
        ability to continue to originate a significant volume of one- to four-family
        mortgage loans in our market area;
 ·  our
        ability to acquire funds from or invest funds in wholesale or secondary
        markets;
 ·  the
        future earnings and capital levels of the Bank, which could affect the ability
        of the Company to pay dividends in accordance with its dividend
        policies;
 ·  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 rate, market and monetary fluctuations;
 ·  our
        ability to access cost-effective funding;
 ·  the
        timely development of and acceptance of our new products and services and
        the
        perceived overall value of these products and services by users, including
        the
        features, pricing and quality compared to competitors’ products and services;
 ·  the
        willingness of users to substitute competitors’ products and services for our
        products and services;
 ·  our
        success in gaining regulatory approval of our products and services, 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 all inclusive. We do not undertake to update
        any
        forward-looking statement, whether written or oral, that may be made from
        time
        to time by or on behalf of the Company or the Bank.
 
 As
        used
        in this Form 10-Q, unless we specify otherwise, “the Company,” “we,” “us,” and
“our” refer to Capitol Federal Financial, a United States corporation. “Capitol
        Federal Savings,” and “the Bank,” refer to Capitol Federal Savings Bank, a
        federal savings bank and the wholly-owned subsidiary of Capitol Federal
        Financial. “MHC” refers to Capitol Federal Savings Bank MHC, a mutual holding
        company and majority-owner of Capitol Federal Financial.
  10
  The
        following discussion and analysis is intended to assist in understanding
        the
        financial condition and results of operations of the Company. It should be
        read
        in conjunction with the consolidated financial statements and notes presented
        in
        this report. The discussion includes comments relating to the Bank, since
        the
        Bank is wholly owned by the Company and comprises the majority of its assets
        and
        is the principal source of income for the Company. This discussion and analysis
        should be read in conjunction with the management discussion and analysis
        included in the Company’s 2007 Annual Report on Form 10-K filed with the SEC.
 
 
 Executive
        Summary
 
 The
        following summary should be read in conjunction with our Management’s Discussion
        and Analysis of Financial Condition and Results of Operations in its entirety.
 
 Our
        principal business consists of attracting deposits from the general public
        and
        investing those funds primarily in permanent loans secured by first mortgages
        on
        owner-occupied, one- to four-family residences. We also originate consumer
        loans, loans secured by first mortgages on 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 and
        repurchase agreements 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 investment products, the level
        of
        personal income, and the personal rate of savings within our market areas.
        Lending activities are influenced by the demand for housing and other loans,
        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, investment securities, and cash, 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.
        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 two years.
 
 During
        the first quarter of fiscal year 2008, the Federal Open Market Committee
        of the
        Federal Reserve (“FOMC”) lowered the overnight lending rate, from 4.75% to
        4.25%. As a result, short term interest rates continued to decline, and the
        steepening of the yield curve became more pronounced for maturities greater
        than
        two years. In recent periods, the flat-to-inverted yield curve environment
        restricted the Bank’s ability to balance investment opportunities with the cost
        of funding. The current interest rate environment is more favorable for
        utilizing leverage to increase the level of earning assets. The Bank’s net
        interest margin increased 15 basis points during the quarter ended December
        31,
        2007 compared to the previous quarter, primarily as a result of an increase
        of 9
        basis points in the average yield on earning assets, but also as a result
        of a
        decrease in the average cost of interest-bearing liabilities. During the
        quarter, management entered into repurchase agreements as a means of expanding
        its funding sources.
 
 The
        subprime mortgage banking environment has been experiencing considerable
        strain
        from rising delinquencies and liquidity pressures and some subprime mortgage
        lenders have failed. The increased scrutiny of the subprime lending market
        is
        one of the factors that have impacted general market conditions as well as
        perceptions of our business. Our credit underwriting standards have been
        structured to limit our exposure to the types of loans that are currently
        experiencing high foreclosure and loss rates. Our mortgage loan portfolio
        has
        minimal exposure to loans generally considered to be subprime
        loans.
 
 During
        the first quarter of fiscal year 2008, management terminated interest rate
        swap
        agreements with a notional amount of $575.0 million that were scheduled to
        mature during fiscal year 2010. As a result of the termination,
        the
  11
  Bank
        received cash proceeds and recorded a deferred gain of $1.7 million that
        will be
        amortized to interest expense on FHLB advances over the remaining term of
        the
        FHLB advances originally hedged by the terminated interest rate swap agreements.
 
 Net
        income for the quarter ended December 31, 2007 was $9.1 million compared
        to $6.3
        million for the prior quarter. The $2.8 million increase in net income was
        primarily a result of a decrease in interest expense and a modest increase
        in
        interest income. The decrease in interest expense was a direct result of
        the
        termination of the swaps.
 
 The
        amount of total borrowings is a function of balancing investment opportunities,
        liquidity requirements, and managing the interest rate sensitivity of the
        Bank.
        Management monitors the Bank’s investment opportunities and balances those
        opportunities with the cost of FHLB advances or other funding sources. See
        additional discussion of interest rate risk in "Item 7A. Quantitative and
        Qualitative Disclosure About Market Risk."
 
 
 Available
        Information
 
 Company
        and financial information, including press releases, Annual Reports on Form
        10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
        amendments to those reports can be obtained free of charge from our investor
        relations website, http://ir.capfed.com. SEC filings are available on our
        website immediately after they are electronically filed with or furnished
        to the
        SEC, and are also available on the SEC’s website at www.sec.gov.
 
 
 Critical
        Accounting
        Policies
 
 Our
        most
        critical accounting policies are the methodologies used to determine the
        allowance for loan losses, other-than-temporary declines in the value of
        securities, the valuation of MSR 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
        high degree of complexity, and require management to make difficult and
        subjective judgments that may require assumptions or estimates about highly
        uncertain matters. The use of different judgments, assumptions, and estimates
        could cause reported results to differ materially. These critical accounting
        policies and their application are reviewed at least annually by our audit
        committee. The following is a description of our critical accounting policies
        and an explanation of the methods and assumptions underlying their application.
 
 Allowance
        for Loan
        Losses. Management maintains an allowance for loan losses to absorb 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 at least annually. 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 collectibility 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
  12
  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 these conditions were believed to have had
        on the
        collectibility 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 the condition may be reflected as a specific allowance applicable to the
        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 collectibility 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.
 
 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 losses inherent in our loan portfolios.
 
 Securities
        Impairment. Management regularly monitors the investment and mortgage-related security
        portfolios for impairment on a security by security basis. Many factors are
        considered in determining whether the impairment is deemed to be
        other-than-temporary, including, but not limited to, the length of time the
        security has had a market value less than the cost basis, the severity of
        the
        loss, the intent and ability of the Bank to hold the security for a period
        of
        time sufficient for a substantial recovery of its investment, recent events
        specific to the issuer or industry including the issuer’s financial condition
        and current ability to make future payments in a timely manner, external
        credit
        ratings and recent downgrades in these ratings. If management deems the decline
        to be other-than-temporary, the carrying value of the security is adjusted
        and
        an impairment amount is recorded in the consolidated statements of income.
        Currently, all securities are rated investment grade, and there is a market
        for
        the securities.
 
 Valuation
        of Mortgage Servicing
        Rights. The Bank
        records MSR as a result of retaining the servicing of loans that are owned
        by
        another entity. Impairment exists if the carrying value of MSR exceeds the
        estimated fair value of the MSR. MSR are stratified by the underlying loan
        term
        and by interest rate. Individual impairment allowances for each stratum are
        established when necessary and then adjusted in subsequent periods to reflect
        changes in the measurement of impairment. The estimated fair value of each
        MSR
        stratum is determined through analysis of future cash flows incorporating
        numerous assumptions including: servicing income, servicing costs, market
        discount rates, prepayment speeds, and other market driven data.
 
 The
        fair
        value of MSR is highly sensitive to changes in assumptions. Changes in
        prepayment speed assumptions have the most significant impact on the fair
        value
        of MSR. Generally, as interest rates decline, prepayments accelerate due
        to
        increased refinance activity, which results in a decrease in the fair value
        of
        MSR. As interest rates rise, prepayments slow which generally results in
        an
        increase in the fair value of MSR. All assumptions are reviewed for
        reasonableness on a quarterly basis and adjusted as necessary to reflect
        current
        and anticipated market conditions. Thus, any measurement of the fair value
        of
        MSR is limited by the conditions existing and the assumptions utilized as
        of a
        particular point in time, and those assumptions may not be appropriate if
        applied at a different point in time. We receive an independent appraisal
        of the
        fair value of our MSR at least annually.
 
 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.
  13
  
 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.
 
 During
        the first quarter of fiscal year 2008, management terminated interest rate
        swap
        agreements with an aggregate notional amount of $575.0 million due to market
        conditions. As of December 31, 2007, the Bank had one remaining interest
        rate
        swap agreement with a notional amount of $225.0 million.
 
 
 Financial
        Condition
 
 Total
        assets increased from $7.68 billion at September 30, 2007 to $7.95 billion
        at
        December 31, 2007. The $268.1 million increase in assets was primarily
        attributed to a $194.6 million increase in the mortgage-related securities
        portfolio and a $90.9 million increase in cash and cash equivalents, partially
        offset by a $24.2 million decrease in the investment securities portfolio.
 
 Total
        liabilities increased from $6.81 billion at September 30, 2007 to $7.08 billion
        at December 31, 2007. The $273.1 million increase in liabilities was due
        primarily to an increase in other borrowings of $250.0 million and to an
        increase in deposits of $58.7 million.
 
 Stockholders’
        equity decreased $5.0 million to $862.6 million at December 31, 2007, from
        $867.6 million at September 30, 2007.
 
 The
        following table presents selected balance sheet data for the Company at the
        dates indicated.
 Balance
                    atDecember
                    31,
                
                September
                    30,
                
                June
                    30,
                
                March
                    31,
                
                December
                    31,2007
                
                2007
                
                2007
                
                2007
                
                2006Selected
                    Balance Sheet Data:
                
                (Dollars
                    in thousands, except per share amounts)Total
                    assets
                
                $
                7,945,586
                
                $
                7,677,530
                
                $
                7,826,549
                
                $
                8,098,626
                
                $
                8,205,879Cash
                    and cash equivalents
                
                
                253,725
                
                
                162,791
                
                
                188,664
                
                
                242,186
                
                
                187,479Investment
                    securities
                
                
                500,045
                
                
                524,168
                
                
                673,160
                
                
                773,404
                
                
                844,514Mortgage-related
                    securities
                
                
                1,608,897
                
                
                1,414,271
                
                
                1,466,822
                
                
                1,603,443
                
                
                1,668,548Loans
                    receivable, net
                
                
                5,310,296
                
                
                5,291,426
                
                
                5,252,275
                
                
                5,216,763
                
                
                5,229,077MSR
                
                
                5,483
                
                
                5,606
                
                
                6,017
                
                
                6,304
                
                
                6,508Capital
                    stock of FHLB
                
                
                139,380
                
                
                139,661
                
                
                147,557
                
                
                157,344
                
                
                167,829Deposits
                
                
                3,981,449
                
                
                3,922,782
                
                
                3,946,693
                
                
                4,002,866
                
                
                3,934,707Advances
                    from FHLB
                
                
                2,746,532
                
                
                2,732,183
                
                
                2,870,337
                
                
                3,074,973
                
                
                3,270,125Other
                    borrowings
                
                
                303,538
                
                
                53,524
                
                
                53,509
                
                
                53,495
                
                
                53,481Stockholders'
                    equity
                
                
                862,579
                
                
                867,631
                
                
                870,095
                
                
                870,624
                
                
                867,139Accumulated
                    other comprehensive gain (loss)
                
                
                3,165
                
                
                1,287
                
                
                174
                
                
                370
                
                
                (457
                )Equity
                    to total assets at end of period
                
                
                10.86
                %
                
                11.30
                %
                
                11.12
                %
                
                10.75
                %
                
                10.57
                %Book
                    value per share
                
                $
                11.84
                
                $
                11.88
                
                $
                11.92
                
                $
                11.94
                
                $
                11.92Shares
                    outstanding
                
                
                72,857,963
                
                
                73,024,845
                
                
                73,010,580
                
                
                72,932,544
                
                
                72,725,595
 14
  The
        following table presents rate information at the dates
        indicated.
 December
                  31,
              
              September
                  30,
              
              June
                  30,
              
              December
                  31,2007
              
              2007
              
              2007
              
              2006Average
                  Yield / Cost at End of Period:
                  (annualized)Loans
                  receivable
              
              
              
              
              
              5.74
              %
              
              5.73
              %
              
              5.69
              %
              
              5.66
              %Mortgage-related
                  securities
              
              
              
              
              
              4.66
              
              
              4.46
              
              
              4.30
              
              
              4.26Investment
                  securities
              
              
              
              
              
              4.14
              
              
              4.52
              
              
              4.68
              
              
              4.82Deposits
              
              
              
              
              
              3.77
              
              
              3.86
              
              
              3.85
              
              
              3.68FHLB
                  advances
              
              
              
              
              
              4.90
              
              
              5.39
              
              
              5.07
              
              
              4.88Borrowings,
                  other(1)
              
              
              
              
              
              4.98
              
              
              8.12
              
              
              8.12
              
              
              8.14
 
  (1)  The
        decrease in the rate of Borrowings, other between September 30, 2007 and
        December 31, 2007 was a result of entering into the repurchase agreements
        which
        total $250.0 million at an average rate of 4.34%.
  As
        previously discussed, management recorded a deferred gain of $1.7 million
        during
        the first quarter of fiscal year 2008 in association with the termination
        of
        interest rate swap agreements with a notional amount of $575.0 million. The
        deferred gain will be amortized over the remaining life of the FHLB advances.
        The increase in the balance of Cash and cash equivalents was the result of
        the
        advances the Bank took out just before the end of the quarter. The cash received
        from the advances was accumulated to payoff the advances maturing in January
        2008.
 
 Loans
        Receivable .  The
        loan
        portfolio increased $18.9 million from $5.29 billion at September 30, 2007
        to
        $5.31 billion at December 31, 2007. Loans purchased from nationwide lenders
        represented 16.5% of the loan portfolio at December 31, 2007 compared to
        17.2%
        at September 30, 2007. As of December 31, 2007, the average balance of a
        purchased mortgage loan was approximately $350 thousand while the average
        balance of an originated mortgage loan was approximately $110 thousand.
  Included
        in the loan portfolio at December 31, 2007 were $392.4 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. The interest-only loans in our portfolio have initial
        interest-only terms of either five or ten years, with approximately equal
        distribution between the two terms. 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 had an average credit score greater than
        700 at
        the time of purchase and an average loan-to-value ratio not exceeding 80%
        at the
        time of purchase. As of December 31, 2007, the performance of our interest-only
        loans is comparable to the performance of the rest of our one- to four-family
        loan portfolio.
 
 Total
        one- to four-family loan originations during the current three month period
        were
        $147.2 million at an average rate of 5.97% compared to one- to four-family
        loan
        originations of $138.5 million at an average rate of 5.96% for the same period
        one year ago. Of the one- to four- family loans originated during the current
        three month period and the same period one year ago, $124.6 million and $114.0
        million, respectively, were fixed-rate. Generally, during the three months
        ended
        December 31, 2007, the Bank’s 30-year fixed-rate loans, with no points paid by
        the borrower, were priced at approximately 185 basis points above the average
        10-year Treasury rate, while the Bank’s 15-year fixed-rate loans were priced
        approximately 150 basis points above the average 10-year Treasury rate. The
        Bank’s loan pricing is benchmarked to the secondary mortgage market
        pricing.
  15
  The
        following table presents loan origination, refinance and purchase activity
        for
        the periods indicated. Loan originations, purchases and refinances are reported
        together. The fixed-rate one- to four-family loans less than or equal to
        15
        years have an original maturity at origination of less than or equal to 15
        years, while fixed-rate one- to four-family loans greater than 15 years have
        an
        original maturity at origination of greater than 15 years. The adjustable-rate
        one- to four-family loans less than or equal to 36 months have a term to
        first
        reset of less than or equal to 36 months at origination and adjustable-rate
        one-
        to four-family loans greater than 36 months have a term to first reset of
        greater than 36 months at origination.
 
 
 For
                  the Three Months Ended
              
              For
                  the Three Months EndedDecember
                  31, 2007
              
              December
                  31, 2006Amount
              
              Rate
              
              %
                  of Total
              
              Amount
              
              Rate
              
              %
                  of TotalFixed-Rate:
              
              (Dollars
                  in thousands)Origination
                  - one- to four-family<=
                  15 years
              
              $
              26,614
              
              
              5.77
              %
              
              12.89
              %
              $
              20,607
              
              
              5.75
              %
              
              10.52
              %>
                  15 years
              
              
              110,121
              
              
              6.09
              
              
              53.34
              
              
              105,039
              
              
              6.11
              
              
              53.63Other
                  real estate
              
              
              --
              
              
              --
              
              
              --
              
              
              773
              
              
              6.75
              
              
              0.40Non
                  real estate
              
              
              6,696
              
              
              8.42
              
              
              3.24
              
              
              9,047
              
              
              7.93
              
              
              4.62Total
                  fixed-rate loan originations
              
              
              143,431
              
              
              6.14
              
              
              69.47
              
              
              135,466
              
              
              6.18
              
              
              69.17Adjustable-Rate:Origination
                  - one- to four-family<=
                  36 months
              
              
              9,740
              
              
              5.54
              
              
              4.72
              
              
              5,892
              
              
              5.40
              
              
              3.01>
                  36 months
              
              
              32,639
              
              
              5.85
              
              
              15.81
              
              
              33,380
              
              
              5.72
              
              
              17.04Other
                  real estate
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Non
                  real estate
              
              
              20,655
              
              
              8.31
              
              
              10.00
              
              
              21,107
              
              
              8.58
              
              
              10.78Total
                  adjustable-rate loan originations
              
              
              63,034
              
              
              6.61
              
              
              30.53
              
              
              60,379
              
              
              6.69
              
              
              30.83Total
                  loan originations and purchases
              
              $
              206,465
              
              
              6.29
              %
              
              100.00
              %
              $
              195,845
              
              
              6.34
              %
              
              100.00
              %Purchased
                  loans included above:Fixed-rate
                  purchased loans
              
              $
              12,086
              
              
              6.20
              %
              
              
              
              $
              11,676
              
              
              6.19
              %Adjustable-rate
                  purchased loans
              
              $
              19,780
              
              
              5.85
              %
              
              
              
              $
              14,696
              
              
              5.81
              %
 
 
 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.
 For
                  the Three Months EndedDecember
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007
              
              March
                  31, 2007Amount
              
              Avg
                  Rate
              
              Amount
              
              Avg
                  Rate
              
              Amount
              
              Avg
                  Rate
              
              Amount
              
              Avg
                  RateLoans
                  receivable:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              5,346,626
              
              
              5.68
              %
              $
              5,303,830
              
              
              5.64
              %
              $
              5,249,793
              
              
              5.59
              %
              $
              5,259,857
              
              
              5.57
              %Originations
                  and refinances
              
              
              174,599
              
              
              6.34
              
              
              225,333
              
              
              6.50
              
              
              246,940
              
              
              6.24
              
              
              161,705
              
              
              6.31Purchases
              
              
              31,866
              
              
              5.98
              
              
              39,820
              
              
              6.06
              
              
              54,624
              
              
              6.25
              
              
              23,518
              
              
              5.75Repayments
              
              
              (186,091
              )
              
              
              
              
              (221,075
              )
              
              
              
              
              (246,829
              )
              
              
              
              
              (194,085
              )Other
              
              
              (814
              )
              
              
              
              
              (1,282
              )
              
              
              
              
              (698
              )
              
              
              
              
              (1,202
              )Ending
                  balance
              
              $
              5,366,186
              
              
              5.71
              %
              $
              5,346,626
              
              
              5.68
              %
              $
              5,303,830
              
              
              5.64
              %
              $
              5,249,793
              
              
              5.59
              %
 
  16
  The
        following table presents the Company’s loan portfolio at the dates indicated.
  December
                  31, 2007
              
              September
                  30, 2007Amount
              
              Average
                  Rate
              
              %
                  of Total
              
              Amount
              
              Average
                  Rate
              
              %
                  of Total(Dollars
                  in thousands)Real
                  Estate LoansOne-
                  to four-family
              
              $
              5,012,447
              
              
              5.58
              %
              
              93.41
              %
              $
              4,992,398
              
              
              5.55
              %
              
              93.38
              %Multi-family
                  and commercial
              
              
              59,581
              
              
              6.47
              
              
              1.11
              
              
              60,625
              
              
              6.48
              
              
              1.13Construction
                  and development
              
              
              75,046
              
              
              6.24
              
              
              1.40
              
              
              74,521
              
              
              6.22
              
              
              1.39Total
                  real estate loans
              
              
              5,147,074
              
              
              5.60
              
              
              95.92
              
              
              5,127,544
              
              
              5.57
              
              
              95.90Consumer
                  loansSavings
                  loans
              
              
              4,944
              
              
              6.54
              
              
              0.09
              
              
              5,249
              
              
              6.55
              
              
              0.10Automobile
              
              
              4,115
              
              
              6.99
              
              
              0.08
              
              
              4,234
              
              
              6.98
              
              
              0.08Home
                  equity
              
              
              209,408
              
              
              8.24
              
              
              3.90
              
              
              208,986
              
              
              8.41
              
              
              3.91Other
              
              
              645
              
              
              7.77
              
              
              0.01
              
              
              613
              
              
              8.26
              
              
              0.01Total
                  consumer loans
              
              
              219,112
              
              
              8.18
              
              
              4.08
              
              
              219,082
              
              
              8.33
              
              
              4.10Total
                  loans receivable
              
              
              5,366,186
              
              
              5.71
              %
              
              100.00
              %
              
              5,346,626
              
              
              5.68
              %
              
              100.00
              %Less:Loans
                  in process
              
              
              41,936
              
              
              
              
              
              
              
              
              41,126Deferred
                  fees and discounts
              
              
              9,783
              
              
              
              
              
              
              
              
              9,893Allowance
                  for losses
              
              
              4,171
              
              
              
              
              
              
              
              
              4,181Total
                  loans receivable, net
              
              $
              5,310,296
              
              
              
              
              
              
              
              $
              5,291,426
 
 
   
 17
  Lending
        Practices and Underwriting
        Standards
 
 The
        Bank’s primary lending activity is the origination of loans and the purchase of
        loans from a select group of correspondent lenders. These loans are generally
        secured by first mortgages on owner-occupied, one- to four-family residences
        in
        the Bank’s market areas and select market areas in Missouri. Additional lending
        volume has been generated by purchasing whole one- to four-family mortgage
        loans
        from nationwide lenders. These purchases allow the Bank to attain geographic
        diversification and manage credit concentration risks in its loan portfolio.
        The
        loans that are purchased help mitigate the Bank’s interest rate risk exposure
        because they are predominately adjustable-rate or short-term fixed rate
        loans.
 
 The
        Bank’s one- to four-family loans are primarily fully amortizing loans with
        contractual maturities of up to 30 years, except for interest-only loans
        which
        require the payment of interest during the interest-only period, with all
        payments due monthly. Our one- to four- family loans are generally not assumable
        and do not contain prepayment penalties. A “due on sale” clause, allowing the
        Bank to declare the unpaid principal balance due and payable upon the sale
        of
        the secured property, is generally included in the security instrument.
 
 Current
        adjustable-rate one- to four-family loans originated by the Bank generally
        provide for a specified rate limit or cap on the periodic adjustment to the
        interest rate, as well as a specified maximum lifetime cap and minimum rate,
        or
        floor. Negative amortization of principal is not allowed. Borrowers are
        qualified based on the principal, interest, taxes and insurance payment at
        the
        initial rate for three, five and seven year adjustable-rate mortgage (“ARM”)
        loans.
 
 The
        Bank
        also originates interest-only ARM loans that do not require principal payments
        for a period of up to ten years. Borrowers are qualified based on a fully
        amortizing payment at the initial loan rate. The Bank is more restrictive
        on
        debt-to-income ratios and credit scores on interest-only ARM loans than on
        other
        ARM loans to offset the potential risk of payment shock at the time the loan
        rate adjusts and/or the principal and interest payments begin.
 
 In
        an
        effort to offset the impact of repayments and to retain our customers, the
        Bank
        offers existing loan customers whose loan has not been sold to third
        parties the opportunity to modify their original loan terms to new loan
        terms generally consistent with those currently being offered. This is a
        convenient tool for customers who may have considered refinancing from an
        ARM
        loan to a fixed-rate loan or would like to reduce their term and take advantage
        of lower rates associated with current market rates. The program helps ensure
        the Bank maintains the relationship with the customer and significantly reduces
        the amount of time it takes for customers to obtain current market pricing
        and
        terms without having to refinance their loans, and is a more efficient way
        for
        the Bank to process the change. The Bank charges a fee for this service
        generally comparable to fees charged on new loans. The Bank does not solicit
        customers for this program, but considers it a valuable opportunity to retain
        customers who, due to our strict initial underwriting, could likely obtain
        similar financing elsewhere.
 
 One-
        to
        four-family loans are generally underwritten using an automated underwriting
        system developed by a third party. The system’s components closely resemble the
        Bank’s manual underwriting standards which are generally in accordance with
        Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage
        Association (“FNMA”) underwriting guidelines. The automated underwriting system
        analyzes the applicant’s data, with emphasis on credit history, employment and
        income history, qualifying ratios reflecting the applicant’s ability to repay,
        asset reserves, and loan-to-value ratio. Loans that do not meet the automated
        underwriting standards are referred to a staff underwriter for manual
        underwriting. Full documentation to support the applicant’s credit, income, and
        sufficient funds to cover all applicable fees and reserves at closing are
        required on all loans. Properties securing one- to four-family loans are
        appraised by either staff appraisers or independent fee appraisers approved
        by
        the board of directors who are independent of the loan origination function.
 
 Presently,
        the Bank lends up to 105% of the lesser of the appraised value or purchase
        price
        for one- to four-family mortgage loans. At December 31, 2007, less than 1%
        of
        the balance of the loan portfolio had a loan-to-value ratio greater than
        100%.
        For loans with a loan-to-value ratio in excess of 80%, private mortgage
        insurance is required in order to reduce the Bank’s loss exposure to less than
        80% of the appraised value or the purchase price of the property.
 
 The
        underwriting standards of the lenders from whom the Bank purchases loans
        are
        generally similar to the Bank’s internal underwriting standards. “No Doc” or
“Stated Income, Stated Assets” loans are not permitted. Lenders are required to
        fully document all data sources for each application. Management believes
        these
        requirements reduce the credit risk associated with these loans. Before
        committing to purchase a pool of loans, 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, a Bank underwriter reviews 25% of the loan files and the supporting
        documentation in the pool.
  18
  
 The
        underwriting of loans purchased under contractual agreement through
        correspondent lenders is generally performed by a third party underwriter
        who is
        under contract to use the Bank’s internal underwriting standards. Correspondent
        lenders are located within the metropolitan Kansas City market area and select
        market areas in Missouri. The loan product is originated to the Bank’s
        specifications including interest rates, product description, and underwriting
        standards. The Bank purchases approved loans and the related servicing rights,
        on a loan-by-loan basis.
 
 The
        Bank
        also originates construction-to-permanent loans primarily secured by one-
        to
        four-family residential real estate. Presently, all of these loans are secured
        by property located within the Bank’s market areas. Construction loans are
        obtained primarily by homeowners who will occupy the property when construction
        is complete. Construction loans to builders for speculative purposes are
        not
        permitted. The application process includes submission of complete plans,
        specifications, and costs of the project to be constructed. These items are
        used
        as a basis to determine the appraised value of the subject property. All
        construction loans are manually underwritten using the Bank’s internal
        underwriting standards. The construction and permanent loans are closed at
        the
        same time allowing the borrower to secure the interest rate at the beginning
        of
        the construction period and throughout the permanent loan. Construction draw
        requests and the supporting documentation are reviewed and approved by
        management. The Bank also performs regular documented inspections of the
        construction project to ensure the funds are being used for the intended
        purpose
        and the project is being completed according to the plans and specifications
        provided.
 
 The
        Bank
        offers a variety of secured consumer loans, including home equity loans and
        lines of credit, home improvement loans, auto loans, student loans, and loans
        secured by savings deposits. The Bank also originates a very limited amount
        of
        unsecured loans. The Bank does not originate any consumer loans on an indirect
        basis, such as contracts purchased from retailers of goods or services which
        have extended credit to their customers. All consumer loans are originated
        in
        the Bank’s market areas. Home equity loans may be originated in amounts,
        together with the amount of the existing first mortgage, of up to 100% of
        the
        value of the property securing the loan. In order to minimize risk of loss,
        home
        equity loans that are greater than 80% of the value of the property, when
        combined with the first mortgage, require private mortgage insurance. The
        term-to-maturity of home equity and home improvement loans may be up to 20
        years. Other home equity lines of credit have no stated term-to-maturity
        and
        require a payment of 1.5% of the outstanding loan balance per month.
        Interest-only home equity lines of credit have a 10-year term-to-maturity,
        monthly payments of accrued interest, and a balloon payment at maturity.  Repaid
        principal may be re-advanced at any time, not to exceed the original credit
        limit of the loan. Other consumer loan terms vary according to the type of
        collateral and the length of the contract. The majority of the consumer loan
        portfolio is comprised of home equity lines of credit, which have interest
        rates
        that can adjust monthly based upon changes in the prime rate, to a maximum
        of
        18%.
 
 The
        underwriting standards for consumer loans include a determination of the
        applicant’s payment history on other debts and an assessment of their ability to
        meet existing obligations and payments on the proposed loan. Although
        creditworthiness of the applicant is a primary consideration, the underwriting
        process also includes a comparison of the value of the security in relation
        to
        the proposed loan amount.
 
 The
        Bank’s multi-family and commercial real estate loans are secured primarily by
        multi-family dwellings and small office buildings generally located in the
        Bank’s market areas. These loans are granted based on the income producing
        potential of the property and the financial strength of the borrower.
        Loan-to-value ratios on multi-family and commercial real estate loans usually
        do
        not exceed 80% of the appraised value of the property securing the loans.
        The
        net operating income, which is the income derived from the operation of the
        property less all operating expenses, must be sufficient to cover the payments
        related to the outstanding debt. The Bank generally requires personal guarantees
        of the borrowers covering a portion of the debt in addition to the security
        property as collateral for these loans. The Bank also generally requires
        an
        assignment of rents or leases in order to be assured that the cash flow from
        the
        project will be used to repay the debt. Appraisals on properties securing
        these
        loans are performed by independent state certified fee appraisers approved
        by
        the board of directors. While maximum maturities may extend to 30 years,
        loans
        frequently have shorter maturities and may not be fully amortizing, requiring
        balloon payments of unamortized principal at maturity.
 
 Loans
        over $500 thousand must be underwritten by two senior level underwriters.
        Any
        loan greater than $750 thousand must be approved by the Asset and Liability
        Management Committee (“ALCO”) and loans over $1.5 million must be approved by
        the board of directors. For loans requiring ALCO and/or board of directors’
approval, management is responsible for presenting to the ALCO and/or board
        of
        directors information about the creditworthiness of the borrower and the
        estimated value of the subject property. Information pertaining to the
        creditworthiness of the borrower generally consists of a summary of the
        borrower’s credit history, employment stability, sources of income, net worth,
        and debt ratios. The estimated value of the property must be supported by
        an
        independent appraisal report prepared in accordance with our appraisal policy.
 
  19
  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 $2.8 million from
        $7.4
        million at September 30, 2007 to $10.2 million at December 31, 2007. The
        increase in non-performing loans increased our ratio of non-performing loans
        to
        total loans from 0.14% as of September 30, 2007 to 0.19% at December 31,
        2007.
        Of the $10.2 million, $7.2 million, or 70.5%, of non-performing loans are
        secured by property located in our market areas.
 
 Loans
        30
        to 89 days delinquent, which are not included in non-performing loans, increased
        approximately $5.0 million from $17.7 million at September 30, 2007 to $22.7
        million at December 31, 2007. Of the $22.7 million at December 31, 2007,
        $12.0
        million, or 52.9% of 30 to 89 day delinquent loans represent loans secured
        by
        property located in our market areas.
 
 The
        risk
        that 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. There have been some indications that there may be some
        decreases in the value of home prices occurring in our market areas. However,
        we
        believe that given the underwriting standards of the Bank the value of the
        underlying collateral, along with any required private mortgage insurance,
        is
        sufficient to protect the Bank from losses in excess of our allowance for
        loan
        losses. The relatively small increase in the amount of non-performing loans,
        and
        the larger increase in loans 30-89 days delinquent, generally came from all
        areas of our loan portfolio with no specific characteristics noted about
        these
        loans evidencing a trend. Other risks to our loan portfolio remained largely
        unchanged from September 30, 2007.
 
 The
        following table presents the Company’s 30 to 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 to 89 days delinquent. Non-performing assets
        include non-performing loans and real estate owned.
 
 December
                  31,
              
              September
                  30,
              
              June
                  30,
              
              March
                  31,2007
              
              2007
              
              2007
              
              2007Asset
                  quality information:
              
              (Dollars
                  in thousands)Loans
                  30-89 days delinquent
              
              $
              22,712
              
              $
              17,732
              
              $
              21,172
              
              $
              18,883Non-performing
                  loans
              
              
              10,232
              
              
              7,352
              
              
              6,554
              
              
              6,833Real
                  estate owned
              
              
              2,023
              
              
              2,097
              
              
              1,828
              
              
              1,905Asset
                  quality ratios:Non-performing
                  assets to total assets atend
                  of period
              
              
              0.15
              %
              
              0.12
              %
              
              0.11
              %
              
              0.11
              %Non-performing
                  loans to total loans
              
              
              0.19
              %
              
              0.14
              %
              
              0.12
              %
              
              0.13
              %
 
 The
        allowance for loan losses as a percentage of non-performing loans was 40.76%
        at
        December 31, 2007, compared to 56.87% at September 30, 2007 and 62.01% at
        December 31, 2006. The decrease in the ratio of allowance for loan losses
        to
        non-performing loans since December 31, 2006 primarily resulted from an increase
        in non-performing loans. Charge-offs, net of recoveries, totaled $10 thousand
        for the current three months and represented 0.12% of average non-performing
        loans and less than 0.01% of the average outstanding balance of loans
        receivable.
  20
  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 EndedDecember
                  31,2007
              
              2006Allowance
                  for loan losses:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              4,181
              
              $
              4,433Losses
                  charged against the allowance:One-
                  to four-family loans
              
              
              (3
              )
              
              9Multi-family
                  loans
              
              
              --
              
              
              --Commercial
                  and other loans
              
              
              --
              
              
              --Consumer
                  loans
              
              
              13
              
              
              1Total
                  charge-offs
              
              
              10
              
              
              10Recoveries
              
              
              --
              
              
              --Provision
                  (recovery) charged to expense
              
              
              --
              
              
              (280
              )Ending
                  balance
              
              $
              4,171
              
              $
              4,143Allowance
                  for loan losses to non-performing
                  loans at period end
              
              
              40.76
              %
              
              62.01
              %Allowance
                  for loan losses to loansreceivable,
                  net at period end
              
              
              0.08
              %
              
              0.08
              %
 
 
 
 21
  
 Mortgage-Related
        Securities. The
        balance of mortgage-related securities increased $194.6 million from $1.41
        billion at September 30, 2007 to $1.61 billion at December 31, 2007. The
        increase was due primarily to purchases of mortgage-related securities,
        partially offset by principal repayments, to utilize increased cash from
        deposits, repayments on assets, and the lower amount of originations relative
        to
        the cash used to originate loans. This will continue if available cash flow
        exceeds loan originations and purchases.
 
 The
        following tables provide 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 beginning and
        ending
        WAL is the estimated remaining maturity of the underlying collateral after
        projected prepayment speeds have been applied. The increase in the yield
        at
        December 31, 2007 compared to September 30, 2007 was primarily a result of
        the
        purchase of mortgage-related securities with yields higher than that of the
        existing portfolio and the repricing of securities within the portfolio.
        The
        increase in the WAL at December 31, 2007 compared to September 30, 2007 was
        due
        to purchases of mortgage-related securities with WALs greater than that of
        the
        existing portfolio.
 
 For
                  the Three Months EndedDecember
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007
              
              March
                  31, 2007Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WALMortgage-related
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              1,414,271
              
              
              4.46
              %
              
              4.04
              
              $
              1,466,822
              
              
              4.30
              %
              
              4.89
              
              $
              1,603,443
              
              
              4.27
              %
              
              3.40
              
              $
              1,668,548
              
              
              4.26
              %
              
              3.48Maturities
                  and repayments
              
              
              (95,243
              )
              
              
              
              
              
              
              
              (126,050
              )
              
              
              
              
              
              
              
              (135,905
              )
              
              
              
              
              
              
              
              (112,054
              )Sale
                  of securities, net of gains
              
              
              --
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              --Net
                  amortization of premiums/discounts
              
              
              (335
              )
              
              
              
              
              
              
              
              (783
              )
              
              
              
              
              
              
              
              (1,228
              )
              
              
              
              
              
              
              
              (988
              )Purchases:Fixed
              
              
              200,382
              
              
              5.17
              
              
              3.98
              
              
              72,610
              
              
              5.79
              
              
              4.34
              
              
              692
              
              
              5.62
              
              
              7.61
              
              
              1,983
              
              
              5.65
              
              
              18.18Adjustable
              
              
              86,819
              
              
              4.88
              
              
              4.68
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              44,672
              
              
              4.60
              
              
              1.24Change
                  in valuation on AFS securities:
              
              
              3,003
              
              
              
              
              
              
              
              
              1,672
              
              
              
              
              
              
              
              
              (180
              )
              
              
              
              
              
              
              
              1,282Ending
                  balance
              
              $
              1,608,897
              
              
              4.66
              %
              
              4.41
              
              $
              1,414,271
              
              
              4.46
              %
              
              4.04
              
              $
              1,466,822
              
              
              4.30
              %
              
              4.89
              
              $
              1,603,443
              
              
              4.27
              %
              
              3.40
 
 
  
 22
 Investment
        Securities. Investment securities, which consist of agency bonds (primarily issued by
        FNMA,
        FHLMC, or FHLB) and municipal investments, decreased $24.2 million from $524.2
        million at September 30, 2007 to $500.0 million at December 31, 2007. The
        following tables provide a summary of the activity of investment securities
        for
        the periods presented. The yields for the beginning and ending balances are
        as
        of the periods presented. The decrease in the yield at December 31, 2007
        compared to September 30, 2007 was a result of calls and/or maturities of
        securities with rates higher than that of the remaining portfolio. Reinvestment
        of proceeds was at rates lower than that of the called or matured securities.
        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 decrease in the WAL at December
        31, 2007 compared to September 30, 2007 was due to certain securities in
        the
        portfolio approaching their call date .
        The
        Bank borrowed from the FHLB prior to the maturity of FHLB advances during
        the
        month of January 2008. Of these funds, $150.0 million was invested at a positive
        spread to the cost of the advances through the maturity date of the
        advances.
 
 For
                  the Three Months EndedDecember
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007
              
              March
                  31, 2007Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WALInvestment
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              524,168
              
              
              4.52
              %
              
              1.66
              
              $
              673,160
              
              
              4.68
              %
              
              1.71
              
              $
              773,404
              
              
              4.76
              %
              
              1.72
              
              $
              844,514
              
              
              4.82
              %
              
              1.66Maturities
                  and calls
              
              
              (189,890
              )
              
              
              
              
              
              
              
              (155,250
              )
              
              
              
              
              
              
              
              (158,740
              )
              
              
              
              
              
              
              
              (229,500
              )Net
                  amortization of premiums/discounts
              
              
              171
              
              
              
              
              
              
              
              
              334
              
              
              
              
              
              
              
              
              1,303
              
              
              
              
              
              
              
              
              1,572Purchases
                  - Fixed
              
              
              165,590
              
              
              4.28
              
              
              0.70
              
              
              5,802
              
              
              3.76
              
              
              4.85
              
              
              57,329
              
              
              5.01
              
              
              0.74
              
              
              156,768
              
              
              5.34
              
              
              1.44Change
                  in valuation of AFS securities
              
              
              6
              
              
              
              
              
              
              
              
              122
              
              
              
              
              
              
              
              
              (136
              )
              
              
              
              
              
              
              
              50Ending
                  balance
              
              $
              500,045
              
              
              4.14
              %
              
              0.67
              
              $
              524,168
              
              
              4.52
              %
              
              1.66
              
              $
              673,160
              
              
              4.68
              %
              
              1.71
              
              $
              773,404
              
              
              4.76
              %
              
              1.72
 
 
 
 23
  Liabilities. Total liabilities increased from $6.81 billion at September 30, 2007 to $7.08
        billion at December 31, 2007. The $273.1 million increase in liabilities
        was due
        primarily to an increase in other borrowings of $250.0 million and an increase
        in deposits of $58.7 million, partially offset by a decrease in advance payments
        by borrowers for taxes and insurance. The Bank entered into repurchase
        agreements with two counterparties because rates and terms were more favorable
        than other funding options on those dates. The use of repurchase agreements
        also
        allows for the diversification of funding sources and the use of securities
        as
        collateral that were not being leveraged.
 
 The
        Bank
        took out additional FHLB advances during the month of December 2007 to take
        advantage of the favorable rates and terms available at the time, recognizing
        that $300.0 million of existing advances would be maturing in January 2008.
        Management will continue to monitor market conditions for funding opportunities
        that can be leveraged to improve earnings without creating undue interest
        rate
        risk exposure.
 
 At
        December 31, 2007, $189.9 million of the $2.53 billion in certificates were
        brokered and public unit deposits, compared to $193.0 million in brokered
        and
        public unit deposits at September 30, 2007. The $3.1 million decrease between
        September 30, 2007 and December 31, 2007 was primarily attributed to maturities
        of public unit deposits that were not retained because the Bank did not price
        competitively in the market for public units. Management will continue to
        monitor the wholesale deposit market for attractive opportunities.
 
 At
              
              At
              
              At
              
              AtDecember
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007
              
              March
                  31, 2007Average
              
              %
                  of
              
              
              
              Average
              
              %
                  of
              
              
              
              Average
              
              %
                  of
              
              
              
              Average
              
              %
                  ofAmount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total(Dollars
                  in thousands)Checking
              
              $
              413,349
              
              
              0.21
              %
              
              10.38
              %
              $
              394,109
              
              
              0.21
              %
              
              10.05
              %
              $
              420,952
              
              
              0.21
              %
              
              10.66
              %
              $
              435,300
              
              
              0.21
              %
              
              10.87
              %Savings
              
              
              229,862
              
              
              2.05
              
              
              5.77
              
              
              237,148
              
              
              2.58
              
              
              6.04
              
              
              243,040
              
              
              3.07
              
              
              6.16
              
              
              247,844
              
              
              2.99
              
              
              6.19Money
                  market
              
              
              811,002
              
              
              2.95
              
              
              20.37
              
              
              790,277
              
              
              3.18
              
              
              20.15
              
              
              801,511
              
              
              3.28
              
              
              20.31
              
              
              825,432
              
              
              3.28
              
              
              20.62Certificates
              
              
              2,527,236
              
              
              4.77
              
              
              63.48
              
              
              2,501,248
              
              
              4.77
              
              
              63.76
              
              
              2,481,190
              
              
              4.72
              
              
              62.87
              
              
              2,494,290
              
              
              4.62
              
              
              62.32Total
                  deposits
              
              $
              3,981,449
              
              
              3.77
              %
              
              100.00
              %
              $
              3,922,782
              
              
              3.86
              %
              
              100.00
              %
              $
              3,946,693
              
              
              3.85
              %
              
              100.00
              %
              $
              4,002,866
              
              
              3.76
              %
              
              100.00
              %
 
  
 24
 Stockholders’
Equity. Stockholders’
        equity decreased $5.0 million from $867.6 million at September 30, 2007 to
        $862.6 million at December 31, 2007. The decrease was primarily a result
        of
        treasury stock purchases of $7.2 million and dividends paid of $10.4 million,
        partially offset by net income of $9.1 million and an increase in accumulated
        other comprehensive income of $1.9 million due to the increase in market
        value
        of AFS securities.
 
 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 December 31, 2007. The unvested shares in the ESOP receive cash equal
        to the
        dividends paid on the public shares. The cash received is used to repay the
        annual debt obligation on the loan taken out by the ESOP from the Company
        at the
        time of the mutual-to-stock conversion of the Bank to purchase shares for
        the
        ESOP. These shares are held in trust for a future employee benefit, and are
        therefore excluded from the calculation of public shares.
 
 Total
                  voting shares outstanding at September 30, 2007
              
              74,258,977Treasury
                  stock acquisitions
              
              
              (223,542)RRP
                  grants, net
              
              2,500Options
                  exercised, net
              
              
              4,250Total
                  voting shares outstanding at December 31, 2007
              
              74,042,185Unvested
                  shares in ESOP
              
              
              (1,209,832)Shares
                  held by MHC
              
              
              (52,192,817)Total
                  shares eligible to receive dividends at December 31, 2007 (public
                  shares)
              20,639,536
 
   25
  The
        following table presents quarterly dividends paid in calendar years 2008,
        2007
        and 2006. The dollar amounts represent dividends paid during the quarter.
        The
        actual amount of dividends to be paid during the quarter ending December
        31,
        2007, as declared on January 9, 2008, will be based upon the number of shares
        outstanding on the record date of February 1, 2008. All shares outstanding
        presented in the table below, except for the quarter ending March 31, 2008,
        are
        as of the date of record per the dividend declaration. For the purposes of
        the
        table below, the number of dividend shares for the quarter ending March 31,
        2008
        is based upon shares outstanding on January 28, 2008. 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
        January 28, 2008.
  
 Calendar
                  Year2008
              
              2007
              
              2006(Dollars
                  in thousands, except per share amounts)Quarter
                  ended March 31Number
                  of dividend shares
              
              
              20,646,160
              
              
              20,520,793
              
              
              20,457,283Dividend
                  per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              $
              10,323
              
              $
              10,261
              
              $
              10,229Quarter
                  ended June 30Number
                  of dividend shares
              
              
              
              
              
              20,673,933
              
              
              20,257,420Dividend
                  per share
              
              
              
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              
              
              
              $
              10,337
              
              $
              10,129Quarter
                  ended September 30Number
                  of dividend shares
              
              
              
              
              
              20,694,533
              
              
              20,250,134Dividend
                  per share
              
              
              
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              
              
              
              $
              10,347
              
              $
              10,125Quarter
                  ended December 31Number
                  of dividend shares
              
              
              
              
              
              20,860,278
              
              
              20,432,393Dividend
                  per share
              
              
              
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              
              
              
              $
              10,430
              
              $
              10,216Special
                  year end dividendNumber
                  of dividend shares
              
              
              
              
              
              --
              
              
              20,432,793Dividend
                  per share
              
              
              
              
              $
              --
              
              $
              0.09Total
                  dividends paid
              
              
              
              
              $
              --
              
              $
              1,839Calendar
                  year-to-date dividends per share
              
              $
              0.50
              
              $
              2.00
              
              $
              2.09
 
 
 26
  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, FHLB advances, and other borrowings. Net interest income
        depends on the balance of interest-earning assets and interest-bearing
        liabilities, and the interest rates earned or paid on them.
 
 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
        annualized expense by the average balance of the related liabilities, for
        the
        periods shown. Average outstanding 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. Yields on
        tax-exempt securities were not calculated on a tax-equivalent
        basis.
 For
                  the Three Months EndedDecember
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007
              
              December
                  31, 2006Average
              
              
              
              Average
              
              
              
              Average
              
              
              
              AverageOutstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              RateAssets:
              (Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable(1)
              $
                  5,309,758
              
              5.74
              %
              $
                  5,279,454
              
              5.63
              %
              $
                  5,238,291
              
              5.59
              %
              $
                  5,235,039
              
              5.59
              %Mortgage-related
                  securities
              1,497,081
              
              4.58
              
              1,444,060
              
              4.35
              
              1,543,049
              
              4.21
              
              1,803,033
              
              4.33Investment
                  securities
              391,173
              
              4.22
              
              562,665
              
              4.58
              
              717,008
              
              4.72
              
              574,857
              
              4.65Capital
                  stock of FHLB
              133,378
              
              6.21
              
              140,374
              
              6.67
              
              149,288
              
              6.48
              
              165,159
              
              6.48Cash
                  and cash equivalents
              129,227
              
              4.32
              
              113,146
              
              5.01
              
              89,768
              
              5.34
              
              236,522
              
              5.15Total
                  interest-earning assets(1)
              7,460,616
              
              5.41
              
              7,539,699
              
              5.32
              
              7,737,404
              
              5.25
              
              8,014,610
              
              5.24Other
                  non-interest-earning assets
              203,260
              
              
              
              157,599
              
              
              
              160,904
              
              
              
              192,225Total
                  assets
              $
                  7,663,877
              
              
              
              $
                  7,697,298
              
              
              
              $
                  7,898,308
              
              
              
              $
                  8,206,835Liabilities
                  and stockholders' equity:Interest-bearing
                  liabilities:Deposits
              $
                  3,914,532
              
              3.86
              %
              $
                  3,902,775
              
              3.88
              %
              $
                  3,940,736
              
              3.81
              %
              $
                  3,855,407
              
              3.65
              %FHLB
                  advances(2)
              2,593,271
              
              5.19
              
              2,741,914
              
              5.27
              
              2,915,505
              
              5.05
              
              3,271,001
              
              4.89Other
                  borrowings
              149,724
              
              5.77
              
              53,514
              
              8.23
              
              53,500
              
              8.23
              
              53,472
              
              8.26Total
                  interest-bearing liabilities
              6,657,527
              
              4.42
              
              6,698,203
              
              4.48
              
              6,909,741
              
              4.36
              
              7,179,880
              
              4.25Other
                  non-interest-bearing liabilities
              137,469
              
              
              
              130,172
              
              
              
              118,137
              
              
              
              161,865Stockholders'
                  equity
              868,881
              
              
              
              868,923
              
              
              
              870,430
              
              
              
              865,090Total
                  liabilities andstockholders'
                  equity
              $
                  7,663,877
              
              
              
              $
                  7,697,298
              
              
              
              $
                  7,898,308
              
              
              
              $
                  8,206,835
 (Continued)
 
  27
  
 Net
                  interest rate spread
              
              
              0.99
              %
              
              
              0.84
              %
              
              
              0.89
              %
              
              
              0.99
              %Net
                  interest-earning assets
              $
                  803,090
              
              
              
              $
                  841,496
              
              
              
              $
                  827,663
              
              
              
              $
                  834,730Net
                  interest margin
              
              
              1.43
              %
              
              
              1.28
              %
              
              
              1.33
              %
              
              
              1.39
              %Ratio
                  of interest-earning assetsto
                  interest-bearing liabilities
              
              
              1.12
              
              
              
              1.13
              
              
              
              1.12
              
              
              
              1.12Selected
                  performance ratios:Return
                  on average assets (annualized)
              
              
              0.48
              %
              
              
              0.33
              %
              
              
              0.37
              %
              
              
              0.50
              %Return
                  on average equity (annualized)
              
              
              4.20
              %
              
              
              2.90
              %
              
              
              3.35
              %
              
              
              4.74
              %Average
                  equity to average assets
              
              
              11.34
              %
              
              
              11.29
              %
              
              
              11.02
              %
              
              
              10.54
              %
 
 
 (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) The
        rate
        calculation includes net interest expense of $2.2 million, $3.6 million,
        $3.3
        million and $3.4 million related to the interest rate swaps for the three
        months
        ended December 31, 2007, September 30, 2007, June 30, 2007 and December 31,
        2006, respectively.
  
  (Concluded)
  28
  
 The
        following table presents selected income statement information for the quarters
        indicated.
  For
                  the Three Months EndedDecember
                  31,
              
              September
                  30,
              
              June
                  30,
              
              March
                  31,
              
              December
                  31,2007
              
              2007
              
              2007
              
              2007
              
              2006Selected
                income statement data:
              
              
              (Dollars
                  in thousands, except per share amounts)Interest
                  and dividend income:Loans
                  receivable
              
              $
              76,263
              
              $
              74,343
              
              $
              73,219
              
              $
              73,990
              
              $
              73,192Mortgage-related
                  securities
              
              
              17,127
              
              
              15,690
              
              
              16,224
              
              
              17,317
              
              
              19,521Investment
                  securities
              
              
              4,130
              
              
              6,444
              
              
              8,459
              
              
              9,262
              
              
              6,684Other
                  interest and dividend income
              
              
              3,508
              
              
              3,808
              
              
              3,624
              
              
              4,004
              
              
              5,769Total
                  interest and dividend income
              
              
              101,028
              
              
              100,285
              
              
              101,526
              
              
              104,573
              
              
              105,166Interest
                  expense:Deposits
              
              
              38,033
              
              
              38,166
              
              
              37,377
              
              
              36,267
              
              
              35,469FHLB
                  advances
              
              
              34,161
              
              
              36,894
              
              
              37,220
              
              
              38,508
              
              
              40,741Other
                  borrowings
              
              
              2,207
              
              
              1,125
              
              
              1,113
              
              
              1,101
              
              
              1,129Total
                  interest expense
              
              
              74,401
              
              
              76,185
              
              
              75,710
              
              
              75,876
              
              
              77,339Provision
                  (recovery) for loan losses
              
              
              --
              
              
              --
              
              
              --
              
              
              55
              
              
              (280
              )Net
                  interest and dividend income(after
                  provision (recovery) forloan
                  losses)
              
              
              26,627
              
              
              24,100
              
              
              25,816
              
              
              28,642
              
              
              28,107Other
                  income
              
              
              7,111
              
              
              6,412
              
              
              5,908
              
              
              5,431
              
              
              6,415Other
                  expenses
              
              
              19,451
              
              
              19,938
              
              
              20,136
              
              
              20,020
              
              
              17,831Income
                  tax expense
              
              
              5,174
              
              
              4,274
              
              
              4,299
              
              
              5,597
              
              
              6,440Net
                  income
              
              $
              9,113
              
              $
              6,300
              
              $
              7,289
              
              $
              8,456
              
              $
              10,251Efficiency
                  Ratio
              
              
              57.65
              
              
              65.34
              
              
              63.47
              
              
              58.76
              
              
              51.65Basic
                  earnings per share
              
              $
              0.12
              
              $
              0.08
              
              $
              0.10
              
              $
              0.12
              
              $
              0.14Diluted
                  earnings per share
              
              $
              0.12
              
              $
              0.08
              
              $
              0.10
              
              $
              0.12
              
              $
              0.14Dividends
                  declared per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50
              
              $
              0.59
 
  29
 
 
   Comparison
        of Operating Results for
        the Three Months Ended December 31, 2007 and 2006
  Net
        income for the quarter ended December 31, 2007 was $9.1 million compared
        to
        $10.2 million for the same period in the prior fiscal year. The $1.1 million
        decrease in net income was primarily a result of a decrease in interest and
        dividend income of $4.2 million, partially offset by a decrease in interest
        expense of $2.9 million.
 
 Total
        interest and dividend income for the quarter was $101.0 million compared
        to
        $105.2 million for the prior year quarter. The $4.2 million decrease was
        a
        result of a decrease in interest income on investments of $2.6 million, a
        decrease in interest income on mortgage-related securities of $2.4 million,
        a
        decrease of $1.6 million in interest income on cash and cash equivalents,
        and a
        decrease in dividends on FHLB stock of $619 thousand, partially offset by
        an
        increase in interest income on loans receivable of $3.1 million.
 
 Interest
        income on loans receivable for the quarter was $76.3 million compared to
        $73.2
        million for the prior year quarter. The $3.1 million increase was primarily
        a
        result of an increase in the average balance of the loan portfolio between
        the
        two periods and an increase of 15 basis points in the weighted average yield
        of
        the loan portfolio to 5.74% for the current quarter. The increase in the
        weighted average yield can be attributed to ARM loans repricing to higher
        rates
        and loans originated at rates higher than the portfolio rate.
 
 Interest
        income on mortgage-related securities for the quarter was $17.1 million compared
        to $19.5 million for the prior year quarter. The $2.4 million decrease in
        interest income was due to a decrease in the average balance which was partially
        offset by an increase in the average yield. The decrease in the average
        portfolio balance was due primarily to principal repayments that were not
        reinvested in mortgage-related securities during the past year as these proceeds
        were used, in part, to pay down FHLB advances. The weighted average yield
        of the
        mortgage-related securities portfolio increased by 25 basis points between
        the
        two periods as a result of adjustable-rate securities in the portfolio repricing
        to higher rates, and due to the purchase of mortgage-related securities with
        yields higher than that of the existing portfolio in the current quarter.
 
 Interest
        income on investment securities for the quarter was $4.1 million compared
        to
        $6.7 million for the prior year quarter. The $2.6 million decrease in interest
        income was primarily a result of a decrease in the average balance of the
        portfolio and, to a lesser extent, a 43 basis point decrease in the weighted
        average portfolio yield to 4.22% for the current quarter. The decrease in
        the
        average balance was a result of maturities and calls which were not reinvested,
        in their entirety, into investment securities. The decrease in the weighted
        average yield of the portfolio was attributed to maturities and calls of
        securities with weighted average yields greater than that of the portfolio
        and
        reinvestments at lower rates because these securities had shorter terms to
        maturity than other investments made.
 
 Interest
        income on cash and cash equivalents for the quarter was $1.4 million compared
        to
        $3.0 million for the prior year quarter. The $1.6 million decrease in interest
        income was primarily a result of a decrease in the average balance during
        the
        current quarter and an 83 basis point decrease in the average yield to 4.32%
        for
        the current quarter. The decrease in the average balance of cash and cash
        equivalents related primarily to the timing of the repayment of maturing
        FHLB
        advances. The decrease in the average yield was due to a decrease in short-term
        interest rates.
 
 Interest
        expense on deposits for the current quarter was $38.0 million compared to
        $35.5
        million for the prior year quarter. The $2.5 million increase in interest
        expense was primarily a result of an increase in the average rate paid on
        the
        certificate of deposit portfolio. The weighted average rate of the certificate
        of deposit portfolio for the current quarter was 4.79% compared to 4.40%
        for the
        prior year quarter. The Bank increased certificate rates in response to the
        general market trend for similar instruments in order to remain competitive
        in
        its markets. This was necessary, in part, because competing institutions,
        including several national financial institutions, have been slow to lower
        their
        rates on certificates of deposit due to an apparent need for increased
        liquidity.
 
 Interest
        expense on FHLB advances for the current quarter was $34.2 million compared
        to
        $40.7 million for the prior year quarter. The $6.5 million decrease in interest
        expense was a result of a decrease in the average balance due to maturing
        advances that were not renewed, partially offset by an increase in the paying
        rate on the interest rate swaps for the majority of the quarter. The Bank
        terminated $575.0 million of the interest rate swaps in December 2007. During
        the current quarter, interest expense of $2.2 million was related to the
        interest rate swaps, compared to $3.4
        million in the prior year quarter.
  30
  Interest
        expense on other borrowings was $2.2 million compared to $1.1 million in
        the
        prior year quarter. The $1.1 million increase was due to an increase in the
        average balance of other borrowings due to the Bank entering into repurchase
        agreements during the first quarter of fiscal year 2008. Additional information
        about the repurchase agreements is included under “Liquidity and Capital
        Resources.”
 
 Total
        other income for the current quarter was $7.1 million compared to $6.4 million
        in the prior year quarter. The $696 thousand increase in other income was
        due
        primarily to an increase in BOLI income and to the receipt of $194 thousand
        in
        interest on an amended income tax return, partially offset by a decrease
        in
        other income, net. BOLI income was $621 thousand for the current quarter,
        compared to no income from BOLI in the prior year quarter. Other income,
        net
        decreased $178 thousand due primarily to a decrease in profit on sales of
        real
        estate owned.
 
 Total
        other expenses for the current quarter increased $1.6 million to $19.4 million
        compared to $17.8 million in the prior year quarter. The increase was due
        primarily to an increase in other, net expenses of $796 thousand, salaries
        and
        employee benefits of $314 thousand, and occupancy expense of $287 thousand.
        The
        increase in other, net expenses was partially offset by a decrease in office
        supplies and related expense of $355 thousand due to a decrease in postage
        and
        stationary expense associated with conversion-related mailings in the
        first quarter of fiscal year 2007. The increase in other expense, net was
        due
        primarily to an increase in miscellaneous expense relative to a decrease
        in
        miscellaneous operating expenses in the prior year quarter which were
        individually insignificant, but in the aggregate resulted in an increase
        of $1.3
        million when compared to the current year quarter. The increase in miscellaneous
        operating expenses was also due to an increase in a liability accrual related
        to
        a settlement of Visa, Inc. with American Express. The
        increase in salaries and employee benefits was due to increased payroll expense
        resulting from the hiring of new employees for existing vacant and new
        positions, filling positions held open during the previous year quarter prior
        to
        the core computer system conversion, and no capitalization of payroll expense
        in
        the current quarter compared to capitalization of $414 thousand of payroll
        expense in the prior year quarter. These increases were partially offset
        by a
        decrease in ESOP expense due to a decrease in the average price of CFFN common
        stock during the quarter. The
        increase in occupancy expense related primarily to an increase in depreciation
        of the core information technology assets of $523 thousand, partially offset
        by
        a $232 thousand decrease in software maintenance expense.
 
 Income
        tax expense for the current quarter was $5.2 million compared to $6.4 million
        in
        the prior year quarter. The decrease in income tax expense was due to a decrease
        in earnings compared to the prior year quarter, and a decrease in the effective
        tax rate for the current quarter was 36.2%, compared to 38.6% for the prior
        year
        quarter. The decrease in the effective tax rate in the current quarter compared
        to the prior year quarter was a result of an increase in nontaxable income
        from
        municipal securities and BOLI .
  31
  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 December 31, 2007 to the quarter
        ended
        December 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
                  Ended December 31,2007
                  vs. 2006Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              1,009
              
              $
              2,062
              
              $
              3,071Mortgage-related
                  securities
              
              
              (3,453
              )
              
              1,059
              
              
              (2,394
              )Investment
                  securities
              
              
              (1,983
              )
              
              (571
              )
              
              (2,554
              )Capital
                  stock of FHLB
              
              
              (506
              )
              
              (113
              )
              
              (619
              )Cash
                  equivalents
              
              
              (1,213
              )
              
              (429
              )
              
              (1,642
              )Total
                  interest-earning assets
              
              $
              (6,146
              )
              $
              2,008
              
              $
              (4,138
              )Interest-bearing
                  liabilities:Savings(1)
              
              $
              358
              
              $
              850
              
              $
              1,208Checking
              
              
              (4
              )
              
              (29
              )
              
              (33
              )Money
                  market
              
              
              (133
              )
              
              (379
              )
              
              (512
              )Certificates(1)
              
              
              (534
              )
              
              2,435
              
              
              1,901FHLB
                  advances and other borrowings
              
              
              (6,970
              )
              
              1,468
              
              
              (5,502
              )Total
                  interest-bearing liabilities
              
              $
              (7,283
              )
              $
              4,345
              
              $
              (2,938
              )Net
                  change in net interest and dividend income
              
              $
              1,137
              
              $
              (2,337
              )
              $
              (1,200
              )
 
 (1) The
        increase in the volume and the rate in the savings accounts is related to
        the
        variable-rate retirement certificate of deposits that were reclassified to
        savings from certificates as the reclassified accounts did not have a stated
        maturity date as a result of changes required by the new core information
        technology processing system. The change in volume and rate on the savings
        accounts would have been a decrease of $5 thousand and an increase of $15
        thousand, respectively, excluding the variable-rate retirement certificates
        reclassified to savings. The change in the volume and rate on the certificates
        would have been an increase of $955 thousand and an increase of $2.1 million,
        respectively, including the variable-rate retirement certificates reclassified
        to savings.
 
 
 Comparison
        of Operating Results for
        the Three Months Ended December 31, 2007 and September 30, 2007
 
 For
        the
        quarter ended December 31, 2007, the Company recognized net income of $9.1
        million, compared to net income of $6.3 million for the quarter ended September
        30, 2007. The $2.8 million increase in net income was primarily the result
        of a
        $2.5 million increase in net interest and dividend income and an increase
        in
        other income of $698 thousand, partially offset by an increase in income
        tax
        expense of $899 thousand.
 
 Total
        interest and dividend income for the quarter was $101.0 million compared
        to
        $100.3 million for the quarter ended September 30, 2007. The $744 thousand
        increase was a result of an increase in interest income on loans receivable
        of
        $1.9 million and an increase in interest income on mortgage-related securities
        of $1.4 million, partially offset by a decrease in interest income on investment
        securities of $2.3 million, and a decrease in dividends on FHLB stock of
        $280
        thousand.
  32
   Interest
        income on loans receivable for the current quarter was $76.3 million compared
        to
        $74.3 million for the quarter ended September 30, 2007. The $2.0 million
        increase in interest income was primarily a result of an 11 basis point increase
        in the average yield of the loan portfolio, and also to an increase in the
        average balance of loans receivable of $30.3 million. In addition, the
        amortization of net deferred fees increased income for the quarter by $490
        thousand.
 
 Interest
        income on mortgage-related securities for the current quarter was $17.1 million
        compared to $15.7 million for the quarter ended September 30, 2007. The $1.4
        million increase was primarily a result of a 23 basis point increase in the
        average yield of the portfolio, and to a $53.0 million increase in the average
        balance of the portfolio.
 
 Interest
        income on investment securities for the current quarter was $4.1 million
        compared to $6.4 million for the quarter ended September 30, 2007. The $2.3
        million decrease was primarily a result of a decrease in the average balance
        of
        $171.5 million for the current quarter due to maturities and calls that were
        not
        reinvested in investment securities.
 
 Interest
        income on cash and cash equivalents and FHLB stock remained relatively unchanged
        quarter over quarter.
 
 Interest
        expense decreased $1.8 million to $74.4 million for the current quarter from
        $76.2 million for the quarter ended September 30, 2007. The decrease was
        due to
        a decrease in interest expense on FHLB advances of $2.7 million, partially
        offset by an increase in interest expense on other borrowings of $1.1 million.
        The decrease in interest expense on FHLB advances was primarily a result
        of a
        decrease in interest expense on the swapped FHLB advances due to the termination
        of certain interest rate swaps. The decrease was also attributed to $200.0
        million of advances that matured in October which were not immediately renewed,
        partially offset by interest on $200.0 million of new advances taken in
        December. The increase in interest expense on other borrowings of $1.1 million
        was due to an increase in the average balance of other borrowings due to
        the
        Bank entering into repurchase agreements during the first quarter of fiscal
        year
        2008. Additional information about the repurchase agreements is included
        under
“Liquidity and Capital Resources.”
 
 Total
        other income increased $698 thousand to $7.1 million for the current quarter
        compared to $6.4 million for the quarter ended September 30, 2007. The increase
        in other income was due primarily to an increase in BOLI income, the receipt
        of
        interest on an amended income tax return of $194 thousand, and to an increase
        in
        retail fees and charges, partially offset by a decrease in other income,
        net of
        $201 thousand. BOLI income was $621 thousand for the current quarter, compared
        to $27 thousand from BOLI in the prior quarter as a result of the current
        quarter being the first full quarter of earnings on the BOLI. Retail fees
        and
        charges increased $157 thousand primarily as a result of an increase in
        overdraft fees, ATM fees, and fee income from Visa check cards. The decrease
        in
        other income, net was primarily a result of a decrease in profit on the sale
        of
        real estate owned of $115 thousand (“REO”) due to lower volume and lower profit
        margin on REO sales.
 
 Total
        other expenses for the current quarter were $19.5 million for the current
        quarter, compared to $19.9 million in the prior quarter. The $486 thousand
        decrease was attributed to a decrease in regulatory and outside services
        of $544
        thousand, and a decrease of $293 thousand in advertising expense, offset
        by
        increases in salaries and employee benefits of $378 thousand and other, net
        expense of $237 thousand. The decrease in regulatory and outside services
        was
        due primarily to a decrease in consulting expense, attorney fees, and audit
        fees
        generally associated with the end of the fiscal year. The decrease in
        advertising expense was due to additional expense in the fourth quarter of
        fiscal year 2007 related to corporate sponsorships. The decrease in deposit
        and
        loan transaction costs was due primarily to the reclassification of certain
        expenses related to debit cards from deposit and loan transaction costs to
        office supplies and related expenses. The increase in salaries and employee
        benefits was due to fluctuations
        in employee benefits due primarily to accrual adjustments in the fourth quarter
        of fiscal year 2007.
 
 Income
        tax expense for the current quarter was $5.2 million compared to $4.3 million
        for the quarter ended September 30, 2007. The increase in income tax expense
        was
        primarily due to an increase in earnings for the current quarter. The effective
        tax rate for the current quarter was 36.2% compared to 40.4% for the quarter
        ended September 30, 2007. The decrease in the effective tax rate in the current
        quarter compared to the prior year quarter was a result of an increase in
        nontaxable income from municipal securities and BOLI.
  33
  
 
 
 
 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 December 31, 2007 to the quarter
        ended
        September 30, 2007. 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
                  EndedDecember
                  31, 2007 vs. September 30, 2007Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              433
              
              $
              1,487
              
              $
              1,920Mortgage-related
                  securities
              
              
              588
              
              
              849
              
              
              1,437Investment
                  securities
              
              
              (1,842
              )
              
              (472
              )
              
              (2,314
              )Capital
                  stock of FHLB
              
              
              (116
              )
              
              (164
              )
              
              (280
              )Cash
                  and cash equivalents
              
              
              187
              
              
              (207
              )
              
              (20
              )Total
                  interest-earning assets
              
              $
              (750
              )
              $
              1,493
              
              $
              743Interest-bearing
                  liabilities:Savings
              
              $
              (46
              )
              $
              (323
              )
              $
              (369
              )Checking
              
              
              (3
              )
              
              --
              
              
              (3
              )Money
                  market
              
              
              1
              
              
              (278
              )
              
              (277
              )Certificates
              
              
              276
              
              
              240
              
              
              516FHLB
                  advances and other borrowings
              
              
              (637
              )
              
              (1,014
              )
              
              (1,651
              )Total
                  interest-bearing liabilities
              
              $
              (409
              )
              $
              (1,375
              )
              $
              (1,784
              )Net
                  change in net interest and dividend income
              
              $
              (341
              )
              $
              2,868
              
              $
              2,527
 
 34
 
 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, other borrowings, repayments on and maturities of outstanding loans
        and mortgage-related securities, other short-term investments, and funds
        provided from operations. While scheduled payments from the amortization
        of
        loans and mortgage-related securities and payments on short-term investments
        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. Sources of funds are used primarily to
        meet
        ongoing operations, to pay maturing certificates of deposit and savings
        withdrawals, and to fund loan commitments. At December 31, 2007, approximately
        $1.83 billion of the $2.53 billion in certificates of deposit were scheduled
        to
        mature within one year. Based
        on
        past experience and our pricing strategy, we expect that a majority of these
        maturing deposits will renew, although no assurance can be given in this
        regard.
 
 At
        December 31, 2007, cash and cash equivalents totaled $253.7 million. During
        the
        first quarter of fiscal year 2008, the Bank did not immediately renew $200.0
        million of maturing FHLB advances, but took an additional $200.0 million
        of
        advances towards the end of the quarter. Subsequent to December 31, 2007,
        an
        additional $300.0 million of FHLB advances matured. Proceeds from the recent
        advances and a new $100.0 million advance were used to repay the maturing
        advances.
  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 December 31, 2007, the Bank’s ratio of the face amount of advances
        to total assets, as reported to the Office of Thrift Supervision (“OTS”), was
        35%. Our advances are secured by a blanket pledge of our loan portfolio,
        as
        collateral, supported by quarterly reporting to FHLB Topeka. Advances in
        excess
        of 40% of total assets, but not exceeding 55% of total assets, may be approved
        by the president of FHLB Topeka based upon a review of documentation supporting
        the use of the advances.  Currently,
        the blanket pledge is sufficient collateral for our outstanding FHLB advances.
        It is possible that increases in our borrowings or decreases in our loan
        portfolio could require the Bank to pledge securities as collateral on the
        FHLB
        advances. The Bank’s policy allows borrowing from FHLB of up to 55% of total
        assets.
  During
        the first quarter of fiscal year 2008, the Bank entered into repurchase
        agreements totaling $250.0 million. The agreements are treated as secured
        borrowings and are reported as a liability of the Company on a consolidated
        basis. $100.0 million of borrowings are scheduled to mature in fiscal year
        2011,
        and $150.0 million are scheduled to mature in fiscal year 2012. The Bank
        has
        pledged securities with a market value of $290.7 million as collateral. At
        the
        maturity date of these borrowings, the pledged securities will be delivered
        to
        the Bank. The Bank may enter into additional repurchase agreements as management
        deems appropriate.
  In
        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.
  Despite
        the current challenging rate environment, it is management’s and the board of
        directors’ intention to continue to pay regular quarterly dividends of $0.50 per
        share for the foreseeable future. MHC, which owns a majority of the outstanding
        shares of CFFN common stock, generally waives its right to receive dividends
        paid on the common stock. See additional discussion and calculation of public
        shares in “Item 2, Management’s Discussion and Analysis - Stockholders’ Equity.”
At December 31, 2007, CFFN, at the holding company level, had $106.3 million
        in
        cash and certificates of deposit at the Bank to be used to further the Company's
        general corporate and capital management strategies, which could include
        the
        payment of dividends.
   35
  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.
 The
        Company’s contractual obligations related to operating leases and debentures
        have not changed significantly from September 30, 2007. The following table
        summarizes our other contractual obligations as of December 31, 2007.
 
 Maturity
                  RangeLess
                  than
              
              1
                  - 3
              
              3
                  - 5
              
              More
                  thanTotal
              
              1
                  year
              
              years
              
              years
              
              5
                  years(Dollars
                  in thousands)FHLB
                  Advances
              
              $
              2,746,000
              
              $
              925,000
              
              $
              1,745,000
              
              $
              76,000
              
              $
              --Repurchase
                  Agreements
              
              $
              250,000
              
              $
              --
              
              $
              100,000
              
              $
              150,000
              
              $
              --Certificates
                  of Deposit
              
              $
              2,527,237
              
              $
              1,829,321
              
              $
              632,326
              
              $
              63,910
              
              $
              1,680Commitments
                  to originate andpurchase
                  mortgage loans
              
              
              89,984
              
              
              89,984
              
              
              --
              
              
              --
              
              
              --Commitments
                  to fund unused homeequity
                  lines of credit
              
              
              269,039
              
              
              269,039
              
              
              --
              
              
              --
              
              
              --Unadvanced
                  portion ofconstruction
                  loans
              
              
              41,936
              
              
              41,936
              
              
              --
              
              
              --
              
              
              --
 
 A
        percentage of commitments are expected to expire unfunded, so the amounts
        reflected above are not necessarily indicative of future liquidity requirements. Additionally,
        the Bank is not obligated to honor commitments to fund unused home equity
        lines
        of credit if a customer is delinquent or otherwise in violation of the loan
        agreement.
 
 The
        maturity schedule for our certificate of deposit portfolio at December 31,
        2007
        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.
   36
  The
        following table presents the maturity of FHLB advances at par as of December
        31,
        2007. The balance of advances excludes the unrealized loss adjustment on
        the
        remaining swapped FHLB advance and the deferred gain on the terminated interest
        rate swaps. Management
        will continue to monitor the Bank’s investment opportunities and balance those
        opportunities with the cost of FHLB advances or other funding sources throughout
        fiscal year 2008.
  Actual
                    rates
                
                Effectivewithout
                
                rates
                    withMaturity
                    by
                
                interest
                    rate
                
                interest
                    rateFiscal
                    year
                Amount
                swaps
                
                swaps(Dollars
                    in thousands)2008
                $
                    925,000
                4.34
                %
                4.67
                %2009
                620,000
                4.27
                
                4.272010(1)
                925,000
                5.57
                
                5.572011
                276,000
                4.87
                
                4.87Total
                $
                    2,746,000
                4.79
                %
                4.90
                %
 (1)  The
        interest rate swaps hedged against a portion of these advances were terminated
        during the first quarter of fiscal year 2008. The effective rate with interest
        rate swaps includes the rate adjustment associated with the deferred gain
        related to the interest rate swap termination, which will be amortized as
        a rate
        adjustment over the remaining life of the related advances.
 
 The
        following table presents the maturity of FHLB advances by quarter for calendar
        year 2008 as of December 31, 2007. As of December 31, 2007, the Bank had
        an
        interest rate swap agreement with a notional amount of $225.0 million that
        is
        scheduled to mature in May 2008.
 WeightedAverageMaturity
                    by Quarter End
                Amount
                Rate(Dollars
                    in thousands)March
                    31, 2008
                $
                    300,000
                3.84
                %June
                    30, 2008
                425,000
                4.85September
                    30, 2008
                200,000
                3.99$
                    925,000
                4.34
                %
 In
        December 2003, management entered into interest rate swap agreements with
        an
        aggregate notional amount of $800.0 million to modify the Bank’s interest rate
        risk profile by hedging certain FHLB advances. In December 2007, management
        terminated interest rate swap agreements with an aggregate notional amount
        of
        $575.0 million due to favorable economic market conditions. The interest
        rate
        swaps were scheduled to mature in fiscal year 2010. The net position at the
        time
        of termination was a gain of $1.7 million which will be deferred and recorded
        as
        a yield adjustment to the related advances over the remaining term to maturity
        of the advances. The termination of the interest rate swap agreements will
        improve the interest rate profile of the Bank by extending the effective
        repricing frequency of the related advances from monthly to their stated
        maturity. See “Notes to Consolidated Financial Statements—Note 4.”
  
  Contingencies
  In
        the
        normal course of business, the Company and its subsidiary are named defendants
        in various lawsuits and counter claims. In the opinion of management, after
        consultation with legal counsel, none of the currently pending suits are
        expected to have a materially adverse effect on the Company’s consolidated
        financial statements for the current interim or future periods.
   37
  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 $794.2 million at December
        31, 2007, or 10.0% of total Bank assets on that date. As of December 31,
        2007,
        the Bank exceeded all capital requirements of the OTS. The following table
        presents the Bank’s regulatory capital ratios at December 31, 2007 based upon
        regulatory guidelines.
 RegulatoryRequirementBank
              
              For
                  “WellRatios
              
              Capitalized”
                  StatusCore
                  capital
              9.9%
              
              5.0%Tier
                  I risk-based capital
              22.9%
              
              6.0%Total
                  risk-based capital
              22.8%
              
              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. It is likely a waiver will be necessary through December 31,
        2008. Currently, the Bank has authorization from the OTS to distribute capital
        from the Bank to the Company through the quarter ending June 30, 2008. 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, 2007, attached as Exhibit 13 to the Company’s Annual Report on
        Form 10-K for the year ended September 30, 2007.
 
 ALCO
        regularly reviews the interest rate risk exposure of the Bank by forecasting
        the
        impact of hypothetical, alternative interest rate environments on net interest
        income and 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. The Bank’s analysis of its MVPE at December 31, 2007 indicates a
        decrease in its risk exposure as compared to September 30, 2007. The Bank’s
        analysis of the sensitivity of its net interest income to parallel changes
        in
        interest rates at December 31, 2007 indicates a significant decrease in
        sensitivity since September 30, 2007.
 
 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 repricing of assets or liabilities
        occurs at anticipated product and market rates for the alternative rate
        environments
  38
  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 securities 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 IncomeAtChange
                  (in Basis Points)
              
              December
                  31,
              
              September
                  30,in
                  Interest Rates(1)
              
              2007
              
              2007-200
                  bp
              
              -6.88
              
              16.72-100
                  bp
              
              1.63
              
              14.530
                  bp
              
              --
              
              --+100
                  bp
              
              -2.77
              
              -8.30+200
                  bp
              
              -9.31
              
              -23.25+300
                  bp
              
              -16.56
              
              -38.61
 
 (1) Assumes
        an instantaneous, permanent and parallel change in interest rates at all
        maturities.
 
 The
        primary reason for the decrease in estimated net interest income in the
        increasing rate environments is the anticipated increase in the cost of deposits
        in excess of the increases in yields 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. The increase in the cost of deposits is
        also
        due to anticipated increases in the cost of money market accounts. The
        improvement in the performance of net interest income in the rising interest
        rate scenarios compared to September 2007 can be attributed to the termination
        of $575 million of interest rate swaps that were hedging long-term FHLB
        advances. By terminating these interest rate swaps, $575 million of floating
        rate liabilities were converted to longer-term fixed-rate liabilities. This
        reduces the amount of liabilities that reprice in increasing rate environments.
        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. In addition, caps on
        adjustable-rate products limit the increase in rates in these assets when
        rates
        rise.
 
 The
        increase in estimated net interest income if interest rates were to decrease
        100
        basis points is primarily the result of the immediate decrease in the cost
        of
        our deposits compared to a slower decrease in the yield on our interest-earning
        assets. This benefit to net interest income was reduced compared to September
        2007 due to the termination of the interest rate swaps discussed above. In
        the
        down 200 interest rate shock the cashflow reinvested from the mortgage loan
        and
        mortgage-related securities portfolios more than offsets the initial benefit
        of
        lower deposit rates.
 
 As
        a
        result of the flat or inverted yield curve during fiscal year 2007 and the
        relatively short term to reprice of our liabilities compared to our assets,
        the
        Bank experienced net interest margin compression during fiscal year 2007.
        The
        steeper yield curve at December 31, 2007 should benefit the net interest
        margin
        as the short-term liabilities will continue to reprice at lower interest
        rates
        while cashflows from the mortgage loan and mortgage-related securities
        portfolios can be reinvested at relatively higher rates, which should cause
        an
        increase in earnings.
  39
  The
        following table sets forth the estimated percentage change in MVPE at each
        period end presented based on the indicated instantaneous, parallel and
        permanent change in interest rates. The MVPE is defined as the net of the
        present value of the cash flows of an institution’s existing assets, liabilities
        and off-balance sheet instruments. The percentage change in each interest
        rate
        environment represents the difference between MVPE in the base case and MVPE
        in
        each alternative interest rate environment. The estimations of MVPE 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, 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
                  MVPEAtChange
                  (in Basis Points)
              
              December
                  31,
              
              September
                  30,in
                  Interest Rates(1)
              
              2007
              
              2007-200
                  bp
              
              -6.15
              
              1.12-100
                  bp
              
              2.27
              
              5.370
                  bp
              
              --
              
              --+100
                  bp
              
              -11.35
              
              -13.99+200
                  bp
              
              -27.06
              
              -32.14+300
                  bp
              
              -44.47
              
              -52.52
 
 (1) Assumes
        an instantaneous, permanent and parallel change in interest rates at all
        maturities.
 
 Changes
        in the estimated market values of our financial assets and liabilities drive
        changes in 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). However,
        the
        average life expected on our mortgage-related assets varies under different
        interest rate environments because customers have the ability to prepay their
        mortgage loans. Prepayment assumptions change on mortgage-related assets
        under
        various interest rate environments because many customers with mortgage debt
        look to attain financing at the lowest cost available. Generally, there is
        no
        penalty to prepay a mortgage loan we have originated or purchased. If rates
        decrease, the customer has an economic incentive to lower the cost of their
        mortgage (through a lower interest rate) with only the fees associated with
        the
        new mortgage or loan modification to attain the lower cost mortgage. In a
        decreasing rate environment, prepayments increase and the average life of
        a
        mortgage shortens compared to higher rate environments. When interest rates
        increase, the economic incentive for customers to modify their mortgage debt
        is
        reduced, resulting in lower prepayment assumptions and longer average lives.
        Holders of certificates of deposit have the ability to modify the terms of
        their
        deposits by withdrawing before maturity the balance in their account. Generally
        a penalty is assessed for early withdrawal. In a decreasing rate environment
        the
        economic incentive to the depositor probably does not exist because the rate
        on
        the new account would likely be lower than they are currently receiving.
        Given
        the short term nature of our certificates of deposit, in an increasing rate
        environment customers will likely wait until maturity to change the terms
        of
        their deposit, which would result in no change to the expected lives of our
        certificates of deposit in a rising rate environment. These characteristics
        of
        financial assets and liabilities result in a decrease in the estimated value
        of
        the Bank’s MVPE in rising rate environments.
 
 The
        Bank’s measure of its MVPE sensitivity to decreasing interest rates indicates
        a
        positive change at December 31, 2007 for the down 100 basis point scenario.
        The
        increase in MVPE if interest rates drop 100 basis points is primarily driven
        by
        the continued short-term nature of our liabilities compared to the shortening
        in
        the expected lives of our assets, compared to the base case rate scenario,
        as a
        result of an assumed increase in prepayment speeds on mortgage-related assets,
        primarily our fixed-rate loan portfolio. Given the current composition of
        our
        loan portfolio and the current interest rate environment, it is likely that
        many
        of our customers would be economically enticed to refinance or modify their
        mortgage loans with a 100 basis point decline in rates compared to the base
        case
  40
  scenario.
        The Bank’s MVPE is negatively impacted in the down 200 basis point environment.
        This is caused by the significant increase in the projected cash flows from
        mortgage prepayments, refinances or modifications of loans to market rates
        lower
        than anticipated in the above analysis such that the lives of the assets
        would
        be shorter than the liabilities. The higher prepayment assumptions shorten
        the
        expected average lives on our fixed-rate assets thereby decreasing the
        sensitivity of the present value of their cash flows to changes in interest
        rates, while the expected average lives of our liabilities remains largely
        unchanged. The decrease in the percentage change in MVPE in the falling rate
        environment from September 30, 2007 was caused by the termination of $575
        million of interest rate swaps, discussed above, that reduced the amount
        of
        liabilities that will reprice in this interest rate scenario.
 
 The
        Bank’s MVPE declines in rising interest rate environments. 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 assets, such as
        our
        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 likely 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 the more rates
        increase. The sensitivity of the Bank’s MVPE decreased from September 30, 2007
        due primarily to the termination of interest rate swaps discussed
        above.
 
 41
 Gap
        Table :
        The
        following gap table summarizes the anticipated maturities or repricing of
        our
        interest-earning assets and interest-bearing liabilities as of December 31,
        2007, based on the information and assumptions set forth in the notes
        below . Although
        certain assets and liabilities may have similar maturities or periods to
        repricing, they may react differently 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
        gap
        table.
  December
                  31,
                  2007Within
                  Three Months
              Three
                  Months To One Year
              More
                  Than One Year to Three Years
              More
                  Than Three Years to Five Years
              Over
                  Five Years
              TotalInterest-earning
                assets:
              
              
              (Dollars in
              thousands)Loans
                  receivable(1)(2):Mortgage
                  loans:Fixed
              $
                  148,190
              $
                  730,815
              $
                  1,562,347
              $
                  586,069
              $
                  402,789
              $
                  3,430,210Adjustable
              112,818
              690,469
              787,247
              104,383
              2,227
              1,697,144Other
                  loans
              134,144
              5,180
              12,025
              7,868
              59,600
              218,817Securities:Non-mortgage(3)
              235,916
              216,927
              14,810
              3,491
              28,802
              499,946Mortgage-related
                  securities(4)
              222,307
              662,421
              432,228
              162,992
              123,965
              1,603,913Other
                  interest-earning assets
              201,147
              --
              --
              --
              --
              201,147Total
                  interest-earning assets
              1,054,522
              2,305,812
              2,808,657
              864,803
              617,383
              7,651,177Interest-bearing
                  liabilities:Deposits:Savings(5)
              132,282
              6,364
              14,984
              11,859
              64,373
              $
                  229,862Checking(5)
              9,456
              33,425
              71,647
              65,027
              233,794
              413,349Money
                  market(5)
              36,727
              101,544
              186,336
              107,610
              378,785
              811,002Certificates
              506,283
              1,323,039
              632,326
              63,910
              1,678
              2,527,236Borrowings(6)
              578,609
              400,000
              1,845,000
              226,000
              --
              3,049,609Total
                  interest-bearing liabilities
              1,263,357
              1,864,372
              2,750,293
              474,406
              678,630
              7,031,058Excess
                  (deficiency) of interest-earning assets overinterest-bearing
                  liabilities
              $
                  (208,835)
              $
                  441,440
              $
                  58,364
              $
                  390,397
              $
                  (61,247)
              $
                  620,119Cumulative
                  excess (deficiency) of interest-earningassets
                  over interest-bearing liabilities
              $
                  (208,835)
              $
                  232,605
              $
                  290,969
              $
                  681,366
              $
                  620,119Cumulative
                  excess (deficiency) of interest-earningassets
                  over interest-bearing liabilities as apercent
                  of total assets at December 31, 2007
              (2.63)%
              2.93%
              3.66%
              8.58%
              7.80%Cumulative
                  one-year gap at September 30, 2007
              
              (11.57)%Cumulative
                  one-year gap at September 30, 2006
              
              (13.62)%
 
 42
  (1)  Adjustable-rate
        loans are included in the period in which the rate is next scheduled to adjust
        or in the period in which repayments are expected to occur prior to their
        next
        rate adjustment, rather than in the period in which the loans are due.
        Fixed-rate loans are included in the periods in which they are scheduled
        to be
        repaid, based on scheduled amortization and prepayment assumptions.
 (2)  Balances
        have been reduced for non-performing loans, which totaled $10.2 million at
        December 31, 2007.
 (3)  Based
        on
        contractual maturities, or terms to call date or pre-refunding dates as of
        December 31, 2007, and excludes the unrealized gain adjustment of $99 thousand
        on AFS investment securities.
 (4)  Reflects
        estimated prepayments of mortgage-related securities in our portfolio, and
        excludes the unrealized gain adjustment of $5.0 million on AFS mortgage-related
        securities.
 (5)  Although
        our checking, savings and money market accounts are subject to immediate
        withdrawal, management considers a substantial amount of such accounts to
        be
        core deposits having significantly longer effective maturities. The decay
        rates
        (the assumed rate at which the balance of existing accounts would decline)
        used
        on these accounts are based on assumptions developed based upon our actual
        experience with these accounts. If all of our checking, savings and money
        market
        accounts had been assumed to be subject to repricing within one year,
        interest-bearing liabilities which were estimated to mature or reprice within
        one year would have exceeded interest-earning assets with comparable
        characteristics by $901.8 million, for a cumulative one-year gap of (11.35)%
        of
        total assets.
 (6)  Borrowings
        exclude the $1.1 million unrealized loss adjustment on the swapped FHLB
        advances, $1.6 million deferred gain on the terminated FHLB advances and
        $71
        thousand of capitalized debt issuance costs on other borrowings.
 
 The
        decrease in the one-year gap from September 30, 2007 to December 31, 2007
        occurred for two reasons. The first was a reduction of liabilities repricing
        in
        the upcoming year that was caused by the termination of $575 million of interest
        rate swaps hedging FHLB advances. These interest rate swaps effectively
        converted long-term fixed-rate advances to adjustable-rate advances that
        repriced monthly. Once the swaps were terminated the advances became long-term
        fixed-rate liabilities that will not reprice in the upcoming year. The second
        reason for the reduction in the one-year gap was the decrease in interest
        rates.
        This decrease is expected to cause a significant increase in the projected
        cash
        flows in the upcoming year from mortgage prepayments, refinances or
        modifications of loans to lower market rates. This results in shorter average
        lives and quicker repricing of assets than the September 30, 2007
        projections.
 
 
 
 43
   Changes
        in portfolio
        composition.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 62.1% of these portfolios at December 31, 2007 compared
        to
        59.7% at September 30, 2007. The WAL is the estimated remaining maturity
        of the
        underlying collateral after projected prepayment speeds have been applied.
        The
        increase in the WAL between September 30, 2007 and December 31, 2007 was
        due
        largely to purchasing new securities and reinvesting principal cash flows
        into
        securities with longer WAL. The increase in the yield between September 30,
        2007
        and December 31, 2007 is a result of adjustable-rate mortgage-related securities
        repricing upward and to the purchase of securities with yields greater than
        that
        of the overall portfolio yield.
  December
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007Balance
              
              WAL
              
              Yield
              
              Balance
              
              WAL
              
              Yield
              
              Balance
              
              WAL
              
              Yield(Dollars
                  in thousands)Fixed-rate
                  investments:Agency
                  bonds
              
              $
              460,997
              
              
              0.28
              
              
              4.18
              %
              $
              501,057
              
              
              1.51
              
              
              4.56
              %
              $
              655,940
              
              
              1.59
              
              
              4.70
              %Mortgage-related
                  securities, at cost
              
              
              806,285
              
              
              4.12
              
              
              4.79
              
              
              632,142
              
              
              4.15
              
              
              4.68
              
              
              587,263
              
              
              6.49
              
              
              4.55Municipal
                  bonds
              
              
              38,949
              
              
              7.06
              
              
              3.66
              
              
              23,018
              
              
              5.06
              
              
              3.69
              
              
              17,249
              
              
              6.21
              
              
              3.66Total
                  fixed-rate investments
              
              
              1,306,231
              
              
              2.85
              
              
              4.54
              
              
              1,156,217
              
              
              3.02
              
              
              4.61
              
              
              1,260,452
              
              
              3.94
              
              
              4.62Adjustable-rate
                  investments:Mortgage-related
                  securities, at cost
              
              
              797,628
              
              
              4.71
              
              
              4.53
              
              
              780,147
              
              
              3.95
              
              
              4.29
              
              
              879,250
              
              
              3.81
              
              
              4.13Total
                  adjustable-rate investments
              
              
              797,628
              
              
              4.71
              
              
              4.53
              
              
              780,147
              
              
              3.95
              
              
              4.29
              
              
              879,250
              
              
              3.81
              
              
              4.13Total
                  investment portfolio, at cost
              
              $
              2,103,859
              
              
              3.56
              
              
              4.54
              %
              $
              1,936,364
              
              
              3.40
              
              
              4.48
              %
              $
              2,139,702
              
              
              3.88
              
              
              4.42
              %
 
  The
        certificate of deposit portfolio increased $26.0 million from September 30,
        2007
        to December 31, 2007 and the average cost of the portfolio stayed the same
        between the two reporting dates. Certificates maturing in one year or less
        at
        December 31, 2007 were $1.83 billion with an average cost of 4.83%. The
        following table presents the maturity of certificates of deposit at the dates
        indicated.
 
 December
                  31, 2007
              
              September
                  30, 2007
              
              June
                  30, 2007
              
              March
                  31, 2007Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              Rate(Dollars
                  in thousands)Certificates
                  maturing within:0
                  to 3 months
              
              $
              506,282
              
              
              4.74
              %
              $
              358,141
              
              
              4.55
              %
              $
              360,011
              
              
              4.42
              %
              $
              442,706
              
              
              4.40
              %3
                  to 6 months
              
              
              573,343
              
              
              4.87
              
              
              507,072
              
              
              4.77
              
              
              358,352
              
              
              4.63
              
              
              357,839
              
              
              4.416
                  months to one year
              
              
              749,696
              
              
              4.86
              
              
              881,810
              
              
              4.88
              
              
              921,104
              
              
              4.81
              
              
              753,490
              
              
              4.68One
                  year to two years
              
              
              357,331
              
              
              4.45
              
              
              400,859
              
              
              4.66
              
              
              580,902
              
              
              4.85
              
              
              680,400
              
              
              4.81After
                  two years
              
              
              340,584
              
              
              4.81
              
              
              353,366
              
              
              4.85
              
              
              260,821
              
              
              4.69
              
              
              259,855
              
              
              4.62Total
                  certificates
              
              $
              2,527,236
              
              
              4.77
              %
              $
              2,501,248
              
              
              4.77
              %
              $
              2,481,190
              
              
              4.72
              %
              $
              2,494,290
              
              
              4.62
              %Average
                  maturity (in years)
              
              
              0.90
              
              
              
              
              
              0.95
              
              
              
              
              
              0.95
              
              
              
              
              
              0.97
 
 
 44
  Item
        4 .
        Controls and
        Procedures
 John
        B.
        Dicus, the Company’s President and Chief Executive Officer, and Kent G.
        Townsend, the Company’s Executive Vice President and Chief Financial Officer,
        have evaluated the Company’s disclosure controls and procedures (as defined in
        Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, the
“Act”)
        as of December 31, 2007. Based upon their evaluation, they have concluded
        that
        as of December 31, 2007, such disclosure controls and procedures were effective
        to ensure that information required to be disclosed by the Company in the
        reports it files or submits under the Act is accumulated and communicated
        to the
        Company’s management (including the Chief Executive Officer and Chief Financial
        Officer) to allow timely decisions regarding required disclosure, and is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms.
 
 Changes
        in Internal Control Over
        Financial Reporting
 During
        the quarter ended December 31, 2007, there were no changes in the Company’s
        internal control over financial reporting as defined by Rule 13a-15(d) of
        the
        Act that have materially affected, or are reasonably likely to materially
        affect, the Company’s internal control over financial reporting.
 
 Part II -   OTHER
        INFORMATION
 
 Item
        1.  Legal
        Proceedings
 We
        are
        not involved in any pending legal proceedings other than routine legal
        proceedings occurring in the ordinary course of business. We believe that
        these
        routine legal proceedings, in the aggregate, are immaterial to our financial
        condition and results of operations.
 
 Item
        1A. Risk
        Factors
 A
        decline in local and national real
        estate markets may impact our operations and/or financial
        condition. There
        has been a slowdown in the housing market, both nationally and locally, as
        evidenced by reports of reduced levels of new and existing home sales,
        increasing inventories of houses on the market, stagnant to declining property
        values, and an increase in the length of time houses remain on the market.
        No
        assurance can be given that these conditions will not continue or worsen.
        If
        these conditions do continue or worsen, they may result in a decrease in
        our
        interest income or an adverse impact on our loan losses.
 
 There
        have been no other material changes to our risk factors since September 30,
        2007. For a summary of other risk factors relevant to our operations, see
        Part I, Item 1A in our 2007 Annual Report on Form 10-K.
 
 
  45
  
 <Index>
 Item
        2.  Unregistered Sales
        of Equity Securities and Use of Proceeds
 There
        was
        no activity during the quarter.
 
 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 December 31, 2007 and additional information regarding our share
        repurchase program. Our current repurchase plan of 500,000 shares was announced
        on May 26, 2006. The plan has no expiration date and had 187,931 shares
        remaining as of December 31, 2007. The Company intends to repurchase shares
        from
        time to time, depending on market conditions, at prevailing market prices
        in
        open-market and other transactions. The shares would be held as treasury
        stock
        for general corporate use.
  
  Total
              
              Total
                  Number of
              Maximum
                  NumberNumber
                  of
              Average
              Shares
                  Purchased as
              of
                  Shares that MayShares
              Price
                  Paid
              Part
                  of Publicly
              Yet
                  Be PurchasedPeriod
              Purchased
              per
                  Share
              Announced
                  Plans
              Under
                  the PlanOctober
                  1, 2007 throughOctober
                  31, 2007
              --
              --
              --
              411,473November
                  1, 2007 throughNovember
                  30, 2007
              106,045
              32.68
              106,045
              305,428December
                  1, 2007 throughDecember
                  31, 2007
              117,497
              32.16
              117,497
              187,931Total
              223,542
              $
                  32.41
              223,542
              187,931
 
 <Index>
 Item
        3.  Defaults Upon
        Senior Securities
 Not
        applicable.
 
 <Index>
  46
  Item
        4.  Submission of
        Matters to a Vote of Security Holders
 At
        the
        Annual Meeting of Stockholders for the fiscal year ended September 30, 2007,
        held January 9, 2008, two matters were presented to stockholders. Stockholders
        elected Michael T. McCoy, M.D., Jeffrey M. Johnson, and Marilyn S. Ward to
        three-year terms as directors. Stockholders also ratified the appointment
        of
        Deloitte & Touche, LLP as auditors for the fiscal year ending September 30,
        2008. The votes cast as to each matter are set forth below:
 
 Number
                  of VotesBrokerFor
              Against
              Abstain
              Non-VotesProposal
                  1.Election
                  of the following directors for the termsindicated:Michael
                  T. McCoy, M.D. (three years)
              72,987,527
              285,414
              --
              --Jeffrey
                  M. Johnson (three years)
              72,984,243
              288,698
              --
              --Marilyn
                  S. Ward (three years)
              73,010,477
              262,464The
                  following directors had their term of officecontinue
                  after the meeting:B.B.
                  AndersenJohn
                  B. DicusJohn
                  C. DicusJeffrey
                  R. ThompsonProposal
                  2.Ratification
                  of Deloitte & Touche LLP
              73,021,413
              160,152
              91,374
              --as
                  auditors.
 
 <Index>
 Item
        5.  Other
        Information
 Not
        applicable.
 
 <Index>
 Item
        6.  Exhibits
 See
        Index
        to Exhibits.
  47
  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:   February
        4, 2008   By: /s/
        John B.
        Dicus
 John B. Dicus, President and
 Chief Executive Officer
 
 
 Date:   February
        4,
        2008  By: /s/
        Kent G.
        Townsend
 Kent G. Townsend, Executive Vice President and
 Chief Financial Officer
 
 
 <Index>
  
 48


INDEX
      TO EXHIBITS


Exhibit
              Number
            Document2.0
            
            Plan
                of Reorganization and Stock Issuance Plan*3(i)
            
            Federal
                Stock Charter of Capitol Federal Financial*3(ii)
            
            Bylaws
                of Capitol Federal Financial filed on November 29, 2007 as Exhibit
                3(ii)
                tothe
                Annual Report on Form 10-K and incorporated herein by
                reference4(i)
            
            Form
                of Stock Certificate of Capitol Federal Financial*4(ii)
            
            The
                Registrant agrees to furnish to the Securities and Exchange Commission,
                upon request, theinstruments
                defining the rights of the holders of the Registrant’s long-term debt.10.1(i)
            
            Registrant’s
                Thrift Plan filed on November 29, 2007 as Exhibit 10.1(i)
                tothe
                Annual Report on Form 10-K and incorporated herein by
                reference10.1(ii)
            
            Registrant’s
                Stock Ownership Plan filed on November 29, 2007 as Exhibit 10.1(ii)
                tothe
                Annual Report on Form 10-K and incorporated herein by
                reference10.2
            
            Registrant’s
                2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
                April 13,2000
                as Appendix A to Registrant’s Revised Proxy Statement (File No. 000-25391)
                and incorporated herein by reference10.3
            
            Registrant’s
                2000 Recognition and Retention Plan (the “RRP”) filed on April 13, 2000 asAppendix
                B to Registrant’s Revised Proxy Statement (File No. 000-25391) and
                incorporated herein by reference10.4
            
            Capitol
                Federal Financial Deferred Incentive Bonus Plan filed on December
                14, 2006as
                Exhibit 10.4 to the Annual Report on Form 10-K and incorporated herein
                by
                reference10.5
            
            Form
                of Incentive Stock Option Agreement under the Stock Option Plan filed
                on
                February 4, 2005as
                Exhibit 10.5 to the December 31, 2004 Form 10-Q and incorporated
                herein by
                reference10.6
            
            Form
                of Non-Qualified Stock Option Agreement under the Stock Option Plan
                filed
                on February 4,2005
                as Exhibit 10.6 to the December 31, 2004 Form 10-Q and incorporated
                herein
                by reference10.7
            
            Form
                of Restricted Stock Agreement under the RRP filed on February 4,
                2005 as
                Exhibit 10.7 to theDecember
                31, 2004 Form 10-Q and incorporated herein by reference10.8
            
            Description
                of Named Executive Officer Salary and Bonus Arrangements filed on
                November
                29,2007
                as Exhibit 10.8 to the Annual Report on Form 10-K and incorporated
                herein
                by reference10.9
            
            Description
                of Director Fee Arrangements filed on February 5, 2007 as Exhibit
                10.9 to
                the December 31, 2006 Form 10-Q and incorporated herein by
                reference10.10
            
            Short-term
                Performance Plan filed on December 14, 2005 as Exhibit 10.10 to the
                AnnualReport
                on Form 10-K for the fiscal year ended September 30, 2005 and incorporated
                herein by reference11
            
            Statement
                re: computation of earnings per share**31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by
                John B.
                Dicus, President and Chief Executive Officer31.2
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by
                Kent G.
                Townsend, Executive Vice President and Chief Financial
                Officer32
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 made by John B. Dicus, President and
                Chief
                Executive Officer, and Kent G. Townsend, Executive Vice President
                and
                Chief Financial Officer





*Incorporated
      by reference from Capitol Federal Financial’s Registration Statement on Form S-1
      (File No. 333-68363) filed on February 11, 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.


49