UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549


_________________





Form
10-Q


(Mark
One)


þQUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended December 31, 2008





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 26, 2009, there were 74,074,380 shares of Capitol Federal Financial
Common Stock outstanding.











1





PART I -- FINANCIAL INFORMATION
            Page
              NumberItem
      1.  Financial Statements (Unaudited):Consolidated Balance
      Sheets at December 31, 2008 and September 30,
    2008
            3Consolidated
      Statements of Income for the three months endedDecember
      31, 2008 and December 31, 2007
            4Consolidated
      Statement of Stockholders’ Equity for the three months
      endedDecember
      31, 2008
            5Consolidated Statements of
      Cash Flows for the three months endedDecember
      31, 2008 and December 31, 2007
            6Notes to Consolidated
      Financial Statements
            8Item
      2.  Management’s
      Discussion and Analysis of Financial Condition
    andResults
      of Operations
            11Item
      3.  Quantitative and Qualitative Disclosure about
      Market Risk
            41Item
      4.  Controls and Procedures
            48PART
      II -- OTHER INFORMATIONItem
      1.    Legal Proceedings
            48Item
      1A. Risk
      Factors
            48Item
      2.    Unregistered Sales of Equity Securities
      and Use of Proceeds
            49Item
      3.    Defaults Upon Senior
      Securities
            49Item
      4.    Submission of Matters to a Vote of Security
      Holders
            50Item
      5.    Other Information
            50Item
      6.    Exhibits
            50Signature
      Page
            51INDEX
      TO EXHIBITS
            52





2


PART
I -- FINANCIAL INFORMATION


Item
1. Financial Statements


CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


(Dollars
in thousands except per share data and amounts)


December
      31,
                          
                          
                          September
      30,2008
                          
                          
                          2008ASSETS:
                          
                          (Unaudited)Cash
      and cash equivalents
                          
                          $
                          143,134
                          
                          
                          $
                          87,138Investment
      securities:Available-for-sale
      ("AFS") at market (amortized cost of $51,560 and $51,700)
                          
                          
                          49,841
                          
                          
                          
                          49,586Held-to-maturity
      ("HTM") at cost (market value of $57,273 and $92,211)
                          
                          
                          56,124
                          
                          
                          
                          92,773Mortgage-related
      securities:AFS,
      at market (amortized cost of $1,442,111 and $1,491,536)
                          
                          
                          1,466,761
                          
                          
                          
                          1,484,055HTM,
      at cost (market value of $720,442 and $743,764)
                          
                          
                          709,541
                          
                          
                          
                          750,284Loans
      receivable held-for-sale, net
                          
                          
                          244
                          
                          
                          
                          997Loans
      receivable, net
                          
                          
                          5,456,569
                          
                          
                          
                          5,320,780Capital
      stock of Federal Home Loan Bank ("FHLB"), at cost
                          
                          
                          131,230
                          
                          
                          
                          124,406Accrued
      interest receivable
                          
                          
                          32,424
                          
                          
                          
                          33,704Premises
      and equipment, net
                          
                          
                          31,769
                          
                          
                          
                          29,874Real
      estate owned ("REO"), net
                          
                          
                          4,477
                          
                          
                          
                          5,146Other
      assets
                          
                          
                          75,210
                          
                          
                          
                          76,506TOTAL
      ASSETS
                          
                          $
                          8,157,324
                          
                          
                          $
                          8,055,249LIABILITIES:Deposits
                          
                          $
                          3,867,304
                          
                          
                          $
                          3,923,883Advances
      from FHLB
                          
                          
                          2,596,964
                          
                          
                          
                          2,447,129Other
      borrowings, net
                          
                          
                          713,595
                          
                          
                          
                          713,581Advance
      payments by borrowers for taxes and insurance
                          
                          
                          19,330
                          
                          
                          
                          53,213Income
      taxes payable
                          
                          
                          10,985
                          
                          
                          
                          6,554Deferred
      income tax liabilities, net
                          
                          
                          16,588
                          
                          
                          
                          3,223Accounts
      payable and accrued expenses
                          
                          
                          35,123
                          
                          
                          
                          36,450Total
      liabilities
                          
                          
                          7,259,889
                          
                          
                          
                          7,184,033STOCKHOLDERS'
      EQUITY:Preferred
      stock ($0.01 par value) 50,000,000 shares authorized; none
      issued
                          
                          
                          --
                          
                          
                          
                          --Common
      stock ($0.01 par value) 450,000,000 shares authorized,
      91,512,287shares
      issued; 74,109,081 and 74,079,868 shares outstandingas
      of December 31, 2008 and September 30, 2008, respectively
                          
                          
                          915
                          
                          
                          
                          915Additional
      paid-in capital
                          
                          
                          448,066
                          
                          
                          
                          445,391Unearned
      compensation, Employee Stock Ownership Plan ("ESOP")
                          
                          
                          (9,578
                          )
                          
                          
                          (10,082
                          )Unearned
      compensation, Recognition and Retention Plan ("RRP")
                          
                          
                          (468
                          )
                          
                          
                          (553
                          )Retained
      earnings
                          
                          
                          762,490
                          
                          
                          
                          759,375Accumulated
      other comprehensive gain (loss)
                          
                          
                          14,263
                          
                          
                          
                          (5,968
                          )Less
      shares held in treasury (17,403,206 and 17,432,419 shares as
      ofDecember
      31, 2008 and September 30, 2008, respectively, at cost)
                          
                          
                          (318,253
                          )
                          
                          
                          (317,862
                          )Total
      stockholders' equity
                          
                          
                          897,435
                          
                          
                          
                          871,216TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                          
                          $
                          8,157,324
                          
                          
                          $
                          8,055,249


See
accompanying notes to consolidated interim financial statements.


<Index>


3


CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME  (Unaudited)


(Dollars
and share counts in thousands except per share data and amounts)





For
      the Three Months EndedDecember
      31,2008
                        
                        
                        2007INTEREST
      AND DIVIDEND INCOME:Loans
      receivable
                        
                        $
                        76,716
                        
                        
                        $
                        76,263Mortgage-related
      securities
                        
                        
                        26,402
                        
                        
                        
                        17,127Investment
      securities
                        
                        
                        1,326
                        
                        
                        
                        4,130Capital
      stock of FHLB
                        
                        
                        780
                        
                        
                        
                        2,080Cash
      and cash equivalents
                        
                        
                        49
                        
                        
                        
                        1,428Total
      interest and dividend income
                        
                        
                        105,273
                        
                        
                        
                        101,028INTEREST
      EXPENSE:Deposits
                        
                        
                        26,785
                        
                        
                        
                        38,033FHLB
      advances
                        
                        
                        29,545
                        
                        
                        
                        34,161Other
      borrowings
                        
                        
                        7,725
                        
                        
                        
                        2,207Total
      interest expense
                        
                        
                        64,055
                        
                        
                        
                        74,401NET
      INTEREST AND DIVIDEND INCOME
                        
                        
                        41,218
                        
                        
                        
                        26,627PROVISION
      FOR LOAN LOSSES
                        
                        
                        549
                        
                        
                        
                        --NET
      INTEREST AND DIVIDEND INCOMEAFTER
      PROVISION FOR LOAN LOSSES
                        
                        
                        40,669
                        
                        
                        
                        26,627OTHER
      INCOME:Retail
      fees and charges
                        
                        
                        4,530
                        
                        
                        
                        4,489Loan
      fees
                        
                        
                        569
                        
                        
                        
                        598Insurance
      commissions
                        
                        
                        491
                        
                        
                        
                        478Income
      from BOLI
                        
                        
                        384
                        
                        
                        
                        621Gains
      on securities and loans receivable, net
                        
                        
                        24
                        
                        
                        
                        77Other,
      net
                        
                        
                        644
                        
                        
                        
                        848Total
      other income
                        
                        
                        6,642
                        
                        
                        
                        7,111OTHER
      EXPENSES:Salaries
      and employee benefits
                        
                        
                        11,164
                        
                        
                        
                        10,435Occupancy
      of premises
                        
                        
                        3,722
                        
                        
                        
                        3,157Advertising
                        
                        
                        1,742
                        
                        
                        
                        831Deposit
      and loan transaction fees
                        
                        
                        1,303
                        
                        
                        
                        1,355Regulatory
      and other services
                        
                        
                        1,149
                        
                        
                        
                        1,619Other,
      net
                        
                        
                        3,107
                        
                        
                        
                        2,054Total
      other expenses
                        
                        
                        22,187
                        
                        
                        
                        19,451INCOME
      BEFORE INCOME TAX EXPENSE
                        
                        
                        25,124
                        
                        
                        
                        14,287INCOME
      TAX EXPENSE
                        
                        
                        9,272
                        
                        
                        
                        5,174NET
      INCOME
                        
                        $
                        15,852
                        
                        
                        $
                        9,113Basic
      earnings per common share
                        
                        $
                        0.22
                        
                        
                        $
                        0.12Diluted
      earnings per common share
                        
                        $
                        0.22
                        
                        
                        $
                        0.12Dividends
      declared per public share
                        
                        $
                        0.61
                        
                        
                        $
                        0.50Basic
      weighted average common shares
                        
                        
                        73,063
                        
                        
                        
                        72,956Diluted
      weighted average common shares
                        
                        
                        73,162
                        
                        
                        
                        73,018




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 October 1, 2008
                $       915
                $ 445,391
                $         (10,082)
                $           (553)
                $   759,375
                $           (5,968)
                $ (317,862)
                $     871,216Comprehensive
      income:Net
      income
                
                
                
                
                15,852
                
                
                15,852Changes
      in unrealized gains(losses) onsecurities
      available-for-sale,net of deferred income taxesof $12,295
                
                
                
                
                
                20,231
                
                20,231Total
      comprehensive income
                
                
                
                
                
                
                
                36,083ESOP
      activity, net
                
                1,666
                504
                
                
                
                
                2,170RRP
      activity, net
                
                8
                
                
                
                
                
                8Stock
      based compensation - stock options and RRP
                
                92
                
                85
                
                
                
                177Acquisition
      of treasury stock
                
                
                
                
                
                
                (859)
                (859)Stock
      options exercised
                
                909
                
                
                
                
                468
                1,377Dividends
      on common stock to publicstockholders
      ($.61 per public share)
                
                
                
                
                (12,737)
                
                
                (12,737)Balance
      at December 31, 2008
                $       915
                $ 448,066
                $           (9,578)
                $           (468)
                $   762,490
                $          14,263
                $ (318,253)
                $       897,435








See
accompanying notes to consolidated interim financial statements.








<Index>





5


CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)


For
      the Three Months EndedDecember
      31,2008
                            
                            
                            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                            
                            $
                            15,852
                            
                            
                            $
                            9,113Adjustments
      to reconcile net income to net cash provided byoperating
      activities:FHLB
      stock dividends
                            
                            
                            (780
                            )
                            
                            
                            (2,080
                            )Provision for
      loan losses
                            
                            
                            549
                            
                            
                            
                            --Originations
      of loans receivable held-for-sale
                            
                            
                            (738
                            )
                            
                            
                            (7,631
                            )Proceeds
      from sales of loans receivable held-for-sale
                            
                            
                            1,508
                            
                            
                            
                            7,224Amortization
      and accretion of premiums and discounts on mortgage-related
      securities and investment securities
                            
                            
                            220
                            
                            
                            
                            164Depreciation
      and amortization of premises and equipment
                            
                            
                            1,156
                            
                            
                            
                            1,272Common
      stock committed to be released for allocation - ESOP
                            
                            
                            2,170
                            
                            
                            
                            1,656Stock
      based compensation - stock options and RRP
                            
                            
                            177
                            
                            
                            
                            216Other,
      net
                            
                            
                            (99
                            )
                            
                            
                            1,669Changes
      in:Accrued
      interest receivable
                            
                            
                            1,280
                            
                            
                            
                            4,662Other
      assets
                            
                            
                            1,303
                            
                            
                            
                            375Income
      taxes payable/receivable
                            
                            
                            5,855
                            
                            
                            
                            6,767Accounts
      payable and accrued expenses
                            
                            
                            (1,327
                            )
                            
                            
                            (4,383
                            )Net
      cash provided by operating activities
                            
                            
                            27,126
                            
                            
                            
                            19,024CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities or calls of investment securities AFS
                            
                            
                            28
                            
                            
                            
                            64,782Proceeds
      from maturities or calls of investment securities HTM
                            
                            
                            37,400
                            
                            
                            
                            125,108Purchases
      of investment securities HTM
                            
                            
                            (886
                            )
                            
                            
                            (165,590
                            )Principal
      collected on mortgage-related securities AFS
                            
                            
                            49,459
                            
                            
                            
                            44,882Purchases
      of mortgage-related securities AFS
                            
                            
                            --
                            
                            
                            
                            (286,168
                            )Principal
      collected on mortgage-related securities HTM
                            
                            
                            40,735
                            
                            
                            
                            50,361Purchases
      of mortgage-related securities HTM
                            
                            
                            --
                            
                            
                            
                            (1,033
                            )Proceeds
      from the redemption of capital stock of FHLB
                            
                            
                            2,958
                            
                            
                            
                            12,361Purchases
      of capital stock of FHLB
                            
                            
                            (9,002
                            )
                            
                            
                            (10,000
                            )Loan
      originations, net of principal collected
                            
                            
                            (25,289
                            )
                            
                            
                            (22,892
                            )Loan
      purchases, net of principal collected
                            
                            
                            (112,860
                            )
                            
                            
                            3,232Net
      deferred fee activity
                            
                            
                            (35
                            )
                            
                            
                            (111
                            )Purchases
      of premises and equipment
                            
                            
                            (3,088
                            )
                            
                            
                            (974
                            )Proceeds
      from sales of real estate owned, net
                            
                            
                            2,131
                            
                            
                            
                            976Net
      cash used in investing activities
                            
                            
                            (18,449
                            )
                            
                            
                            (185,066
                            )





(Continued)


6





For
      the Three Months EndedDecember
      31,2008
                      
                      
                      2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid
                      
                      
                      (12,737
                      )
                      
                      
                      (10,430
                      )Deposits,
      net of withdrawals
                      
                      
                      (56,579
                      )
                      
                      
                      58,667Proceeds
      from advances/line of credit from FHLB
                      
                      
                      312,682
                      
                      
                      
                      200,000Repayments
      on advances/line of credit from FHLB
                      
                      
                      (162,682
                      )
                      
                      
                      (200,000
                      )Proceeds
      from repurchase agreements
                      
                      
                      --
                      
                      
                      
                      250,000Change
      in advance payments by borrowers for taxes
    and insurance
                      
                      
                      (33,883
                      )
                      
                      
                      (34,112
                      )Acquisitions
      of treasury stock
                      
                      
                      (859
                      )
                      
                      
                      (7,245
                      )Stock
      options exercised
                      
                      
                      1,032
                      
                      
                      
                      96Excess
      tax benefits from stock options
                      
                      
                      345
                      
                      
                      
                      --Net
      cash provided by financing activities
                      
                      
                      47,319
                      
                      
                      
                      256,976NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      55,996
                      
                      
                      
                      90,934CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                      
                      
                      87,138
                      
                      
                      
                      162,791End
      of period
                      
                      $
                      143,134
                      
                      
                      $
                      253,725SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Income
      tax payments, net of refund
                      
                      $
                      3,417
                      
                      
                      $
                      (1,594
                      )Interest
      payments, net of interest credited to deposits
                      
                      $
                      36,542
                      
                      
                      $
                      35,031SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIES:Loans
      transferred to real estate owned
                      
                      $
                      1,846
                      
                      
                      $
                      901Market
      value change related to fair value hedge:Interest
      rate swaps hedging FHLB advances
                      
                      $
                      --
                      
                      
                      $
                      (12,729
                      )








(Concluded)


See accompanying notes to consolidated
interim financial statements.


<Index>


7


Notes to Consolidated Interim Financial Statements
(Unaudited)





1.   Basis
of Financial Statement Presentation


The
accompanying consolidated financial statements of Capitol Federal Financial
(“CFFN”) and subsidiary (the “Company”) have been prepared in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.  These statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2008 Annual Report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”).  Interim results are not
necessarily indicative of results for a full year.





In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting
periods.  Significant estimates include the allowance for loan losses,
other-than-temporary declines in the fair value of securities and other
financial instruments. Actual results could differ from those
estimates.  See “Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting
Policies.”





The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Capitol Federal Savings Bank (the “Bank”). The Bank has
a wholly owned subsidiary, Capitol Funds, Inc.  Capitol Funds, Inc.
has a wholly owned subsidiary, Capitol Federal Mortgage Reinsurance
Company.  All intercompany accounts and transactions have been
eliminated.





2.   Earnings
Per Share


The Company accounts for the 3,024,574 shares acquired by its ESOP
in accordance with Statement of Position (“SOP”) 93-6 and the shares awarded
pursuant to its RRP in a manner similar to the ESOP shares.  Shares
acquired by the ESOP and shares awarded pursuant to the RRP are not considered
in the basic average shares outstanding until the shares are committed for
allocation or vested to an employee’s individual account.  The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share calculations.





For
      the Three Months EndedDecember
      31,2008(1)
                    
                    
                    2007(2)(Dollars
      in thousands, except per share amounts)Net
      income
                    
                    $
                    15,852
                    
                    
                    $
                    9,113Average
      common shares outstanding
                    
                    
                    73,062,337
                    
                    
                    
                    72,955,067Average
      committed ESOP shares outstanding
                    
                    
                    548
                    
                    
                    
                    548Total
      basic average common shares outstanding
                    
                    
                    73,062,885
                    
                    
                    
                    72,955,615Effect
      of dilutive RRP shares
                    
                    
                    8,716
                    
                    
                    
                    6,789Effect
      of dilutive stock options
                    
                    
                    90,443
                    
                    
                    
                    55,183Total
      diluted average common shares outstanding
                    
                    
                    73,162,044
                    
                    
                    
                    73,017,587Net
      earnings per share:Basic
                    
                    $
                    0.22
                    
                    
                    $
                    0.12Diluted
                    
                    $
                    0.22
                    
                    
                    $
                    0.12


(1)Options to purchase 25,500 shares of common stock at $43.46 per share
were outstanding as of December 31, 2008, but were not included in the
computation of diluted earnings per share because they were anti-dilutive for
the three months ended December 31, 2008.
 
 (2)Options to purchase 185,300 shares of common stock at prices between
$33.69 per share and $38.77 per share were outstanding as of December 31, 2007,
but were not included in the computation of diluted earnings per share because
they were anti-dilutive for the three months ended December 31,
2007.


8







3.
Fair Value Measurements


Effective
October 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157 “Fair Value Measurements” which defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value
measurements. The statement applies whenever other standards require or permit
assets or liabilities to be measured at fair value.  The statement
does not require new fair value measurements, but rather provides a definition
and framework for measuring fair value which will result in greater consistency
and comparability among financial statements prepared under GAAP. The Company’s
adoption of SFAS No. 157 did not have a material impact on its financial
condition or results of operations.  The following disclosures, which
include certain disclosures which are generally not required in interim period
financial statements, are included herein as a result of the Company’s adoption
of SFAS No. 157.





The
Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. The Company did not have any
liabilities that were measured at fair value at December 31,
2008.  The Company’s securities that are AFS are recorded at fair
value on a recurring basis.  Additionally, from time to time, the
Company may be required to record at fair value other assets or liabilities on a
non-recurring basis, such as real estate owned, loans held for sale, and
impaired loans. These non-recurring fair value adjustments involve the
application of lower-of-cost-or-fair value accounting or write-downs of
individual assets.





In
accordance with SFAS No. 157, the Company groups its assets at fair value
in three levels, based on the markets in which the assets are traded and the
reliability of the assumptions used to determine fair value. These levels
are:





•
            
            Level
      1 — Valuation is based upon quoted prices for identical instruments traded
      in active markets.•
            
            Level
      2 — Valuation is based upon quoted prices for similar instruments in
      active markets, quoted prices for identical or similar instruments in
      markets that are not active, and model-based valuation techniques for
      which all significant assumptions are observable in the
      market.•
            
            Level
      3 — Valuation is generated from model-based techniques that use
      significant assumptions not observable in the market. These unobservable
      assumptions reflect the Company’s own estimates of assumptions that market
      participants would use in pricing the asset or liability. Valuation
      techniques include the use of option pricing models, discounted cash flow
      models, and similar techniques. The results cannot be determined with
      precision and may not be realized in an actual sale or immediate
      settlement of the asset or liability.





9


The
Company bases its fair values on the price that would be received to sell an
asset in an orderly transaction between market participants at the measurement
date.  SFAS No. 157 requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value.





The
following is a description of valuation methodologies used for assets measured
at fair value on a recurring basis.





AFS
Securities


The
Company’s AFS securities portfolio is carried at estimated fair value on a
recurring basis, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive income/loss in stockholders'
equity.  Substantially all of the securities within the AFS portfolio
consist of mortgage-related securities and investment securities issued by U.S.
Government sponsored enterprises or agencies.  The fair values for all
of the AFS securities are obtained from independent nationally recognized
pricing services. Various modeling techniques are used to determine pricing for
the Company’s  mortgage-related securities and investment securities,
including option pricing and discounted cash flow models. The inputs to these
models may include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, benchmark securities, bids, offers and reference
data.  There are some AFS securities in the AFS portfolio that have
significant unobservable input requiring the independent pricing services to use
some judgment in pricing the related securities.  These AFS securities
are classified as Level 3.  All other AFS securities are classified as
Level 2.





The
following table provides the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a recurring
basis at December 31, 2008:





Quoted
      Prices in Active
                          
                          
                          Significant
      Other
                          
                          
                          SignificantCarrying
                          
                          
                          Markets
      for Identical
                          
                          
                          Observable
      Inputs
                          
                          
                          Unobservable
      InputsValue
                          
                          
                          Assets
      (Level 1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)(1)(Dollars
      in thousands)AFS
      securities:Investment
      securities
                          
                          $
                          49,841
                          
                          
                          $
                          --
                          
                          
                          $
                          47,922
                          
                          
                          $
                          1,919Mortgage-related
      securities
                          
                          
                          1,466,761
                          
                          
                          
                          --
                          
                          
                          
                          1,466,761
                          
                          
                          
                          --$
                          1,516,602
                          
                          
                          $
                          --
                          
                          
                          $
                          1,514,683
                          
                          
                          $
                          1,919





(1)
The Company’s Level 3 AFS securities were immaterial as of December 31, 2008 and
had no material activity during the period ended December 31, 2008.





The
following is a description of valuation methodologies used for significant
assets measured at fair value on a non-recurring basis.





Loans
Receivable


Loans
which meet certain criteria are evaluated individually for impairment. A loan is
considered impaired when, based upon current information and events, it is
probable the Bank will be unable to collect all amounts due, including principal
and interest, according to the contractual terms of the loan
agreement.  Substantially all of the Bank’s impaired loans at December
31, 2008 are secured by real estate.  These impaired loans are
individually assessed to determine that the carrying value of the loan is not in
excess of the fair value of the collateral, less estimated selling costs. Fair
value is estimated through current appraisals, real estate brokers or listing
prices.  Fair values may be adjusted by management to reflect current
market conditions and, as such, are classified as Level 3.  Impaired
loans at December 31, 2008 were $19.5 million. Based on this evaluation, the
Company established an allowance for loan losses of $842 thousand at December
31, 2008 for such impaired loans.





REO,
net


REO
represents real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure and is carried at the lower of cost or fair value less estimated
selling costs.  Fair value is estimated through current appraisals,
real estate brokers or listing prices.  As these properties are
actively marketed, estimated fair values may be adjusted by management to
reflect current market conditions and, as such, are classified as Level
3.  REO at December 31, 2008 was $4.5 million. During the quarter
ending December 31, 2008, charge-offs to the allowance for loan losses related
to loans that were transferred to REO were $90 thousand. Write downs
related to REO that were charged to non-interest expense were $244 thousandfor
that same period.


10


The
following table provides the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a non-recurring
basis at December 31, 2008:





Quoted
      Prices in Active
                          
                          
                          Significant
      Other
                          
                          
                          SignificantMarkets
      for Identical
                          
                          
                          Observable
      Inputs
                          
                          
                          Unobservable
      InputsAssets
      (Level 1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)(Dollars
      in thousands)Impaired
      loans
                          
                          $
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          19,513REO,
      net
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          4,477$
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          23,990





4.  Recent
Accounting Pronouncements


In
January 2009, the Financial Accounting Standards Board (“FASB”) issued FASB
issued Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20.”  FSP
EITF 99-20-1 eliminates the requirement that a security holder’s best estimate
of cash flows be based upon those that “a market participant” would
use.  Instead, an other–than-temporary impairment (“OTTI”) should be
recognized as a realized loss through earnings when it is probable there has
been an adverse change in the security holder’s estimated cash flows from
previous projections.  This treatment is consistent with the
impairment model in SFAS No. 115 “Accounting for Certain Investments in Debt and
Equity Securities.”  FSP EITF 99-20-1 is effective for the Company for
the period ending December 31, 2008, and did not have a material impact on its
financial condition or results of operations.





Item 2.   Management’s Discussion and Analysis of
Financial Condition and Results of Operations





The
Company and its wholly-owned subsidiary, the Bank, may from time to time make
written or oral “forward-looking statements,” including statements contained in
the Company’s filings with the SEC.  These forward-looking statements
may be included in this Quarterly Report on Form 10-Q and the exhibits attached
to it, in the Company’s reports to stockholders and in other communications by
the Company, which are made in good faith by us pursuant to the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.





These
forward-looking statements include statements about our beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions, that
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond our control.  The
words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,”
“expect,” “intend,” “plan” and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
future results to differ materially from the plans, objectives, goals,
expectations, anticipations, estimates and intentions expressed in the
forward-looking statements:





·
            our
      ability to continue to maintain overhead costs at reasonable
      levels;


·
            our
      ability to continue to originate a significant volume of one- to
      four-family mortgage loans in our market
area;


·
            our
      ability to acquire funds from or invest funds in wholesale or secondary
      markets;


·
            the
      future earnings and capital levels of the Bank, which could affect the
      ability of the Company to pay dividends in accordance with its dividend
      policies;


·
            fluctuations
      in deposit flows, loan demand, and/or real estate values, which may
      adversely affect our business;


·
            the
      credit risks of lending and investing activities, including changes in the
      level and direction of loan delinquencies and write-offs and changes in
      estimates of the adequacy of the allowance for loan
  losses;


·
            the
      strength of the U.S. economy in general and the strength of the local
      economies in which we conduct
operations;


·
            the
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Board of Governors of the Federal
      Reserve System;


·
            the
      effects of, and changes in, foreign and military policies of the United
      States Government;


·
            inflation,
      interest rate, market and monetary
fluctuations;


·
            our
      ability to access cost-effective
funding;


11


·
            the
      timely development of and acceptance of our new products and services and
      the perceived overall value of these products and services by users,
      including the features, pricing and quality compared to competitors’
      products and services;


·
            the
      willingness of users to substitute competitors’ products and services for
      our products and services;


·
            our
      success in gaining regulatory approval of our products and services and
      branching locations, when required;


·
            the
      impact of changes in financial services laws and regulations, including
      laws concerning taxes, banking securities and insurance and the impact of
      other governmental initiatives affecting the financial services
      industry;


·
            implementing
      business initiatives may be more difficult or expensive than
      anticipated;


·
            technological
      changes;


·
            acquisitions
      and dispositions;


·
            changes
      in consumer spending and saving habits;
and


·
            our
      success at managing the risks involved in our
  business





This list
of important factors is not all inclusive.  We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of the Company or the Bank.





As used
in this Form 10-Q, unless we specify otherwise, “the Company,” “we,” “us,” and
“our” refer to Capitol Federal Financial, a United States corporation. “Capitol
Federal Savings,” and “the Bank,” refer to Capitol Federal Savings Bank, a
federal savings bank and the wholly-owned subsidiary of Capitol Federal
Financial. “MHC” refers to Capitol Federal Savings Bank MHC, a mutual holding
company and majority-owner of Capitol Federal Financial.





The
following discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company.  It
should be read in conjunction with the consolidated financial statements and
notes presented in this report.  The discussion includes comments
relating to the Bank, since the Bank is wholly owned by the Company and
comprises the majority of its assets and is the principal source of income for
the Company.  This discussion and analysis should be read in
conjunction with the management discussion and analysis included in the
Company’s 2008 Annual Report on Form 10-K filed with the SEC.








Executive
Summary





The
following summary should be read in conjunction with our Management’s Discussion
and Analysis of Financial Condition and Results of Operations in its
entirety.





Our
principal business consists of attracting deposits from the general public and
investing those funds primarily in permanent loans secured by first mortgages on
owner-occupied, one- to four-family residences.  We also originate
consumer loans, loans secured by first mortgages on non-owner-occupied one- to
four-family residences, 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 additional funding
sources.





The
Company is significantly affected by prevailing economic conditions including
federal monetary and fiscal policies and federal regulation of financial
institutions.  Deposit balances are influenced by a number of factors
including interest rates paid on competing personal investment products, the
level of personal income, and the personal rate of savings within our market
areas.  Lending activities are influenced by the demand for housing
and other loans, changing loan underwriting guidelines, as well as interest rate
pricing competition from other lending institutions.  The primary
sources of funds for lending activities include deposits, loan repayments,
investment income, borrowings, and funds provided from operations.





The
Company’s results of operations are primarily dependent on net interest income,
which is the difference between the interest earned on loans, mortgage-related
securities, investment securities, and cash, and the interest paid on deposits
and borrowings.  On a weekly basis, management reviews deposit flows,
loan demand, cash levels, and changes in several market rates to assess all
pricing strategies.  We generally price our loan and deposit products
based upon an analysis of our competition and changes in market
rates.  The Bank generally prices its first mortgage loan products
based upon prices available in the secondary market.  Generally,
deposit pricing is based upon a survey of peers in the Bank’s market areas, and
the need to attract funding and retain maturing
deposits.  The


12


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 2009, the financial services industry and the
economy as a whole continued to experience turmoil in the wake of steep declines
in credit and asset quality due largely to subprime lending, real estate
devaluations, and an increase in unemployment.  As a result of a
relatively stable economy and real estate market valuations in the Bank’s market
areas, along with the Bank’s traditional lending practices, the Bank has not
experienced the adverse operational impacts felt by many financial
institutions.  However, we are not immune to negative consequences
arising from the overall economic weakness and sharp downturn in the housing
industry nationally.  We have experienced a moderate increase in the
balance of our non-performing loans, but the balance of our non-performing loans
continue to remain at low levels relative to the size of our loan
portfolio.  We continue to closely monitor the local and national real
estate markets and other factors related to risks inherent in our loan
portfolio.  Based on our evaluation of our loan quality, real estate
markets, the overall economic environment, and the increase in and composition
of our delinquencies and non-performing loans, management determined a $549
thousand provision for loan losses was appropriate for the quarter ended
December 31, 2008.





During
late December 2008 and continuing into the second quarter of fiscal year 2009,
mortgage rates declined to record lows in response to the Federal Reserve’s
purchases of U.S. agency debt and mortgage-backed securities.  The
decline in mortgage rates has spurred an increased demand for our loan
modification program.  Our loan modification program allows existing
loan customers, whose loans have not been sold to third parties and who have
been current on their contractual loan payments for the previous 12 months, the
opportunity to modify their original loan terms to current loan terms being
offered.  Since the Federal Reserve lowered rates in December,
approximately $520.0 million of loan modification requests have been received,
through January 2009.  The weighted average interest rate reduction
for these loans is approximately 95 basis points.  During the same
time period, the Bank received approximately $90.0 million of refinancing
requests.  The volume and magnitude of these loan modifications and
refinances will likely have a negative impact on our net interest margin in
future quarters as a result of loans repricing to lower market interest
rates.
  The Bank
continues to maintain access to liquidity in excess of forecasted needs by
diversifying its funding sources and maintaining a strong retail oriented
deposit portfolio.  We believe the turmoil in the credit and equity
markets has made deposit products in strong financial institutions desirable for
many customers.  In addition, the investments of the Bank are
government-agency backed securities which are highly liquid and have not been
credit impaired and are therefore available as collateral for additional
borrowings or for sale if the need or unforeseen conditions
warrant.  See additional discussion regarding liquidity in the section
entitled “Liquidity and Capital Resources.”





The Bank
opened one new branch in our Wichita market area in October 2008.  The
Bank has plans to open two additional branches in fiscal year 2009 located in
our market area in south Johnson County, Kansas.  The Bank has
preliminary plans to open three additional branches in our market areas in
Kansas City and Wichita by September 30, 2010.





Available
Information





Company
and financial information, including press releases, Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports can be obtained free of charge from our investor
relations website, http://ir.capfed.com.  SEC filings are available on
our website immediately after they are electronically filed with or furnished to
the SEC, and are also available on the SEC’s website at
www.sec.gov.








Critical
Accounting Policies





Our most
critical accounting policies are the methodologies used to determine the
allowance for loan losses and other-than-temporary declines in the value of
securities.  These policies are important to the presentation of our
financial condition and results of operations, involve a high degree of
complexity, and require management to make difficult and subjective judgments
that may require assumptions or estimates about highly uncertain
matters.  The use of different judgments, assumptions, and estimates
could cause reported results to differ materially.  These critical
accounting policies and their application are reviewed at least annually by our
audit committee.  The following is a description of our critical
accounting policies and an explanation of the methods and assumptions underlying
their application.


13


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 analysis for general valuation allowances, specific
valuation allowances for identified problem loans and portfolio segments, and
knowledge of economic conditions which may lead to credit risk concerns about
the loan portfolio or segments of the loan portfolio.




All loans
that are not impaired, as defined in SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15” and No. 118
“Accounting by Creditors for Impairment of a Loan – Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114”, are included in a formula
analysis, as permitted by SFAS No. 5, “Accounting for
Contingencies.”   Management uses the formula analysis to
evaluate the adequacy of the general valuation allowance.  Each
quarter, the loan portfolio is segregated into categories in the formula
analysis based upon certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.), interest payments (fixed-rate,
adjustable-rate), loan source (originated or purchased), and payment status
(i.e. current or number of days delinquent).  Impaired loans and loans
with known potential losses are excluded from the analysis and evaluated for
specific valuation allowances.  Potential loss factors are assigned to
each category in the analysis based on management’s assessment of the potential
risk inherent in each category.  The greater the risks associated with
a particular category, the higher the loss factor.  Loss factors
increase as individual loans become classified, delinquent, the foreclosure
process begins or as economic conditions warrant.  The loss factors
are periodically reviewed by management for appropriateness giving consideration
to historical loss experience, delinquency and non-performing loan trends, the
results of foreclosed property transactions and the status of the local and
national economies and housing markets, in order to ascertain that the loss
factors cover probable and estimable losses inherent in the loan
portfolio.  Management’s evaluation of the inherent loss with respect
to these conditions is subject to a higher degree of uncertainty because they
are not identified with a specific problem loan or portfolio
segments.




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 analysis in the event that, in
management’s judgment, significant factors which affect the collectibility of
the portfolio or any category of the loan portfolio, as of the evaluation date,
are not reflected in the current loss factors.  By assessing the
estimated losses inherent in our loan portfolio on a quarterly basis, we can
adjust specific and inherent loss estimates based upon more current
information.




Specific
valuation allowances are established in connection with individual loan reviews
of specifically identified problem loans and the asset classification process,
including the procedures for impairment recognition under SFAS No. 114 and SFAS
No. 118.  Such evaluations include a review of loans on which full
collectibility is not reasonably assured, evaluation of the estimated fair value
of the underlying collateral, and other factors that determine risk exposure to
arrive at an adequate specific valuation allowance amount.  Loans with
an outstanding balance of $1.5 million or more are reviewed annually if secured
by property in one of the following categories:  multi-family (five or
more units) property, unimproved land, other improved commercial property,
acquisition and development of land projects, developed building lots, office
building, single-use building, or retail building.  Specific valuation
allowances are established if the review determines a quantifiable
impairment.  If a loan is not impaired, it is included in the formula
analysis.




Management
reviews the appropriateness of the allowance for loan losses 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 for loan losses include, but are not
limited to, changes in our underwriting standards, credit quality trends
(including changes in the balance and characteristics of non-performing loans
expected to result from existing economic conditions), trends in collateral
values, loan volumes and concentrations, and recent loss experience in
particular segments of the portfolio as of the balance sheet
date.  Management also measures the impact these conditions were
believed to have had on the collectibility of impaired loans.




Assessing
the adequacy of the allowance for loan losses is inherently
subjective.  Actual results could differ from our estimates as a
result of changes in economic or market conditions.  Changes in
estimates could result in a material change in the allowance for loan
losses.  In the opinion of management, the allowance for loan losses,
when taken as a whole, is adequate to absorb reasonable estimated losses
inherent in our loan portfolio.  However, future adjustments may be
necessary if portfolio performance or economic or market conditions differ
substantially from the conditions that existed at the time of the initial
determinations.




Securities
Impairment.  Management continually 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 nature of the investment, the length of time




14


the
security has had a market value less than the cost basis, the cause(s), 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,
expectation of an anticipated recovery period, 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 such 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.  At December 31, 2008, all securities were rated investment
grade, and there was a market for the securities.  At December 31,
2008, no securities had been identified as other-than-temporarily
impaired.










Financial
Condition





Total
assets increased from $8.06 billion at September 30, 2008 to $8.16 billion at
December 31, 2008.  The $102.1 million increase in assets was
primarily attributed to a $135.8 million increase in the loan portfolio as a
result of loan purchases during the quarter.  Total liabilities
increased from $7.18 billion at September 30, 2008 to $7.26 billion at December
31, 2008.  The $75.9 million increase in liabilities was primarily a
result of an increase in FHLB advances of $149.8 million, partially offset by a
decrease in deposits of $56.6 million.  The additional FHLB advance in
the current quarter was taken in anticipation of maturing advances in January
2009.  The new advance was taken prior to the maturity of the other
advances due to favorable rate and term offerings available at the time of the
new advance.  Stockholders’ equity increased $26.2 million to $897.4
million at December 31, 2008, from $871.2 million at September 30,
2008.  A large component of this increase was related to an increase
in Accumulated other comprehensive gain (loss) due to an increase in the market
value of AFS securities at December 31, 2008.





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
      31,2008
                
                
                2008
                
                
                2008
                
                
                2008
                
                
                2007(Dollars
      in thousands, except per share amounts)Selected
      Balance Sheet Data:Total
      assets
                
                $
                8,157,324
                
                
                $
                8,055,249
                
                
                $
                7,892,137
                
                
                $
                8,034,662
                
                
                $
                7,945,586Cash
      and cash equivalents
                
                
                143,134
                
                
                
                87,138
                
                
                
                86,437
                
                
                
                264,501
                
                
                
                253,725Investment
      securities
                
                
                105,965
                
                
                
                142,359
                
                
                
                144,346
                
                
                
                88,597
                
                
                
                500,045Mortgage-related
      securities
                
                
                2,176,302
                
                
                
                2,234,339
                
                
                
                2,066,685
                
                
                
                2,076,766
                
                
                
                1,608,897Loans
      receivable, net
                
                
                5,456,569
                
                
                
                5,320,780
                
                
                
                5,326,061
                
                
                
                5,292,866
                
                
                
                5,310,296Capital
      stock of FHLB
                
                
                131,230
                
                
                
                124,406
                
                
                
                129,172
                
                
                
                129,170
                
                
                
                139,380Deposits
                
                
                3,867,304
                
                
                
                3,923,883
                
                
                
                3,961,543
                
                
                
                4,020,966
                
                
                
                3,981,449Advances
      from FHLB
                
                
                2,596,964
                
                
                
                2,447,129
                
                
                
                2,547,294
                
                
                
                2,547,588
                
                
                
                2,746,532Other
      borrowings
                
                
                713,595
                
                
                
                713,581
                
                
                
                453,566
                
                
                
                453,552
                
                
                
                303,538Stockholders'
      equity
                
                
                897,435
                
                
                
                871,216
                
                
                
                863,906
                
                
                
                869,106
                
                
                
                862,579Accumulated
      other comprehensive gain (loss)
                
                
                14,263
                
                
                
                (5,968
                )
                
                
                (5,202
                )
                
                
                6,215
                
                
                
                3,165Equity
      to total assets at end of  period
                
                
                11.00
                %
                
                
                10.82
                %
                
                
                10.95
                %
                
                
                10.82
                %
                
                
                10.86
                %Book
      value per share
                
                $
                12.27
                
                
                $
                11.93
                
                
                $
                11.84
                
                
                $
                11.92
                
                
                $
                11.84







Loans Receivable.The loan portfolio
increased $135.8 million from $5.32 billion at September 30, 2008 to $5.46
billion at December 31, 2008.  The increase was primarily a result of
$146.1 million of loan purchases during the quarter.  Loans purchased
from nationwide lenders represented 15% of the loan portfolio at December 31,
2008 compared to 14% at September 30, 2008.  As of December 31, 2008,
the average balance of a purchased mortgage loan was approximately $350 thousand
while the average balance of an originated mortgage loan was approximately $120
thousand.




Included
in the loan portfolio at December 31, 2008 were $325.6 million of interest-only
loans, which were primarily purchased from nationwide lenders during fiscal year
2005.  These loans do not typically require principal payments during
their initial term, and have initial interest-only terms of either five or ten
years.  At December 31, 2008, $317.0 million, or 97%, of these loans
were still in their interest-only payment term.  As of December
31,




15


2008,
$144.7 million will begin to amortize principal within two years, $22.4 million
will begin amortizing principal within two-to-five years, and the remaining
$149.9 million will begin to amortize principal within five-to-ten
years.  Loans of this type generally are considered to be of greater
risk to the lender because of the possibility that the borrower may default once
principal payments are required.  The loans had an average credit
score of 737 and an average LTV ratio of 80% or less at the time of
purchase.  The Bank has not purchased any interest-only loans since
2006.




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, 2008
                            
                            
                            December
      31, 2007Amount
                            
                            
                            Rate
                            
                            
                            %
      of Total
                            
                            
                            Amount
                            
                            
                            Rate
                            
                            
                            %
      of TotalFixed-Rate:
                            
                            (Dollars
      in thousands)One-
      to four-family<=
      15 years
                            
                            $
                            28,017
                            
                            
                            
                            5.47
                            %
                            
                            
                            8.98
                            %
                            
                            $
                            26,614
                            
                            
                            
                            5.77
                            %
                            
                            
                            12.89
                            %>
      15 years
                            
                            
                            107,145
                            
                            
                            
                            5.79
                            
                            
                            
                            34.35
                            
                            
                            
                            110,121
                            
                            
                            
                            6.09
                            
                            
                            
                            53.34Other
      real estate
                            
                            
                            5,965
                            
                            
                            
                            5.88
                            
                            
                            
                            1.91
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --Consumer
                            
                            
                            3,284
                            
                            
                            
                            7.59
                            
                            
                            
                            1.05
                            
                            
                            
                            6,696
                            
                            
                            
                            8.42
                            
                            
                            
                            3.24Total
      fixed-rate
                            
                            
                            144,411
                            
                            
                            
                            5.77
                            
                            
                            
                            46.29
                            
                            
                            
                            143,431
                            
                            
                            
                            6.14
                            
                            
                            
                            69.47Adjustable-Rate:One-
      to four-family<=
      36 months
                            
                            
                            88,076
                            
                            
                            
                            5.00
                            
                            
                            
                            28.24
                            
                            
                            
                            9,740
                            
                            
                            
                            5.54
                            
                            
                            
                            4.72>
      36 months
                            
                            
                            55,922
                            
                            
                            
                            5.32
                            
                            
                            
                            17.93
                            
                            
                            
                            32,639
                            
                            
                            
                            5.85
                            
                            
                            
                            15.81Consumer
                            
                            
                            23,503
                            
                            
                            
                            5.09
                            
                            
                            
                            7.54
                            
                            
                            
                            20,655
                            
                            
                            
                            8.31
                            
                            
                            
                            10.00Total
      adjustable-rate
                            
                            
                            167,501
                            
                            
                            
                            5.12
                            
                            
                            
                            53.71
                            
                            
                            
                            63,034
                            
                            
                            
                            6.61
                            
                            
                            
                            30.53Total
      originations, refinances and purchases
                            
                            $
                            311,912
                            
                            
                            
                            5.42
                            %
                            
                            
                            100.00
                            %
                            
                            $
                            206,465
                            
                            
                            
                            6.29
                            %
                            
                            
                            100.00
                            %Purchased
      loans included above:Fixed-rate
                            
                            $
                            14,005
                            
                            
                            
                            5.76
                            %
                            
                            
                            
                            
                            
                            $
                            12,086
                            
                            
                            
                            6.20
                            %Adjustable-rate
                            
                            $
                            132,064
                            
                            
                            
                            5.09
                            %
                            
                            
                            
                            
                            
                            $
                            19,780
                            
                            
                            
                            5.85
                            %





During
the three months ended December 31, 2008, the rate on the Bank’s 30-year
fixed-rate one- to four-family loans, with no points paid by the borrower, were
approximately 260 basis points above the average 10-year Treasury rate, while
the rate on the Bank’s 15-year fixed-rate one- to four-family loans were
approximately 230 basis points above the average 10-year Treasury
rate.  The Bank generally prices its first mortgage loan products
based upon prices available in the secondary market.







16





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, 2008
                
                
                September
      30, 2008
                
                
                June
      30, 2008
                
                
                March
      31, 2008Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate(Dollars
      in thousands)Beginning
      balance
                
                $
                5,379,845
                
                
                
                5.66
                %
                
                $
                5,389,901
                
                
                
                5.63
                %
                
                $
                5,352,278
                
                
                
                5.66
                %
                
                $
                5,366,186
                
                
                
                5.71
                %Originations
      and refinances:Fixed
                
                
                130,406
                
                
                
                5.77
                
                
                
                140,565
                
                
                
                6.08
                
                
                
                213,098
                
                
                
                5.72
                
                
                
                167,003
                
                
                
                5.67Adjustable
                
                
                35,437
                
                
                
                5.23
                
                
                
                45,333
                
                
                
                5.69
                
                
                
                47,641
                
                
                
                5.82
                
                
                
                32,596
                
                
                
                6.24Purchases:Fixed
                
                
                14,005
                
                
                
                5.76
                
                
                
                7,309
                
                
                
                6.12
                
                
                
                18,209
                
                
                
                5.51
                
                
                
                10,191
                
                
                
                5.71Adjustable
                
                
                132,064
                
                
                
                5.09
                
                
                
                17,225
                
                
                
                5.76
                
                
                
                14,509
                
                
                
                5.51
                
                
                
                20,322
                
                
                
                5.51Repayments
                
                
                (183,532
                )
                
                
                
                
                
                
                (216,090
                )
                
                
                
                
                
                
                (254,784
                )
                
                
                
                
                
                
                (242,391
                )Other
      (1)
                
                
                (1,873
                )
                
                
                
                
                
                
                (4,398
                )
                
                
                
                
                
                
                (1,050
                )
                
                
                
                
                
                
                (1,629
                )Ending
      balance
                
                $
                5,506,352
                
                
                
                5.63
                %
                
                $
                5,379,845
                
                
                
                5.66
                %
                
                $
                5,389,901
                
                
                
                5.63
                %
                
                $
                5,352,278
                
                
                
                5.66
                %








(1)“Other”consists of transfers to REO
and net fees advanced.












17







The
following table presents the Company’s loan portfolio at the dates
indicated.




December
      31, 2008
                      
                      
                      September
      30, 2008Amount
                      
                      
                      Average
      Rate
                      
                      
                      %
      of Total
                      
                      
                      Amount
                      
                      
                      Average
      Rate
                      
                      
                      %
      of Total(Dollars
      in thousands)Real Estate
      LoansOne-
      to four-family
                      
                      $
                      5,154,113
                      
                      
                      
                      5.60
                      %
                      
                      
                      93.60
                      %
                      
                      $
                      5,026,358
                      
                      
                      
                      5.61
                      %
                      
                      
                      93.43
                      %Multi-family
      and commercial
                      
                      
                      61,353
                      
                      
                      
                      6.38
                      
                      
                      
                      1.12
                      
                      
                      
                      56,081
                      
                      
                      
                      6.44
                      
                      
                      
                      1.04Construction
      and development
                      
                      
                      76,601
                      
                      
                      
                      5.59
                      
                      
                      
                      1.39
                      
                      
                      
                      85,178
                      
                      
                      
                      5.66
                      
                      
                      
                      1.58Total
      real estate loans
                      
                      
                      5,292,067
                      
                      
                      
                      5.61
                      
                      
                      
                      96.11
                      
                      
                      
                      5,167,617
                      
                      
                      
                      5.62
                      
                      
                      
                      96.05Consumer
      LoansSavings
      loans
                      
                      
                      4,497
                      
                      
                      
                      5.79
                      
                      
                      
                      0.08
                      
                      
                      
                      4,634
                      
                      
                      
                      5.95
                      
                      
                      
                      0.09Automobile
                      
                      
                      3,307
                      
                      
                      
                      6.97
                      
                      
                      
                      0.06
                      
                      
                      
                      3,484
                      
                      
                      
                      7.00
                      
                      
                      
                      0.07Home
      equity
                      
                      
                      205,409
                      
                      
                      
                      5.97
                      
                      
                      
                      3.73
                      
                      
                      
                      202,956
                      
                      
                      
                      6.53
                      
                      
                      
                      3.77Other
                      
                      
                      1,072
                      
                      
                      
                      7.74
                      
                      
                      
                      0.02
                      
                      
                      
                      1,154
                      
                      
                      
                      7.13
                      
                      
                      
                      0.02Total
      consumer loans
                      
                      
                      214,285
                      
                      
                      
                      5.99
                      
                      
                      
                      3.89
                      
                      
                      
                      212,228
                      
                      
                      
                      6.52
                      
                      
                      
                      3.95Total
      loans receivable
                      
                      
                      5,506,352
                      
                      
                      
                      5.63
                      %
                      
                      
                      100.00
                      %
                      
                      
                      5,379,845
                      
                      
                      
                      5.66
                      %
                      
                      
                      100.00
                      %Less:Loans
      in process
                      
                      
                      33,593
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      43,186Deferred
      fees and discounts
                      
                      
                      10,053
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,088Allowance
      for loan losses
                      
                      
                      6,137
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,791Total
      loans receivable, net
                      
                      $
                      5,456,569
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      5,320,780







Lending
Practices and Underwriting Standards





The
Bank’s primary lending activity is the origination of loans and the purchase of
loans from a select group of correspondent lenders.  These loans are
generally secured by first mortgages on owner-occupied, one- to four-family
residences in the Bank’s primary market areas and select market areas in
Missouri.  The Bank also makes consumer loans, construction loans
secured by residential properties, commercial properties and multi-family real
estate loans secured by multi-family dwellings or commercial
properties.  Additional lending volume has been generated by
purchasing whole one- to four-family mortgage loans from nationwide
lenders.  By purchasing loans from nationwide lenders, the Bank is
able to attain some geographic diversification and mitigate credit concentration
risks in its loan portfolio, and to help mitigate the Bank’s interest rate risk
exposure because the purchased loans are predominately adjustable-rate or
15-year fixed-rate loans.





The
Bank’s one- to four-family loans are primarily fully amortizing fixed- or
adjustable-rate loans with contractual maturities of up to 30 years, except for
interest-only loans which require the payment of interest during the
interest-only period, all with payments due monthly.  Our one- to
four- family loans are generally not assumable and do not contain prepayment
penalties.  A “due on sale” clause, allowing the Bank to declare the
unpaid principal balance due and payable upon the sale of the secured property,
is generally included in the security instrument.





Current
adjustable-rate one- to four-family loans originated by the Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the
interest rate, as well as a specified maximum lifetime cap and minimum rate, or
floor.  As a consequence of using caps, the interest rates on these
loans may not be as rate sensitive as our cost of funds. Negative amortization
of principal is not allowed.  Borrowers are qualified based on the
principal, interest, taxes and insurance payments at the initial rate for three,
five and seven year adjustable-rate mortgage (“ARM”) loans.  After the
initial three, five or seven year period, the interest rate is repriced annually
and the new principal and interest payment is based on the new interest rate,
remaining unpaid principal balance and term of the


18


ARM
loan.  Our ARM loans are not automatically convertible into fixed-rate
loans; however, we do allow borrowers to pay a modification fee to convert an
ARM loan to a fixed-rate loan.  ARM loans can pose different credit
risks than fixed-rate loans, primarily because as interest rates rise, the
borrower’s payment also rises, increasing the potential for
default.  This specific risk type is known as repricing
risk.





During
2008, the Bank discontinued offering an interest-only ARM product, but holds in
its portfolio originated and purchased interest-only ARM loans.  The
product was discontinued to reduce future credit risk exposure.  At
the time of origination, these loans did not require principal payments for a
period of up to ten years.  Borrowers were qualified based on a fully
amortizing payment at the initial loan rate.  The Bank was more
restrictive on debt-to-income ratios and credit scores on interest-only ARM
loans than on other ARM loans to offset the potential risk of payment shock at
the time the loan rate adjusts and/or the principal and interest payments
begin.   At December 31, 2008, 6% of our loan portfolio consisted
of non-amortizing interest-only ARM loans.  The majority of these
loans were purchased from nationwide lenders during fiscal year
2005.  These loans had an initial interest-only term of either five or
ten years, with approximately equal distribution between the two
terms.





One- to
four-family loans are 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 fee appraisers, both of which are independent of the
loan origination function and have been approved by the board of
directors.





For loans
with an LTV ratio in excess of 80% at the time of origination, private mortgage
insurance is required in order to reduce the Bank’s loss exposure to less than
80% of the appraised value or the purchase price of the property.  The
Bank will lend up to 97% of the lesser of the appraised value or purchase price
for one- to four-family loans provided the Bank is able to obtain private
mortgage insurance.





The
underwriting standards of the lenders from whom the Bank purchases loans are
generally similar to the Bank’s internal underwriting standards.  “No
Doc” or “Stated Income, Stated Assets” loans are not
permitted.  Lenders are required to fully document all data sources
for each application.  Management believes these requirements reduce
the credit risk associated with these loans.  Before committing to
purchase a pool of loans from a nationwide lender, the Bank’s Chief Lending
Officer or Secondary Marketing Manager reviews specific criteria such as loan
amount, credit scores, LTV ratios, geographic location, and debt ratios of each
loan in the pool.  If the specific criteria do not meet the Bank’s
underwriting standards and compensating factors are not sufficient, then a loan
will be removed from the pool.  Once the review of the specific
criteria is complete and loans not meeting the Bank’s standards are removed from
the pool, changes are sent back to the lender for acceptance and
pricing.  Before the pool is funded, an approved Bank underwriter
reviews at least 25% of the loan files and the supporting documentation in the
pool.  Our standard contractual agreement with the seller includes
recourse options for any breach of representation or warranty with the respect
to the loans purchased.





The
underwriting of loans purchased through correspondent lenders is generally
performed by a third party underwriter who is under contract to use a product
description supplied by the Bank that is specific to each
correspondent.  The products offered by the correspondents are at
least as restrictive as the Bank’s own internal underwriting
standards.  Correspondent lenders are located within the metropolitan
Kansas City market area and select market areas in Missouri.  The Bank
purchases approved loans and the related servicing rights, on a loan-by-loan
basis.





In an
effort to offset the impact of repayments and to retain our customers, the Bank
offers existing loan customers whose loans have not been sold to third parties
the opportunity to modify their original loan terms to new loan terms generally
consistent with those currently being offered.  This is a convenient
tool for customers who may have considered refinancing from an ARM loan to a
fixed-rate loan, would like to reduce their term, or take advantage
of


19


lower
rates associated with current market rates.  The program helps ensure
the Bank maintains the relationship with the customer and significantly reduces
the amount of effort required for customers to obtain current market pricing and
terms without having to refinance their loans.  The Bank charges a fee
for this service generally comparable to fees charged on new
loans.  The Bank does not solicit customers for this program, but
considers it a valuable opportunity to retain customers who, due to our strict
initial underwriting, could likely obtain similar financing
elsewhere.





The Bank
also originates construction-to-permanent loans primarily secured by one- to
four-family residential real estate.  Presently, all of the one- to
four-family construction loans are secured by property located within the Bank’s
market areas.  Construction loans are obtained primarily by homeowners
who will occupy the property when construction is complete.  The Bank
is also a participant with five other banking institutions on a construction
loan secured by a retail shopping center in Kansas with two major
retailers.  Construction loans to builders for speculative purposes
are not permitted.  The application process includes submission of
complete plans, specifications, and costs of the project to be
constructed.  These items are used as a basis to determine the
appraised value of the subject property.  All construction loans are
manually underwritten using the Bank’s internal underwriting
standards.  The construction and permanent loans are closed at the
same time allowing the borrower to secure the interest rate at the beginning of
the construction period and throughout the permanent
loan.  Construction draw requests and the supporting documentation are
reviewed and approved by management.  The Bank also performs regular
documented inspections of the construction project to ensure the funds are being
used for the intended purpose and the project is being completed according to
the plans and specifications provided.





The Bank
offers a variety of secured consumer loans, including home equity loans and
lines of credit, home improvement loans, auto loans, and loans secured by
savings deposits.  The Bank also originates a very limited amount of
unsecured loans.  The Bank does not originate any consumer loans on an
indirect basis, such as contracts purchased from retailers of goods or services
which have extended credit to their customers.  All consumer loans are
originated in the Bank’s market areas.  Home equity loans may be
originated in amounts, together with the amount of the existing first mortgage,
of up to 95% of the value of the property securing the loan.  In order
to minimize risk of loss, home equity loans that are greater than 80% of the
value of the property, when combined with the first mortgage, require 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 maximum term of 12 months, monthly payments of accrued interest, and a
balloon payment at maturity.  Repaid principal may be re-advanced at
any time, not to exceed the original credit limit of the loan.  Other
consumer loan terms vary according to the type of collateral and the length of
the contract.  The majority of the consumer loan portfolio is
comprised of home equity lines of credit, which have interest rates that can
adjust monthly based upon changes in the prime rate, to a maximum of
18%.





The
underwriting standards for consumer loans include a determination of the
applicant’s payment history on other debts and an assessment of their ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security in relation to
the proposed loan amount.





Consumer
loans generally have shorter terms to maturity or reprice more frequently, which
reduces our exposure to changes in interest rates, and usually carry higher
rates of interest than do one- to four-family mortgage
loans.  However, consumer loans may entail greater risk than do one-
to four-family mortgage loans, particularly in the case of consumer loans that
are secured by rapidly depreciable assets, such as
automobiles.  Management believes that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities.





The
Bank’s multi-family and commercial real estate loans are secured primarily by
multi-family dwellings and small commercial buildings generally located in the
Bank’s market areas.  These loans are granted based on the income
producing potential of the property and the financial strength of the
borrower.  LTV ratios on multi-family and commercial real estate loans
usually do not exceed 80% of the appraised value of the property securing the
loans.  The net operating income, which is the income derived from the
operation of the property less all operating expenses, must be sufficient to
cover the payments related to the outstanding debt at the time of
origination.  The Bank generally requires personal guarantees of the
borrowers covering a portion of the debt in addition to the


20


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.  Our multi-family and
commercial real estate loans are originated with either a fixed or adjustable
interest rate.  The interest rate on adjustable-rate loans is based on
a variety of indices, generally determined through negotiation with the
borrower.  While maximum maturities may extend to 30 years, these
loans frequently have shorter maturities and may not be fully amortizing,
requiring balloon payments of unamortized principal at maturity.





Our
multi-family and commercial real estate loans are generally large dollar loans
and involve a greater degree of credit risk than one- to four-family mortgage
loans.  Such loans typically involve large balances to single
borrowers or groups of related borrowers.  Because payments on
multi-family and commercial real estate loans are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the
economy.  If the cash flow from the project is reduced, or if leases
are not obtained or renewed, the borrower’s ability to repay the loan may be
impaired.  See “Asset Quality - Non-performing Loans.”





All
originated loans are generated by our own employees.  Loans over $500
thousand must be underwritten by two Class V underwriters, which is the highest
class of underwriter.  Any loan greater than $750 thousand must be
approved by the Asset and Liability Management Committee (“ALCO”) and loans over
$1.5 million must be approved by the board of directors.  For loans
requiring ALCO and/or board of directors’ approval, lending management is
responsible for presenting to the ALCO and/or board of directors information
about the creditworthiness of the borrower and the 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, assets, 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.





Asset
Quality




Historically,
the Bank’s underwriting guidelines have provided the Bank with loans of high
quality and generally low delinquencies and low levels of non-performing assets
compared to national levels.  Of particular importance is the complete
documentation required for each loan the Bank originates and
purchases.  This allows the Bank to make an informed credit decision
based upon a thorough assessment of the borrower’s ability to repay the loan
compared to underwriting methodologies that do not require full
documentation.





The
following matrix shows the balance of one-to-four family mortgage loans
cross-referenced by LTV ratio and credit score.  The LTV ratios used
in the matrix were based on the current loan balance and the lesser of the
purchase price or the most recent bank appraisal available.  Credit
scores were updated in January 2008 for loans originated by the Bank and
purchased loans.  Credit scores were updated again for the majority of
our purchased loans as of August 2008.  Management will continue to
update credit scores as deemed necessary based upon economic
conditions.  Per the matrix, the greatest concentration of loans fall
into the “751 and above” credit score category and have a LTV ratio of less than
70%.  The loans falling into the “less than 660” credit score category
and having LTV ratios of more than 80% comprise the lowest
concentration.




Credit
      ScoreLess
      than 660
                  
                  661
      to 700
                  
                  701
      to 750
                  
                  751
      and above
                  
                  TotalLTV ratio
                  Amount
                  %
      of total
                  
                  
                  Amount
                  %
      of total
                  
                  
                  Amount
                  %
      of total
                  
                  
                  Amount
                  %
      of total
                  
                  
                  Amount
                  %
      of total(Dollars
      in thousands)Less
      than 70%
                  $              135,886
                  2.6
                  %
                  
                  $        155,796
                  3.0
                  %
                  
                  $           450,170
                  8.7
                  %
                  
                  $          1,824,343
                  35.4
                  %
                  
                  $        2,566,195
                  49.8
                  %70%
      to 80%
                  109,886
                  2.1
                  
                  
                  134,025
                  2.6
                  
                  
                  397,071
                  7.7
                  
                  
                  1,162,127
                  22.6
                  
                  
                  1,803,109
                  35.0More
      than 80%
                  75,304
                  1.5
                  
                  
                  90,077
                  1.8
                  
                  
                  225,615
                  4.4
                  
                  
                  393,813
                  7.6
                  
                  
                  784,809
                  15.2Total
                  $              321,076
                  6.2
                  %
                  
                  $        379,898
                  7.4
                  %
                  
                  $        1,072,856
                  20.8
                  %
                  
                  $          3,380,283
                  65.6
                  %
                  
                  $        5,154,113
                  100.0
                  %


21


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,
                
                
                December
      31,2008
                
                
                2008
                
                
                2008
                
                
                2008
                
                
                2007(Dollars
      in thousands)Loans
      30-89 days delinquentOriginated
                
                $
                15,691
                
                
                $
                14,025
                
                
                $
                12,591
                
                
                $
                10,552
                
                
                $
                12,010Purchased
                
                
                9,359
                
                
                
                7,083
                
                
                
                6,621
                
                
                
                8,356
                
                
                
                10,702Non-performing
      loansOriginated
                
                
                9,607
                
                
                
                6,958
                
                
                
                6,555
                
                
                
                5,440
                
                
                
                7,218Purchased
                
                
                9,625
                
                
                
                6,708
                
                
                
                6,699
                
                
                
                4,444
                
                
                
                3,014Real
      estate ownedOriginated
                
                
                2,833
                
                
                
                2,228
                
                
                
                1,274
                
                
                
                2,329
                
                
                
                1,783Purchased
                
                
                1,644
                
                
                
                2,918
                
                
                
                933
                
                
                
                435
                
                
                
                240Non-performing
      assets to total assets atend
      of period
                
                
                0.29
                %
                
                
                0.23
                %
                
                
                0.20
                %
                
                
                0.16
                %
                
                
                0.15
                %Non-performing
      loans to total loans
                
                
                0.35
                %
                
                
                0.26
                %
                
                
                0.25
                %
                
                
                0.19
                %
                
                
                0.19
                %





Loans 30
to 89 days delinquent, which are not included in non-performing loans, increased
approximately $4.0 million from $21.1 million at September 30, 2008 to $25.1
million at December 31, 2008.  Of the $25.1 million at December 31,
2008, $15.7 million, or 63% represent loans secured by property located in our
market areas and $9.4 million, or 37%, were purchased loans.  There is
not believed to be a geographic trend associated with our purchased loans 30 to
89 days delinquent.  During the past three quarters, on average,
approximately 45% of loans that entered the 30 to 89 days delinquent category
made their required loan payments and did not go back into the 30-89 day
delinquent category during the noted time period.  During the same
time period, on average, approximately 35% of loans that entered the 30 to 89
days delinquent category made a portion of their required loan payments but the
loans either stayed in the 30 to 89 day delinquent category because not all
required loan payments were made or went back into the 30-89 day delinquent
category at some point during the noted time period as the borrower once again
became delinquent on their loan payments.  Approximately 20% of the
loans that entered the 30-89 days delinquent category during the past three
quarters entered the non-performing loans category.





Non-performing
loans consist of loans 90 or more days delinquent and loans in the process of
foreclosure.  Non-performing loans increased $5.5 million from $13.7
million at September 30, 2008 to $19.2 million at December 31,
2008.  The increase in non-performing loans increased our ratio of
non-performing loans to total loans from 0.26% as of September 30, 2008 to 0.35%
at December 31, 2008.  There is not believed to be a geographic trend
associated with our purchased non-performing loans.





Of the
$19.2 million of non-performing loans at December 31, 2008, $4.7 million or 24%,
of total non-performing loans were purchased from one nationwide
lender.  The total balance of loans purchased from this lender was
$102.0 million or 2% of the total loan portfolio.   The majority
of the loans purchased from this lender are so-called “80-20” combination
purchase mortgage loans.  These combinations involved an 80% LTV first
mortgage and a simultaneous 20% LTV second mortgage.  The Bank
purchased only the first mortgage.





At
December 31, 2008, non-performing loans with LTV ratios greater than 80%
comprised 21% of total non-performing loans.  Of the non-performing
loans with LTV ratios greater than 80%, 89% had private mortgage insurance which
substantially reduces or eliminates the Bank’s exposure to loss.  The
balance of non-performing loans with LTV ratios greater than 80% with no private
mortgage insurance was $442 thousand at December 31,


22


2008.  At
origination, these loans had LTV ratios less than 80% or had private mortgage
insurance, but as a result of updating the appraisals, the LTV ratios are now in
excess of 80%.





Each
quarter management reviews the risk exposure of the Bank’s mortgage loan
portfolio using its established formula allowance methodology.  In
addition, management considers other then-existing inherent risks to the loan
portfolio based upon our recent experience with non-performing one- to
four-family loans, well-documented trends in the markets in which we have
purchased loans, and changes in the credit risks in the lending portfolio based
upon changing borrower credit characteristics.  Also see “Critical
Accounting Policies – Allowance for Loan Losses.”  We continue to
focus our attention on the purchased loan portfolio because those loans are, in
some instances, located in markets that have seen significant declines in home
valuations.  A provision for loan loss of $549 thousand was recorded
during the current quarter primarily due to additional risks management believes
are inherent in our purchased loan portfolio, as discussed above.  The
majority of the $549 thousand related to general and specific valuation
allowances on purchased loans.  In such cases where the real estate
market values of the underlying collateral decreased below our outstanding loan
balance, we recorded a specific allowance.  Since we rely primarily on
the collateral securing a one-to-four family mortgage loan if a loan were to
enter foreclosure, the additional provision for the loans with specific
allowances was necessary.











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
      31,2008
                      
                      
                      2007Allowance
      for loan losses:
                      
                      (Dollars
      in thousands)Beginning
      balance
                      
                      $
                      5,791
                      
                      
                      $
                      4,181Losses
      charged against the allowance:One-
      to four-family loans
                      
                      
                      192
                      
                      
                      
                      (3
                      )Multi-family
      loans
                      
                      
                      --
                      
                      
                      
                      --Commercial
      and other loans
                      
                      
                      --
                      
                      
                      
                      --Consumer
      loans
                      
                      
                      11
                      
                      
                      
                      13Total
      charge-offs
                      
                      
                      203
                      
                      
                      
                      10Recoveries
                      
                      
                      --
                      
                      
                      
                      --Provision
      charged to expense
                      
                      
                      549
                      
                      
                      
                      --Ending
      balance
                      
                      $
                      6,137
                      
                      
                      $
                      4,171Allowance
      for loan losses to non-performing
      loans at period end
                      
                      
                      31.91
                      %
                      
                      
                      40.76
                      %Allowance
      for loan losses to loansreceivable,
      net at period end
                      
                      
                      0.11
                      %
                      
                      
                      0.08
                      %








23





Mortgage-Related
Securities.  The balance of mortgage-related securities
decreased $58.0 million from $2.23 billion at September 30, 2008 to $2.18
billion at December 31, 2008.  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 after historical prepayment speeds have been
applied.  The increase in the WAL at December 31, 2008 compared to
September 30, 2008 was due to a slowdown in actual prepayments during the
current quarter.





For
      the Three Months EndedDecember
      31, 2008
                                                          
                                                          
                                                          September
      30, 2008
                                                          
                                                          
                                                          June
      30, 2008
                                                          
                                                          
                                                          March
      31, 2008Amount
                                                          
                                                          
                                                          Yield
                                                          
                                                          
                                                          WAL
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Yield
                                                          
                                                          
                                                          WAL
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Yield
                                                          
                                                          
                                                          WAL
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Yield
                                                          
                                                          
                                                          WAL(Dollars
      in thousands)Beginning
      balance
                                                          
                                                          $
                                                          2,234,339
                                                          
                                                          
                                                          
                                                          4.82
                                                          %
                                                          
                                                          
                                                          5.05
                                                          
                                                          
                                                          $
                                                          2,066,685
                                                          
                                                          
                                                          
                                                          4.76
                                                          %
                                                          
                                                          
                                                          4.32
                                                          
                                                          
                                                          $
                                                          2,076,766
                                                          
                                                          
                                                          
                                                          4.70
                                                          %
                                                          
                                                          
                                                          4.88
                                                          
                                                          
                                                          $
                                                          1,608,897
                                                          
                                                          
                                                          
                                                          4.66
                                                          %
                                                          
                                                          
                                                          4.41Maturities
      and repayments
                                                          
                                                          
                                                          (90,194
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (112,777
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (172,376
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (119,682
                                                          )Net
      amortization ofpremiums/discounts
                                                          
                                                          
                                                          27
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          23
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (9
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (426
                                                          )Purchases:Fixed
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          60,137
                                                          
                                                          
                                                          
                                                          5.03
                                                          
                                                          
                                                          
                                                          4.48
                                                          
                                                          
                                                          
                                                          129,614
                                                          
                                                          
                                                          
                                                          4.64
                                                          
                                                          
                                                          
                                                          4.56
                                                          
                                                          
                                                          
                                                          395,048
                                                          
                                                          
                                                          
                                                          4.90
                                                          
                                                          
                                                          
                                                          4.98Adjustable
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          219,888
                                                          
                                                          
                                                          
                                                          4.99
                                                          
                                                          
                                                          
                                                          5.07
                                                          
                                                          
                                                          
                                                          50,443
                                                          
                                                          
                                                          
                                                          4.25
                                                          
                                                          
                                                          
                                                          4.04
                                                          
                                                          
                                                          
                                                          188,024
                                                          
                                                          
                                                          
                                                          4.71
                                                          
                                                          
                                                          
                                                          5.06Change
      in valuation on AFSsecurities
                                                          
                                                          
                                                          32,130
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          383
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (17,753
                                                          )
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          4,905Ending
      balance
                                                          
                                                          $
                                                          2,176,302
                                                          
                                                          
                                                          
                                                          4.82
                                                          %
                                                          
                                                          
                                                          5.81
                                                          
                                                          
                                                          $
                                                          2,234,339
                                                          
                                                          
                                                          
                                                          4.82
                                                          %
                                                          
                                                          
                                                          5.05
                                                          
                                                          
                                                          $
                                                          2,066,685
                                                          
                                                          
                                                          
                                                          4.76
                                                          %
                                                          
                                                          
                                                          4.32
                                                          
                                                          
                                                          $
                                                          2,076,766
                                                          
                                                          
                                                          
                                                          4.70
                                                          %
                                                          
                                                          
                                                          4.88








24








Investment
Securities.  Investment securities, which consist primarily of
agency bonds (primarily issued by FNMA, FHLMC, or FHLB) and municipal
investments, decreased $36.4 million from $142.4 million at September 30, 2008
to $106.0 million at December 31, 2008.  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, 2008
compared to September 30, 2008 was a result of calls and/or maturities of
securities with rates higher than that of the remaining
portfolio.  The beginning and ending WAL represent the estimated
remaining maturity of the securities after projected call dates have been
considered, based upon market rates at each date presented.  The
decrease in the WAL at December 31, 2008 compared to September 30, 2008 was due
to issuers of certain securities in the portfolio exercising their option to
call the security and to maturing securities.





For
      the Three Months EndedDecember
      31, 2008
                      
                      
                      September
      30, 2008
                      
                      
                      June
      30, 2008
                      
                      
                      March
      31, 2008Amount
                      
                      
                      Yield
                      
                      
                      WAL
                      
                      
                      Amount
                      
                      
                      Yield
                      
                      
                      WAL
                      
                      
                      Amount
                      
                      
                      Yield
                      
                      
                      WAL
                      
                      
                      Amount
                      
                      
                      Yield
                      
                      
                      WAL(Dollars
      in thousands)Beginning
      balance
                      
                      $
                      142,359
                      
                      
                      
                      3.94
                      %
                      
                      
                      6.06
                      
                      
                      $
                      144,346
                      
                      
                      
                      3.94
                      %
                      
                      
                      4.45
                      
                      
                      $
                      88,597
                      
                      
                      
                      4.48
                      %
                      
                      
                      2.78
                      
                      
                      $
                      500,045
                      
                      
                      
                      4.14
                      %
                      
                      
                      0.67Maturities
      and calls
                      
                      
                      (37,428
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (119
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (4,009
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (420,000
                      )Net
      amortization ofpremiums/discounts
                      
                      
                      (247
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (244
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (204
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      307Purchases:Fixed
                      
                      
                      886
                      
                      
                      
                      4.52
                      
                      
                      
                      2.75
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      56,669
                      
                      
                      
                      3.12
                      
                      
                      
                      1.46
                      
                      
                      
                      8,253
                      
                      
                      
                      3.20
                      
                      
                      
                      5.67Adjustable
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      3,874
                      
                      
                      
                      6.58
                      
                      
                      
                      28.98
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Change
      in valuationof
      AFS securities
                      
                      
                      395
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,624
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (581
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (8
                      )Ending
      balance
                      
                      $
                      105,965
                      
                      
                      
                      3.34
                      %
                      
                      
                      3.64
                      
                      
                      $
                      142,359
                      
                      
                      
                      3.94
                      %
                      
                      
                      6.06
                      
                      
                      $
                      144,346
                      
                      
                      
                      3.94
                      %
                      
                      
                      4.45
                      
                      
                      $
                      88,597
                      
                      
                      
                      4.48
                      %
                      
                      
                      2.78








25


Liabilities.   Total
liabilities increased from $7.18 billion at September 30, 2008 to $7.26 billion
at December 31, 2008.  The $75.9 million increase in liabilities was
primarily a result of an increase in FHLB advances of $149.8 million, partially
offset by a decrease in deposits of $56.6 million.  The additional
FHLB advance in the first quarter was taken in anticipation of maturing advances
in January 2009, due to favorable rate and term offerings available at the time
of the advance.  The decrease in deposits was primarily a result of a
decrease in certificates due to maturities of brokered deposits of $84.7
million, partially offset by an increase in the balance of checking and money
market accounts.





The
following table presents the amount, average rate and percentage of total
deposits for checking, savings, money market and certificates for the periods
presented.





At
                
                At
                
                At
                
                AtDecember
      31, 2008
                
                September
      30, 2008
                
                June
      30, 2008
                
                March
      31, 2008Average
                
                %
      of
                
                
                
                
                Average
                
                %
      of
                
                
                
                
                Average
                
                %
      of
                
                
                
                
                Average
                
                %
      ofAmount
                
                
                Rate
                
                Total
                
                Amount
                
                
                Rate
                
                Total
                
                Amount
                
                
                Rate
                
                Total
                
                Amount
                
                
                Rate
                
                Total(Dollars
      in thousands)Checking
                
                $
                429,170
                
                
                
                0.21
                %
                
                
                11.10
                %
                
                $
                400,461
                
                
                
                0.21
                %
                
                
                10.21
                %
                
                $
                419,678
                
                
                
                0.21
                %
                
                
                10.59
                %
                
                $
                423,675
                
                
                
                0.21
                %
                
                
                10.54
                %Savings
                
                
                227,773
                
                
                
                0.87
                
                
                
                5.89
                
                
                
                232,103
                
                
                
                1.51
                
                
                
                5.91
                
                
                
                232,807
                
                
                
                1.64
                
                
                
                5.88
                
                
                
                231,050
                
                
                
                1.35
                
                
                
                5.75Money
      market
                
                
                781,832
                
                
                
                1.12
                
                
                
                20.21
                
                
                
                772,323
                
                
                
                1.48
                
                
                
                19.68
                
                
                
                811,415
                
                
                
                1.46
                
                
                
                20.48
                
                
                
                827,623
                
                
                
                1.65
                
                
                
                20.58Certificates
                
                
                2,428,529
                
                
                
                3.64
                
                
                
                62.80
                
                
                
                2,518,996
                
                
                
                3.91
                
                
                
                64.20
                
                
                
                2,497,643
                
                
                
                4.16
                
                
                
                63.05
                
                
                
                2,538,618
                
                
                
                4.54
                
                
                
                63.13Total
      deposits
                
                $
                3,867,304
                
                
                
                2.59
                %
                
                
                100.00
                %
                
                $
                3,923,883
                
                
                
                2.91
                %
                
                
                100.00
                %
                
                $
                3,961,543
                
                
                
                3.04
                %
                
                
                100.00
                %
                
                $
                4,020,966
                
                
                
                3.31
                %
                
                
                100.00
                %





At
December 31, 2008, $95.9 million of the $2.43 billion in certificates were
brokered deposits, compared to $180.6 million in brokered deposits at September
30, 2008.  The remaining brokered deposits will mature within one
year.  Management will continue to monitor the wholesale deposit
market for attractive opportunities.


26





Stockholders’
Equity.Stockholders’ equity increased $26.2 million from
$871.2 million at September 30, 2008 to $897.4 million at December 31,
2008.  The increase was primarily a result of an increase in
unrealized gains on AFS securities of $20.2 million and net income of $15.9
million partially offset by dividends paid of $12.7 million.  Of the
$12.7 million of dividends paid, $2.3 million was related to the fiscal year
2008 special dividend.





On
January 14, 2009, the board of directors approved a dividend of $0.50 per public
share.  The dividend will be paid on February 20, 2009 to stockholders
of record on February 6, 2009.  It is the board of directors’
intention to continue to pay regular quarterly dividends of $0.50 per share for
the foreseeable future.





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, 2008.  The unvested shares in the
ESOP receive cash equal to the dividends paid on the public
shares.  The cash received is used to repay the annual debt obligation
on the loan taken out by the ESOP from the Company at the time of the
mutual-to-stock conversion of the Bank to purchase shares for the
ESOP.  These shares are held in trust for a future employee benefit,
and are therefore excluded from the calculation of public shares.





Total
      voting shares outstanding at September 30, 2008
                
                74,079,868Treasury
      stock acquisitions
                
                
                (19,862)Options
      exercised
                
                
                49,075Total
      voting shares outstanding at December 31, 2008
                
                74,109,081Unvested
      shares in ESOP
                
                
                (1,008,194)Shares
      held by MHC
                
                
                (52,192,817)Total
      shares eligible to receive dividends at December 31, 2008 (public
      shares)
                20,908,070





27


The
following table presents quarterly dividends paid in calendar years 2009, 2008,
and 2007.  The dollar amounts represent dividends paid during the
quarter.  The actual amount of dividends to be paid during the quarter
ending March 31, 2009, as declared on January 14, 2009, will be based upon the
number of shares outstanding on the record date of February 6,
2009.  All shares outstanding presented in the table below, except for
the quarter ending March 31, 2009, are as of the date of record per the dividend
declaration.  For the purposes of the table below, the number of
dividend shares for the quarter ending March 31, 2009 is based upon shares
outstanding on January 26, 2009.  This does not represent the actual
dividend payout, but rather management’s estimate of the number of shares
eligible to receive the dividend and the total dividend payout as of January 26,
2009.





Calendar
      Year2009
                          
                          2008
                          
                          2007(Dollars
      in thousands, except per share amounts)Quarter
      ended March 31Number
      of dividend shares
                          20,873,369
                          
                          20,660,510
                          
                          20,520,793Dividend
      per share
                          $                0.50
                          
                          $                0.50
                          
                          $                0.50Total
      dividends paid
                          $            10,437
                          
                          $            10,330
                          
                          $            10,261Quarter
      ended June 30Number
      of dividend shares
                          
                          
                          20,661,660
                          
                          20,673,933Dividend
      per share
                          
                          
                          $                0.50
                          
                          $                0.50Total
      dividends paid
                          
                          
                          $            10,331
                          
                          $            10,337Quarter
      ended September 30Number
      of dividend shares
                          
                          
                          20,668,519
                          
                          20,694,333Dividend
      per share
                          
                          
                          $                0.50
                          
                          $                0.50Total
      dividends paid
                          
                          
                          $            10,334
                          
                          $           10,347Quarter
      ended December 31Number
      of dividend shares
                          
                          
                          20,881,157
                          
                          20,860,278Dividend
      per share
                          
                          
                          $                0.50
                          
                          $                0.50Total
      dividends paid
                          
                          
                          $            10,440
                          
                          $            10,430Special
      year end dividendNumber
      of dividend shares
                          
                          
                          20,881,157
                          
                          --Dividend
      per share
                          
                          
                          $                0.11
                          
                          $                    --Total
      dividends paid
                          
                          
                          $              2,297
                          
                          $                    --Calendar
      year-to-date dividends per share
                          $                .50
                          
                          $                2.11
                          
                          $                2.00





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-related 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.


28


Average Balance
Sheet: The following table presents the average balances of
our assets, liabilities and stockholders’ equity and the related annualized
yields and rates on our interest-earning assets and interest-bearing liabilities
for the periods indicated and the yield/rate on our interest-earning assets and
interest-bearing liabilities at December 31, 2008.  Average yields are
derived by dividing annualized income by the average balance of the related
assets and average rates are derived by dividing annualized expense by the
average balance of the related liabilities, for the periods
shown.  Average outstanding balances are derived from average daily
balances, except as noted.  The yields and rates include amortization
of fees, costs, premiums and discounts which are considered adjustments to
yields/rates. Yields on tax-exempt securities were not calculated on a
tax-equivalent basis.


At
              
              For
      the Three Months EndedDecember
      31, 2008
              
              December
      31, 2008
              
              September
      30, 2008
              
              June
      30, 2008
              
              December
      31, 2007Average
              
              
              
              Average
              
              
              
              Average
              
              
              
              AverageYield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/Rate
              
              Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              RateAssets:
              
              
              (Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable (1)
              5.66%
              
              $           5,419,179
              
              5.66
              %
              $      5,328,776
              
              5.69
              %
              $      5,316,794
              
              5.62
              %
              $      5,309,758
              
              5.74
              %Mortgage-related
      securities
              4.82
              
              2,201,531
              
              4.80
              
              2,192,268
              
              4.77
              
              2,107,757
              
              4.72
              
              1,497,081
              
              4.58Investment
      securities
              3.34
              
              136,295
              
              3.89
              
              144,718
              
              3.95
              
              128,784
              
              4.03
              
              391,173
              
              4.22Capital
      stock of FHLB
              2.49
              
              124,958
              
              2.48
              
              124,365
              
              4.72
              
              128,379
              
              4.71
              
              133,378
              
              6.21Cash
      and cash equivalents
              0.24
              
              33,025
              
              0.58
              
              59,351
              
              1.92
              
              90,556
              
              2.03
              
              129,227
              
              4.32Total
      interest-earning assets (1)
              5.27
              
              7,914,988
              
              5.32
              
              7,849,478
              
              5.36
              
              7,772,270
              
              5.29
              
              7,460,617
              
              5.41Other
      noninterest-earning assets
              
              
              161,092
              
              
              
              151,695
              
              
              
              187,701
              
              
              
              203,260Total
      assets
              
              
              $           8,076,080
              
              
              
              $      8,001,173
              
              
              
              $      7,959,971
              
              
              
              $      7,663,877Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Savings
              0.87
              
              229,540
              
              1.07
              
              231,986
              
              1.66
              
              230,164
              
              1.42
              
              232,930
              
              2.34Checking
              0.21
              
              405,787
              
              0.21
              
              403,327
              
              0.20
              
              412,468
              
              0.20
              
              382,748
              
              0.21Money
      market
              1.12
              
              775,386
              
              1.31
              
              799,408
              
              1.45
              
              814,074
              
              1.53
              
              794,391
              
              3.12Certificates
              3.64
              
              2,473,763
              
              3.75
              
              2,485,619
              
              3.99
              
              2,508,743
              
              4.32
              
              2,504,463
              
              4.79Total
      deposits
              2.59
              
              3,884,476
              
              2.73
              
              3,920,340
              
              2.94
              
              3,965,449
              
              3.15
              
              3,914,532
              
              3.86FHLB
      advances (2)
              4.68
              
              2,477,961
              
              4.72
              
              2,469,082
              
              4.73
              
              2,547,450
              
              4.75
              
              2,593,271
              
              5.19Other
      borrowings
              4.24
              
              713,585
              
              4.24
              
              638,463
              
              4.10
              
              452,458
              
              4.09
              
              149,724
              
              5.77Total
      interest-bearing liabilities
              3.51
              
              7,076,022
              
              3.58
              
              7,027,885
              
              3.67
              
              6,965,357
              
              3.80
              
              6,657,527
              
              4.42Other
      noninterest-bearing liabilities
              
              
              121,970
              
              
              
              103,332
              
              
              
              122,747
              
              
              
              137,469Stockholders'
      equity
              
              
              878,088
              
              
              
              869,956
              
              
              
              871,867
              
              
              
              868,881Total
      liabilities andstockholders'
      equity
              
              
              $           8,076,080
              
              
              
              $      8,001,173
              
              
              
              $      7,959,971
              
              
              
              $      7,663,877





(continued)


29





Net
      interest rate spread
              1.76%
              
              
              
              1.74
              %
              
              
              1.68
              %
              
              
              1.49
              %
              
              
              0.99
              %Net
      interest-earning assets
              
              
              $              838,966
              
              
              
              $         821,593
              
              
              
              $         806,913
              
              
              
              $         803,089Net
      interest margin
              
              
              
              
              2.08
              %
              
              
              2.03
              %
              
              
              1.89
              %
              
              
              1.43
              %Ratio
      of interest-earning assetsto
      interest-bearing liabilities
              
              
              
              
              1.12
              
              
              
              1.12
              
              
              
              1.12
              
              
              
              1.12Selected
      performance ratios:Return
      on average assets (annualized)
              
              
              
              
              0.79
              %
              
              
              0.79
              %
              
              
              0.72
              %
              
              
              0.48
              %Return
      on average equity (annualized)
              
              
              
              
              7.22
              %
              
              
              7.25
              %
              
              
              6.59
              %
              
              
              4.20
              %Average
      equity to average assets
              
              
              
              
              10.87
              %
              
              
              10.87
              %
              
              
              10.95
              %
              
              
              11.34
              %








(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 (income) expense of ($122)
thousand and $2.2 million related to the interest rate swaps for the three
months ended June 30, 2008 and December 31, 2007, respectively, and a yield
adjustment related to amortization of the deferred gain related to the swap
termination of ($165) thousand for the quarters ended December 31, 2008 and
September 30, 2008, and ($45) thousand for the quarter ended December 31,
2007.  There were no interest rate swaps outstanding for the December
31, 2008 or the September 30, 2008 quarters.




(Concluded)









30





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
      31,2008
                
                
                2008
                
                
                2008
                
                
                2008
                
                
                2007Selected
      income statement data:
                
                (Dollars
      in thousands, except per share amounts)Interest
      and dividend income:Loans
      receivable
                
                $
                76,716
                
                
                $
                75,830
                
                
                $
                74,651
                
                
                $
                75,276
                
                
                $
                76,263Mortgage-related
      securities
                
                
                26,402
                
                
                
                26,153
                
                
                
                24,869
                
                
                
                20,246
                
                
                
                17,127Investment
      securities
                
                
                1,326
                
                
                
                1,428
                
                
                
                1,298
                
                
                
                3,061
                
                
                
                4,130Other
      interest and dividend income
                
                
                829
                
                
                
                1,766
                
                
                
                1,967
                
                
                
                3,233
                
                
                
                3,508Total
      interest and dividend income
                
                
                105,273
                
                
                
                105,177
                
                
                
                102,785
                
                
                
                101,816
                
                
                
                101,028Interest
      expense:Deposits
                
                
                26,785
                
                
                
                29,083
                
                
                
                31,174
                
                
                
                35,145
                
                
                
                38,033FHLB
      advances
                
                
                29,545
                
                
                
                29,543
                
                
                
                30,248
                
                
                
                31,796
                
                
                
                34,161Other
      borrowings
                
                
                7,725
                
                
                
                6,693
                
                
                
                4,682
                
                
                
                3,873
                
                
                
                2,207Total
      interest expense
                
                
                64,055
                
                
                
                65,319
                
                
                
                66,104
                
                
                
                70,814
                
                
                
                74,401Provision
      for loan losses
                
                
                549
                
                
                
                330
                
                
                
                1,602
                
                
                
                119
                
                
                
                --Net
      interest and dividend income(after
      provision for loan losses)
                
                
                40,669
                
                
                
                39,528
                
                
                
                35,079
                
                
                
                30,883
                
                
                
                26,627Other
      income
                
                
                6,642
                
                
                
                7,589
                
                
                
                7,345
                
                
                
                7,982
                
                
                
                7,111Other
      expenses
                
                
                22,187
                
                
                
                21,795
                
                
                
                19,836
                
                
                
                20,907
                
                
                
                19,451Income
      tax expense
                
                
                9,272
                
                
                
                9,563
                
                
                
                8,233
                
                
                
                6,231
                
                
                
                5,174Net
      income
                
                $
                15,852
                
                
                $
                15,759
                
                
                $
                14,355
                
                
                $
                11,727
                
                
                $
                9,113Efficiency
      ratio
                
                
                46.36
                
                
                
                45.94
                
                
                
                45.05
                
                
                
                53.63
                
                
                
                57.65Basic
      earnings per share
                
                $
                0.22
                
                
                $
                0.22
                
                
                $
                0.20
                
                
                $
                0.16
                
                
                $
                0.12Diluted
      earnings per share
                
                $
                0.22
                
                
                $
                0.22
                
                
                $
                0.20
                
                
                $
                0.16
                
                
                $
                0.12Dividends
      declared per public share
                
                $
                0.61
                
                
                $
                0.50
                
                
                $
                0.50
                
                
                $
                0.50
                
                
                $
                0.50










31


Comparison
of Operating Results for the Three Months Ended December 31, 2008 and
2007




Net
income for the quarter ended December 31, 2008 was $15.9 million compared to
$9.1 million for the same period in the prior fiscal year. The $6.8 million
increase in net income was primarily a result of a $10.3 million decrease in
interest expense and a $4.3 million increase in interest and dividend income,
partially offset by a $4.1 million increase in income tax expense and a $2.7
million increase in other expenses.





Interest
and Dividend Income


Total
interest and dividend income for the quarter was $105.3 million compared to
$101.0 million for the prior year quarter.  The $4.3 million increase
was primarily a result of an increase in interest income on mortgage-related
securities of $9.3 million, partially offset by a decrease in interest income on
investment securities of $2.8 million, a decrease in interest income on cash and
cash equivalents of $1.4 million, and a decrease in dividends received on FHLB
stock of $1.3 million.





Interest
income on loans receivable for the quarter was $76.7 million compared to $76.3
million for the prior year quarter.  The $453 thousand increase was a
result of a $109.4 million increase in the average balance of the loan portfolio
between the two periods, partially offset by a decrease of 8 basis points in
weighted average yield of the portfolio to 5.66% for the current
quarter.  The decrease in the weighted average yield was primarily a
result of the home equity loan portfolio repricing to lower market interest
rates.





Interest
income on mortgage-related securities for the quarter was $26.4 million compared
to $17.1 million for the prior year quarter.  The $9.3 million
increase in interest income was due to an increase of $704.5 million in the
average balance and to a lesser extent, an increase of 22 basis points in the
weighted average yield to 4.80% for the current quarter.  The increase
in the average portfolio balance was a result of purchases.  The funds
for the purchases came from maturities and calls of investment securities and
from new borrowings.  The weighted average yield of the
mortgage-related securities portfolio increased between the two periods due
primarily to the purchase of mortgage-related securities with yields higher than
that of the existing portfolio.





Interest
income on investment securities for the quarter was $1.3 million compared to
$4.1 million for the prior year quarter.  The $2.8 million decrease in
interest income was primarily a result of a decrease of $254.9 million in the
average balance of the portfolio and, to a lesser extent, a 33 basis point
decrease in the weighted average portfolio yield to 3.89% for the current
quarter.  The decrease in the average balance was a result of calls
and maturities that were not reinvested in their entirety into the investment
securities portfolio but rather the higher yielding mortgage-related securities
portfolio and also to fund maturing FHLB advances.  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 also due to reinvestments made at lower yields than the overall
portfolio yield.





Dividends
on FHLB stock for the quarter were $780 thousand compared to $2.1 million for
the prior year quarter.  The $1.3 million decrease was primarily due
to a 373 basis point decrease in the weighted average yield.  The
dividend rate on FHLB stock correlates to the federal funds rate, which
decreased during the period.





Interest
income on cash and cash equivalents for the quarter was $48 thousand, compared
to $1.4 million in the prior year quarter.  The decrease was due to a
374 basis point decrease in the weighted average yield, and a decrease in the
average balance of $96.2 million.  The decrease in the weighted
average yield was a result of a decrease in short-term interest rates during the
period.  The decrease in the average balance was a result of cash
being utilized to purchase mortgage-related securities and to fund maturing FHLB
advances.





Interest
Expense


Interest
expense on deposits for the current quarter was $26.8 million compared to $38.0
million for the prior year quarter.  The $11.2 million decrease in
interest expense was primarily a result of a decrease in the average rate paid
on the certificate of deposit, money market and retirement savings portfolios
due to the portfolios repricing to lower market rates.





Interest
expense on FHLB advances for the current quarter was $29.5 million compared to
$34.2 million for the prior year quarter.  The $4.7 million decrease
in interest expense was primarily a result of a decrease in the
average


32


balance
due to maturing advances that were not renewed, and due to a decrease in rate as
a result of the termination and maturity of the interest rate swap agreements
during fiscal year 2008.





Interest
expense on other borrowings was $7.7 million compared to $2.2 million in the
prior year quarter.  The $5.5 million increase was due to an increase
in the average balance of other borrowings due to the Bank entering into $660.0
million of repurchase agreements during fiscal year 2008.  The
proceeds from the repurchase agreement funds were used to purchase
mortgage-related securities and to fund maturing FHLB advances.





Provision
for Loan Losses


The Bank
recorded a provision for loan losses of $549 thousand during the current
quarter, compared to no provision in the prior year quarter.  Based on
our evaluation of the issues regarding the real estate markets, the overall
economic environment, and the increase in and composition of our delinquencies
and non-performing loans, we determined that a provision for loan losses was
prudent and warranted for the three months ended December 31,
2008.  See additional discussion regarding the provision for loan
losses in the sections entitled “Critical Accounting Policies – Allowance for
Loan Losses” and “Asset Quality.”





Other
Income and Expense


Total
other income for the current quarter was $6.6 million compared to $7.1 million
in the prior year quarter.  The $469 thousand decrease in other income
was primarily a result of a $237 thousand decrease in income from BOLI as a
result of a decrease in market interest rates and a decrease in other income,
net, due to interest income of $194 thousand received on an income tax refund in
the prior year quarter.





Total
other expenses for the current quarter increased $2.7 million to $22.2 million,
compared to $19.5 million in the prior year quarter.  The increase was
due primarily to increases in other expense, net of $1.1 million, advertising
expense of $911 thousand, salaries and employee benefits of $729 thousand, and
occupancy expense of $565 thousand.  The increase in other expense,
net was due primarily to an impairment of $379 thousand and a valuation
allowance of $76 thousand recorded on mortgage servicing rights (“MSR”) in the
current quarter due to a decrease in interest rates used to value escrow income
on the underlying asset. The increase in advertising expense was due to
advertising campaigns undertaken to reassure customers in response to current
economic conditions, and to expense associated with the Bank’s new debit card
rewards program.  The increase in salaries and employee benefits was
due to an increase in costs associated with the ESOP as a result of an increase
in the stock price of CFFN between the two periods and to an increase in costs
associated with the short-term performance plan.  The increase in
occupancy expense was due primarily to an increase in depreciation expense for
licensing related to electronic check processing and other software
upgrades.





Income
Tax Expense


Income
tax expense for the current quarter was $9.3 million compared to $5.2 million in
the prior year quarter.  The increase in income tax expense was due to
an increase in earnings compared to the prior year quarter.  The
effective tax rate for each quarter was relatively unchanged at 36.9% for the
current year quarter, compared to 36.2% for the prior year
quarter.


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, 2008 to the quarter ended December 31, 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
      Ended December 31,2008
      vs. 2007Increase
      (Decrease) Due toVolume
                      
                      
                      Rate
                      
                      
                      Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                      
                      $
                      1,506
                      
                      
                      $
                      (1,053
                      )
                      
                      $
                      453Mortgage-related
      securities
                      
                      
                      8,412
                      
                      
                      
                      863
                      
                      
                      
                      9,275Investment
      securities
                      
                      
                      (2,503
                      )
                      
                      
                      (301
                      )
                      
                      
                      (2,804
                      )Capital
      stock of FHLB
                      
                      
                      (123
                      )
                      
                      
                      (1,177
                      )
                      
                      
                      (1,300
                      )Cash
      equivalents
                      
                      
                      (638
                      )
                      
                      
                      (741
                      )
                      
                      
                      (1,379
                      )Total
      interest-earning assets
                      
                      $
                      6,654
                      
                      
                      $
                      (2,409
                      )
                      
                      $
                      4,245Interest-bearing
      liabilities:Savings
                      
                      $
                      (20
                      )
                      
                      $
                      (731
                      )
                      
                      $
                      (751
                      )Checking
                      
                      
                      12
                      
                      
                      
                      --
                      
                      
                      
                      12Money
      market
                      
                      
                      (145
                      )
                      
                      
                      (3,530
                      )
                      
                      
                      (3,675
                      )Certificates
                      
                      
                      (365
                      )
                      
                      
                      (6,469
                      )
                      
                      
                      (6,834
                      )FHLB
      advances
                      
                      
                      (1,486
                      )
                      
                      
                      (3,130
                      )
                      
                      
                      (4,616
                      )Other
      borrowings
                      
                      
                      5,731
                      
                      
                      
                      (213
                      )
                      
                      
                      5,518Total
      interest-bearing liabilities
                      
                      $
                      3,727
                      
                      
                      $
                      (14,073
                      )
                      
                      $
                      (10,346
                      )Net
      change in net interest and dividend income
                      
                      $
                      2,927
                      
                      
                      $
                      11,664
                      
                      
                      $
                      14,591








Comparison
of Operating Results for the Three Months Ended December 31, 2008 and September
30, 2008





For the
quarter ended December 31, 2008, the Company recognized net income of $15.9
million, compared to net income of $15.8 million for the quarter ended September
30, 2008.





Interest
and Dividend Income


Total
interest and dividend income for the current quarter was $105.3 million compared
to $105.2 million for the quarter ended September 30, 2008.  The
slight increase was primarily a result of increases in interest income on loans
receivable and mortgage-related securities, which were almost entirely offset by
decreases in FHLB stock dividends, interest income on cash and cash equivalents,
and interest income on investment securities.





Interest
income on loans receivable for the current quarter was $76.7 million compared to
$75.8 million for the quarter ended September 30, 2008.  The $886
thousand increase in interest income was primarily a result of a $90.4 million
increase in the average balance of the portfolio, partially offset by a decrease
of three basis points in the weighted average yield.


34


Interest
income on mortgage-related securities for the current quarter was $26.4 million
compared to $26.2 million for the quarter ended September 30,
2008.  The $249 thousand increase was primarily a result of a $9.3
million increase in the average balance of the portfolio and an increase in the
average yield of three basis points.





Interest
income on investment securities for the current quarter was $1.3 million
compared to $1.4 million for the quarter ended September 30,
2008.  The slight decrease was primarily a result of an $8.4 million
decrease in the average balance and a six basis point decrease in the weighted
average rate.





Dividends
on FHLB stock for the quarter were $780 thousand compared to $1.5 million for
the quarter ended September 30, 2008.  The $695 thousand decrease was
due to a 224 basis point decrease in the weighted average yield.  The
dividend rate on FHLB stock correlates to the federal funds rate, which
decreased during the period.





Interest
income on cash and cash equivalents for the quarter was $49 thousand compared to
$291 thousand for the quarter ended September 30, 2008.  The decrease
was due primarily to a 134 basis point decrease in the weighted average yield as
a result of a decrease in short-term interest rates during the
period.





Interest
Expense


Interest
expense decreased $1.2 million to $64.1 million for the current quarter from
$65.3 million for the quarter ended September 30, 2008.  The decrease
was due to a decrease in interest expense on deposits of $2.3 million, partially
offset by an increase in interest expense on other borrowings of $1.0
million.  The decrease in deposit interest expense was primarily a
result of a decrease in the rate paid on the certificate of deposit, money
market and savings portfolios as the portfolios continued to reprice to lower
market rates.  The increase in interest expense on other borrowings
was due primarily to an increase in the average balance due to repurchase
agreements entered into throughout the fourth quarter of fiscal year 2008 which
were outstanding for the entire first quarter of fiscal year 2009.  To
a lesser extent, the increase was related to an increase of 14 basis points in
the average rate on other borrowings due to an increase in the LIBOR during the
period .





Provision
for Loan Losses


The Bank
recorded a provision for loan losses of $549 thousand during the current
quarter, compared to a provision of $330 thousand in the quarter ended September
30, 2008.  See additional discussion regarding the provision for loan
losses in the sections entitled “Critical Accounting Policies – Allowance for
Loan Losses” and “Asset Quality.”





Other
Income and Expense


Total
other income decreased $947 thousand to $6.6 million for the current quarter
compared to $7.6 million for the quarter ended September 30,
2008.  The decrease was due primarily to a decrease of $304 thousand
in gains on loans held for sale due to fewer loans sold during the current
quarter and a decrease of $298 thousand in other income, net.





Total
other expenses for the current quarter were $22.2 million for the current
quarter, compared to $21.8 million in the prior quarter.  The $392
thousand increase was due primarily to an increase in other expenses, net of
$688 thousand and an increase in advertising expense of $249 thousand, partially
offset by a decrease in salaries and employee benefits of $606
thousand.  The increase in other expense, net was due primarily to an
impairment of $379 thousand and a valuation allowance of $76 thousand recorded
on MSR in the current quarter due to a decrease in interest rates used to value
escrow income on the underlying asset, relative to the MSR valuation allowance
of $95 thousand recorded in the prior quarter.  The increase in other
expenses, net was also due to REO operations.  The decrease in
salaries and employee benefits was due to adjusting the short-term performance
plan accrual in the prior quarter as a result of actual corporate performance
levels exceeding target corporate performance levels.





Income
Tax Expense


Income
tax expense for the current quarter was $9.3 million compared to $9.6 million
for the quarter ended September 30, 2008.  The effective tax rate for
the current quarter was 36.9% compared to 37.8% for the quarter ended September
30, 2008.  The decrease in the effective tax rate between quarters was
a result of certain effective tax rate adjustments that were recorded entirely
in the quarter ended September 30, 2008.





35


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, 2008 to the quarter ended
September 30, 2008.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate.





Quarter
      EndedDecember
      31, 2008 vs. September 30, 2008Increase
      (Decrease) Due toVolume
                      
                      
                      Rate
                      
                      
                      Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                      
                      $
                      1,274
                      
                      
                      $
                      (388
                      )
                      
                      $
                      886Mortgage-related
      securities
                      
                      
                      111
                      
                      
                      
                      138
                      
                      
                      
                      249Investment
      securities
                      
                      
                      (82
                      )
                      
                      
                      (20
                      )
                      
                      
                      (102
                      )Capital
      stock of FHLB
                      
                      
                      7
                      
                      
                      
                      (702
                      )
                      
                      
                      (695
                      )Cash
      and cash equivalents
                      
                      
                      (94
                      )
                      
                      
                      (148
                      )
                      
                      
                      (242
                      )Total
      interest-earning assets
                      
                      $
                      1,216
                      
                      
                      $
                      (1,120
                      )
                      
                      $
                      96Interest-bearing
      liabilities:Savings
                      
                      $
                      (10
                      )
                      
                      $
                      (340
                      )
                      
                      $
                      (350
                      )Checking
                      
                      
                      1
                      
                      
                      
                      10
                      
                      
                      
                      11Money
      market
                      
                      
                      (85
                      )
                      
                      
                      (273
                      )
                      
                      
                      (358
                      )Certificates
                      
                      
                      (118
                      )
                      
                      
                      (1,483
                      )
                      
                      
                      (1,601
                      )FHLB
      advances
                      
                      
                      35
                      
                      
                      
                      (33
                      )
                      
                      
                      2Other
      borrowings
                      
                      
                      761
                      
                      
                      
                      271
                      
                      
                      
                      1,032Total
      interest-bearing liabilities
                      
                      $
                      584
                      
                      
                      $
                      (1,848
                      )
                      
                      $
                      (1,264
                      )Net
      change in net interest and dividend income
                      
                      $
                      632
                      
                      
                      $
                      728
                      
                      
                      $
                      1,360











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 products 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.  The most
significant liquidity challenge we currently face is the variability in cash
flows as a result of mortgage modification and refinance activity.  To
the extent possible, the Bank manages the cash flows of its loan and deposit
portfolios by the rates it offers customers.  Sources of funds are
used primarily to meet ongoing operations, to pay maturing certificates of
deposit and savings withdrawals, and to fund loan commitments.  At
December 31, 2008, approximately $1.44 billion of the $2.43 billion in
certificates of deposit were scheduled to mature within one
year.  Included in that amount are $95.9 million of brokered
deposits.  Based


36


on past
experience and our pricing strategy, we expect that a majority of the maturing
retail deposits will renew, although no assurance can be given in this
regard.




The Bank
has paid competitive rates for its deposits while not “paying-up” in rates to
grow its deposit base beyond the Bank’s need for funding.  The Bank’s
borrowings have been used primarily to invest in U.S. government agency
securities in order to improve the earnings of the Bank while maintaining its
capital ratios in excess of regulatory standards for well-capitalized financial
institutions.  In addition, the Bank’s focus on managing risk has
provided it liquidity capacity by remaining below borrowing limits at FHLB and
through the uncollateralized balance of its mortgage-related and investment
securities available as collateral for borrowings.




The Bank
has used FHLB advances to provide funds for lending and investment
activities.  FHLB lending guidelines set borrowing limits as part of
their underwriting standards.  At December 31, 2008, the Bank’s ratio
of the face amount of advances to total assets, as reported to the Office of
Thrift Supervision (“OTS”), was 32%.  Our advances are secured by a
blanket pledge of our loan portfolio, as collateral, supported by quarterly
reporting to FHLB Topeka.  Advances in excess of 40% of total assets,
but not exceeding 55% of total assets, may be approved by the president of FHLB
Topeka based upon a review of documentation supporting the use of the
advances.  Currently, the blanket pledge is sufficient collateral for
our outstanding FHLB advances.  It is possible that increases in our
borrowings or decreases in our loan portfolio could require the Bank to pledge
securities as collateral on the FHLB advances.  The Bank’s policy
allows borrowing from FHLB of up to 55% of total assets.




The Bank
has used repurchase agreements primarily to fund purchases of mortgage-related
securities and to fund maturing FHLB advances.  The repurchase
agreements are treated as secured borrowings and are reported as a liability of
the Company on a consolidated basis.  The Bank has pledged securities
with a market value of $778.6 million as collateral.  At the maturity
date of these borrowings, the pledged securities will be delivered back to the
Bank.  The Bank may enter into additional repurchase agreements as
management deems appropriate.   At December 31, 2008, repurchase
agreements were 8% of total assets.  The Bank’s policy allows for
repurchase agreements to total up to 15% of total assets.





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.




At
December 31, 2008, cash and cash equivalents totaled $143.1 million, an increase
of $56.0 million from September 30, 2008.  The increase in cash was
primarily to fund FHLB advances maturing during January 2009.  The
Company maintains access to additional liquidity through its management of the
level of borrowings from the FHLB and counterparties of repurchase agreements
through the availability of high quality collateral for
borrowings.  At December 31, 2008, $1.45 billion of securities were
eligible but unused for collateral.  The Company also has access to
the brokered deposit market but does not currently consider the cost of this
funding source to be balanced with investment opportunities.




The Bank
is a member of the Deposit Insurance Fund (the “DIF”), which is administered by
the Federal Deposit Insurance Corporation (“FDIC”).  Deposits are
insured up to the applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the United States Government.  As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured
institutions.  Recent bank failures have decreased the DIF to levels
below its required reserve ratio.  The FDIC is required to replenish
the fund by increasing deposit insurance premiums when the reserve ratio is
below $1.15 for every $100 insured.  In order to replenish the DIF,
the FDIC has increased deposit insurance premiums.  An institution (or
its successor) insured by the FDIC on December 31, 1996 which had previously
paid assessments was eligible for certain credit against deposit insurance
assessments.  This credit had offset the majority of the Bank’s FDIC
premium expense in past fiscal years but it is expected to be fully utilized
during the third quarter of fiscal year 2009.  As a result of these
factors, the Bank is anticipating an increase in deposit insurance premiums in
fiscal year 2009.  Management estimates the increase to be
approximately $2.0 million for fiscal year 2009.


37


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, 2008, CFFN, at the holding company level, had $110.5 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.




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.  For several periods prior to
December 31, 2008, the Bank could not distribute capital to the Company unless
it received waivers of safe harbor regulation from the OTS, which it did
receive.  The waiver was recently required as a result of lower
earnings in prior periods compared to the timing of dividend payments by the
Bank to the Company.  Currently, the Bank has authorization from the
OTS to distribute capital from the Bank to the Company through the quarter
ending June 30, 2009.  However, as of December 31, 2008, the Bank was
no longer subject to the safe harbor waiver requirement, as the Bank's capital
distributions to the Company no longer exceeded the net income requirements
noted above.




On
October 3, 2008, the Emergency Economic Stabilization Act (“EESA”) was signed
into law.  EESA authorizes the Treasury Department to purchase from
financial institutions and their holding companies up to $700.00 billion in
mortgage loans, mortgage-related securities, and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies in a Troubled Asset Relief Program
(“TARP”).  The purpose of TARP is to restore confidence and stability
to the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other.  The Treasury Department
has allocated $250.00 billion towards the TARP Capital Purchase Program
(“CPP”).  Under the CPP, Treasury will purchase debt or equity
securities from participating institutions.  Since expanding lending
is the primary purpose of CPP, management and the board of directors believe the
Company is already well positioned to meet the CPP’s objective and therefore did
not participate in the CPP.  The other provisions in the EESA did not
have a material impact on the Company’s financial position, results of
operations, cash flows, or liquidity.







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.


38


The
Company’s contractual obligations related to operating leases and debentures
have not changed significantly from September 30, 2008.  The following
table summarizes our other contractual obligations as of December 31,
2008.





Maturity
      RangeLess
      than
                
                
                
                1
      - 3
                
                
                
                3
      - 5
                
                
                More
      thanTotal
                
                
                1
      year
                
                
                years
                
                
                years
                
                
                5
      yearsCertificates
      of Deposit
                
                $
                2,428,529
                
                
                $
                1,439,018
                
                
                $
                873,755
                
                
                $
                114,755
                
                
                $
                1,001Weighted
      average rate
                
                
                3.64
                %
                
                
                3.38
                %
                
                
                4.07
                %
                
                
                3.66
                %
                
                
                4.10
                %FHLB
      Advances
                
                
                2,596,000
                
                
                
                795,000
                
                
                
                1,126,000
                
                
                
                675,000
                
                
                
                --Weighted
      average rate
                
                
                4.66
                %
                
                
                4.70
                %
                
                
                5.15
                %
                
                
                3.77
                %
                
                
                --
                %Repurchase
      Agreements
                
                
                660,000
                
                
                
                --
                
                
                
                395,000
                
                
                
                145,000
                
                
                
                120,000Weighted
      average rate
                
                
                3.97
                %
                
                
                --
                %
                
                
                3.94
                %
                
                
                3.81
                %
                
                
                4.24
                %Commitments
      to originate andpurchase
      mortgage loans
                
                
                211,691
                
                
                
                211,691
                
                
                
                --
                
                
                
                --
                
                
                
                --Weighted
      average rate
                
                
                5.20
                %
                
                
                5.20
                %
                
                
                --
                %
                
                
                --
                %
                
                
                --
                %Commitments
      to fund unused homeequity
      lines of credit
                
                
                267,881
                
                
                
                267,881
                
                
                
                --
                
                
                
                --
                
                
                
                --Weighted
      average rate
                
                
                4.88
                %
                
                
                4.88
                %
                
                
                --
                %
                
                
                --
                %
                
                
                --
                %Unadvanced
      portion ofconstruction
      loans
                
                
                33,593
                
                
                
                33,593
                
                
                
                --
                
                
                
                --
                
                
                
                --








A
percentage of commitments to originate mortgage loans are expected to expire
unfunded, so the amounts reflected in the table above are not necessarily
indicative of future liquidity requirements.  Additionally, the Bank
is not obligated to honor commitments to fund unused home equity lines of credit
if a customer is delinquent or otherwise in violation of the loan
agreement.





The
maturity schedule for our certificate of deposit portfolio at December 31, 2008
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.




39


The
following table presents the maturity of FHLB advances at par and repurchase
agreements as of December 31, 2008.  The balance of FHLB advances
excludes 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.







FHLB
                            
                            
                            Repurchase
                            
                            
                            WeightedMaturity
      by
                            
                            Advances
                            
                            
                            Agreements
                            
                            
                            AverageFiscal
      year
                            
                            Amount
                            
                            
                            Amount
                            
                            
                            Rate(Dollars
      in thousands)2009
                            
                            $
                            620,000
                            
                            
                            $
                            --
                            
                            
                            
                            4.27
                            %2010(1)
                            
                            
                            925,000
                            
                            
                            
                            45,000
                            
                            
                            
                            5.462011
                            
                            
                            276,000
                            
                            
                            
                            200,000
                            
                            
                            
                            4.422012
                            
                            
                            200,000
                            
                            
                            
                            150,000
                            
                            
                            
                            4.242013
                            
                            
                            425,000
                            
                            
                            
                            145,000
                            
                            
                            
                            3.862014
                            
                            
                            150,000
                            
                            
                            
                            100,000
                            
                            
                            
                            3.582015
                            
                            
                            --
                            
                            
                            
                            20,000
                            
                            
                            
                            4.45Total
                            
                            $
                            2,596,000
                            
                            
                            $
                            660,000
                            
                            
                            
                            4.52
                            %





(1)The
interest rate swaps hedged against a portion of these FHLB advances were
terminated during the first quarter of fiscal year 2008. The weighted average
rate 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 FHLB advances.





The
following table presents the maturity of FHLB advances for the next four
quarters as of December 31, 2008.  There are no maturities of
repurchase agreements for the next four quarters.





WeightedMaturity
      by
                          
                          
                          
                          
                          AverageQuarter
      End
                          
                          Amount
                          
                          
                          Rate(Dollars
      in thousands)March
      31, 2009
                          
                          $
                          300,000
                          
                          
                          
                          4.16
                          %June
      30, 2009
                          
                          
                          --
                          
                          
                          
                          --September
      30, 2009
                          
                          
                          320,000
                          
                          
                          
                          4.37December
      31, 2009
                          
                          
                          175,000
                          
                          
                          
                          6.24$
                          795,000
                          
                          
                          
                          4.70
                          %





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.




40


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 $826.9 million at
December 31, 2008, or10% of total Bank assets on that date.  As of
December 31, 2008, the Bank exceeded all capital requirements of the
OTS.  The following table presents the Bank’s regulatory capital
ratios at December 31, 2008 based upon regulatory guidelines.




RegulatoryRequirementBank
                
                For
      “Well-Ratios
                
                Capitalized”
      StatusCore
      capital
                10.0%
                
                5.0%Tier
      I risk-based capital
                23.1%
                
                6.0%Total
      risk-based capital
                23.0%
                
                10.0%










Item 3.   Quantitative and Qualitative
Disclosure About Market Risk





For a
complete discussion of the Company’s asset and liability management policies, as
well as the potential impact of interest rate changes upon the market value of
the Company’s portfolios, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management and Market
Risk” in the Company’s Annual Report to Stockholders for the year ended
September 30, 2008, attached as Exhibit 13 to the Company’s Annual Report on
Form 10-K for the year ended September 30, 2008.





ALCO
regularly reviews the interest rate risk exposure of the Bank by forecasting the
impact of hypothetical, alternative interest rate environments on net interest
income and market value of portfolio equity (“MVPE”) at various
dates.  The MVPE is defined as the net of the present value of the
cash flows of an institution’s existing assets, liabilities and off-balance
sheet instruments.  The present values are determined in alternative
interest rate environments providing potential changes in net interest income
and MVPE under those alternative interest rate environments. The Bank’s analysis
of its MVPE at December 31, 2008 indicates a decrease in its risk exposure
compared to September 30, 2008 primarily due to lower interest rates at December
31, 2008 compared to September 30, 2008.  The Bank’s analysis of the
sensitivity of its net interest income to parallel changes in interest rates at
December 31, 2008 indicates a decrease in sensitivity since September 30,
2008.





For each
period end presented in the following table, the estimated percentage change in
the Bank’s net interest income based on the indicated instantaneous, parallel
and permanent change in interest rates is presented.  The percentage
change in each interest rate environment represents the difference between
estimated net interest income in the 0 basis point interest rate environment
(“base case”, assumes the forward market and product interest rates implied by
the yield curve are realized) and estimated net interest income in each
alternative interest rate environment (assumes market and product interest rates
have a parallel shift in rates across all maturities by the indicated change in
rates).  At December 31, 2008, the three-month Treasury bill yield was
less than one percent, so the -100 and -200 basis point scenarios are not
presented.  Estimations of net interest income used in preparing the
table below are based upon the assumptions 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 as of the dates
presented.  The estimation of net interest income does not include any
projected gain or loss related to the sale of loans or securities, or income
derived from non-interest income sources, but does include the use of different
prepayment assumptions in the alternative interest rate
environments.  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.


41





Percentage
      Change in Net Interest IncomeAtChange
      (in Basis Points)
                
                December
      31,
                
                September
      30,
                
                June
      30,in
      Interest Rates(1)
                
                2008
                
                2008
                
                2008000
      bp
                
                --
                
                --
                
                --+100
      bp
                
                1.15%
                
                -2.20%
                
                -2.39%+200
      bp
                
                -1.02%
                
                -5.08%
                
                -6.12%+300
      bp
                
                -3.42%
                
                -8.62%
                
                -10.24%





(1)      Assumes
an instantaneous, permanent and parallel change in interest rates at all
maturities.





The
primary reason for the increase in estimated net interest income at December 31,
2008 compared to September 30, 2008 in the +100 basis point scenario is the
anticipated increase in the yield on interest-earning assets as cash flows from
mortgage-related assets are invested in higher yielding interest-earning
assets.  This was not the case at September 30, 2008 as net interest
income decreased in the +100 basis point scenario.  The primary reason
for this change was the significant decrease in mortgage rates that occurred
during the current quarter.  This caused the WAL of mortgage assets to
shorten significantly as borrowers have a financial incentive to refinance their
mortgages into lower interest rates.  In the +200 and +300 basis point
scenarios, the cash flows from mortgage-related assets slowed significantly as
the refinance incentive for borrowers is eliminated, resulting in
interest-bearing liabilities repricing at a faster pace than interest-earning
assets, thus reducing net interest income.  The increase in the cost
of deposits in these scenarios 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.  Changes in interest rates on the
mortgage loan and mortgage-related securities portfolios happen at a slower pace
in these scenarios, compared to interest-bearing liabilities, because only the
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
following table sets forth the estimated percentage change in MVPE at each
period end presented based on the indicated instantaneous, parallel and
permanent change in interest rates.  The MVPE is defined as the net of
the present value of the cash flows of an institution’s existing assets,
liabilities and off-balance sheet instruments.  The percentage change
in each interest rate environment represents the difference between MVPE in the
base case and MVPE in each alternative interest rate environment.  At
December 31, 2008, the three-month Treasury bill was less than one percent, so
the -100 and -200 basis point scenarios are not presented.  The
estimations of MVPE used in preparing the table below are based upon the
assumptions 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,
                
                June
      30,in
      Interest Rates(1)
                
                2008
                
                2008
                
                2008000
      bp
                
                --
                
                --
                
                --+100
      bp
                
                3.67%
                
                -6.99%
                
                -10.79%+200
      bp
                
                -9.06%
                
                -19.37%
                
                -26.83%+300
      bp
                
                -28.68%
                
                -34.88%
                
                -45.30%





(1)
            Assumes
      an instantaneous, permanent and parallel change in interest rates at all
      maturities.


42





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 borrowers have the ability to prepay their mortgage
loans.  Prepayment assumptions change on mortgage-related assets under
various interest rate environments because many borrowers look to obtain
financing at the lowest cost available.  Generally, there is no
penalty to prepay a mortgage loan we have originated or purchased.  If
interest rates decrease, the borrower has an economic incentive to lower their
mortgage payment (through a lower interest rate) with only the fees associated
with the new mortgage or loan modification.  In a decreasing interest
rate environment, prepayments increase and the average life of a mortgage
shortens compared to higher interest rate environments.  When interest
rates increase, the economic incentive for borrowers to refinance or modify
their mortgage payment is reduced, resulting in lower prepayment assumptions and
longer average lives.





The
Bank’s MVPE increased in the +100 basis point interest rate scenario at December
31, 2008 compared to a decrease at September 30, 2008.  This change
was a result of a significant decrease in mortgage interest rates between the
two periods.  Because of the decrease in interest rates, the WAL of
mortgage-related assets shortened to such a point that the WAL of total
interest-earning assets was shorter than the WAL of total interest-bearing
liabilities.  Therefore, the change in the market value of
interest-earning assets is smaller than the change in interest-bearing
liabilities.  In the +200 and +300 basis point scenarios, the WAL of
mortgage-related assets increase to such a level that the WAL of total
interest-earning assets become longer, and thus more sensitive to changes in
interest rates.  The prepayment assumptions for fixed-rate loans, and
all mortgage-related assets in general, anticipate prepayment speeds that would
likely only be realized through normal changes in borrowers’ lives, such as
divorce, death, job-related relocations, and other life changing
events.  The lower prepayment speeds extend the expected average lives
on these assets, relative to assumptions in the base case, thereby increasing
their sensitivity to changes in interest rates.  The net impact to
MVPE of short-lived liabilities and long-lived assets is to increase the
sensitivity of the Bank to changes in interest rates the more interest rates
increase.





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,
2008, based on the information and assumptions set forth in the notes
below.  Cash flow projections for mortgage loans and mortgage-related
securities are calculated based on current interest rates.  Prepayment
projections are subjective in nature, involve uncertainties and assumptions and,
therefore, cannot be determined with a high degree of accuracy. Although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react differently to changes in market interest
rates.  Assumptions may not reflect how actual yields and costs
respond to market changes. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind changes
in market interest rates.  Certain assets, such as ARM loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset.  In the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the gap table. For additional information
regarding the impact of changes in interest rates, see the Percentage Change in
Net Interest Income and Percentage Change in MVPE tables above.








43


December
      31, 2008Within
      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
                                              
                                              $
                                              230,406
                                              
                                              
                                              $
                                              1,313,872
                                              
                                              
                                              $
                                              1,368,378
                                              
                                              
                                              $
                                              417,085
                                              
                                              
                                              $
                                              428,051
                                              
                                              
                                              $
                                              3,757,792Adjustable
                                              
                                              
                                              149,079
                                              
                                              
                                              
                                              829,591
                                              
                                              
                                              
                                              487,881
                                              
                                              
                                              
                                              37,853
                                              
                                              
                                              
                                              949
                                              
                                              
                                              
                                              1,505,353Other
      loans
                                              
                                              
                                              137,895
                                              
                                              
                                              
                                              31,337
                                              
                                              
                                              
                                              30,342
                                              
                                              
                                              
                                              7,498
                                              
                                              
                                              
                                              6,850
                                              
                                              
                                              
                                              213,922Securities:Non-mortgage
      securities (3)
                                              
                                              
                                              27,271
                                              
                                              
                                              
                                              26,577
                                              
                                              
                                              
                                              15,534
                                              
                                              
                                              
                                              21,581
                                              
                                              
                                              
                                              16,721
                                              
                                              
                                              
                                              107,684Mortgage-related
      securities (4)
                                              
                                              
                                              220,335
                                              
                                              
                                              
                                              891,289
                                              
                                              
                                              
                                              728,524
                                              
                                              
                                              
                                              186,097
                                              
                                              
                                              
                                              125,407
                                              
                                              
                                              
                                              2,151,652Other
      interest-earning assets
                                              
                                              
                                              74
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              74Total
      interest-earning assets
                                              
                                              
                                              765,060
                                              
                                              
                                              
                                              3,092,666
                                              
                                              
                                              
                                              2,630,659
                                              
                                              
                                              
                                              670,114
                                              
                                              
                                              
                                              577,978
                                              
                                              
                                              
                                              7,736,477Interest-bearing
      liabilities:Deposits:Savings(5)
                                              
                                              
                                              115,541
                                              
                                              
                                              
                                              7,320
                                              
                                              
                                              
                                              17,234
                                              
                                              
                                              
                                              13,640
                                              
                                              
                                              
                                              74,038
                                              
                                              
                                              
                                              227,773Checking
      (5)
                                              
                                              
                                              10,026
                                              
                                              
                                              
                                              33,010
                                              
                                              
                                              
                                              102,705
                                              
                                              
                                              
                                              59,977
                                              
                                              
                                              
                                              223,452
                                              
                                              
                                              
                                              429,170Money
      market (5)
                                              
                                              
                                              35,365
                                              
                                              
                                              
                                              97,489
                                              
                                              
                                              
                                              179,939
                                              
                                              
                                              
                                              141,391
                                              
                                              
                                              
                                              327,648
                                              
                                              
                                              
                                              781,832Certificates
                                              
                                              
                                              333,638
                                              
                                              
                                              
                                              1,105,380
                                              
                                              
                                              
                                              873,755
                                              
                                              
                                              
                                              114,755
                                              
                                              
                                              
                                              1,001
                                              
                                              
                                              
                                              2,428,529Borrowings
      (6)
                                              
                                              
                                              353,609
                                              
                                              
                                              
                                              495,000
                                              
                                              
                                              
                                              1,521,000
                                              
                                              
                                              
                                              820,000
                                              
                                              
                                              
                                              120,000
                                              
                                              
                                              
                                              3,309,609Total
      interest-bearing liabilities
                                              
                                              
                                              848,179
                                              
                                              
                                              
                                              1,738,199
                                              
                                              
                                              
                                              2,694,633
                                              
                                              
                                              
                                              1,149,763
                                              
                                              
                                              
                                              746,139
                                              
                                              
                                              
                                              7,176,913Excess
      (deficiency) of interest-earning assets overinterest-bearing
      liabilities
                                              
                                              $
                                              (83,119
                                              )
                                              
                                              $
                                              1,354,467
                                              
                                              
                                              $
                                              (63,974
                                              )
                                              
                                              $
                                              (479,649
                                              )
                                              
                                              $
                                              (168,161
                                              )
                                              
                                              $
                                              559,564Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities
                                              
                                              $
                                              (83,119
                                              )
                                              
                                              $
                                              1,271,348
                                              
                                              
                                              $
                                              1,207,374
                                              
                                              
                                              $
                                              727,725
                                              
                                              
                                              $
                                              559,564Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities as apercent
      of total assets at December 31, 2008
                                              
                                              
                                              (1.02
                                              )%
                                              
                                              
                                              15.59
                                              %
                                              
                                              
                                              14.80
                                              %
                                              
                                              
                                              8.92
                                              %
                                              
                                              
                                              6.86
                                              %Cumulative
      excess (deficiency) at
                                                September
      30, 2008
                                              
                                              
                                              (0.10
                                              )%
                                              
                                              
                                              1.90
                                              %
                                              
                                              
                                              (1.19
                                              )%
                                              
                                              
                                              (4.16
                                              )%
                                              
                                              
                                              9.05
                                              %Cumulative
      excess (deficiency) at
                                                September
      30, 2007
                                              
                                              
                                              (9.45
                                              )%
                                              
                                              
                                              (11.57
                                              )%
                                              
                                              
                                              (5.52
                                              )%
                                              
                                              
                                              1.68
                                              %
                                              
                                              
                                              8.72
                                              %


44


(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 $19.2 million at
December 31, 2008.


(3)  Based
on contractual maturities, or terms to call date or pre-refunding dates as of
December 31, 2008, and excludes the unrealized loss adjustment of $1.7 million
on AFS investment securities.


(4)  Reflects
estimated prepayments of mortgage-related securities in our portfolio, and
excludes the unrealized gain adjustment of $24.7 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 assets which were estimated to mature or
reprice within one year would have exceeded interest-earning liabilities with
comparable characteristics by $131.3 million, for a cumulative one-year gap of
1.61% of total assets.


(6)  Borrowings
exclude $964 thousand of deferred gain on the terminated interest rate swaps,
and $14 thousand of capitalized debt issuance costs on other
borrowings.





The
change in the one-year gap to 15.59% at December 31, 2008 from 1.90% at
September 30, 2008 was a result of a significant decrease in interest rates,
particularly mortgage interest rates.  The decrease in mortgage
interest rates increased projected cash flows from mortgage loan
prepayments which resulted in shorter average lives and quicker repricing of
interest-earning assets at December 31, 2008 compared to September 30,
2008.














45





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 approximately 56% of these portfolios at December 31, 2008 and
September 30, 2008.  The WAL is the estimated remaining maturity after
historical prepayment speeds and projected call option assumptions have been
applied.  The increase in the WAL between September 30, 2008 and
December 31, 2008 was due largely to a slowdown in prepayment speeds on
mortgage- related securities during the current quarter.  The decrease
in the yield between September 30, 2008 and December 31, 2008 was a result of
calls and maturities of higher yielding securities as well as a decrease in the
yield of adjustable-rate securities that reset during the current
quarter.








December
      31, 2008
                  
                  September
      30, 2008
                  
                  June
      30, 2008Balance
                  
                  WAL
                  
                  Yield
                  
                  
                  Balance
                  
                  WAL
                  
                  Yield
                  
                  
                  Balance
                  
                  WAL
                  
                  Yield(Dollars
      in thousands)Fixed-rate
      investments:Agency
      bonds
                  $            45,036
                  
                  0.24
                  
                  3.22
                  %
                  
                  $          82,552
                  
                  5.55
                  
                  4.28
                  %
                  
                  $         82,664
                  
                  2.62
                  
                  4.29
                  %Mortgage-related
      securities
                  1,164,744
                  
                  5.08
                  
                  4.88
                  
                  
                  1,207,086
                  
                  4.92
                  
                  4.88
                  
                  
                  1,196,543
                  
                  4.43
                  
                  4.86Municipal
      bonds
                  58,806
                  
                  4.17
                  
                  3.41
                  
                  
                  58,062
                  
                  4.81
                  
                  3.39
                  
                  
                  58,303
                  
                  5.22
                  
                  3.39Total
      fixed-rate investments
                  1,268,586
                  
                  4.87
                  
                  4.75
                  
                  
                  1,347,700
                  
                  4.95
                  
                  4.78
                  
                  
                  1,337,510
                  
                  4.35
                  
                  4.76Adjustable-rate
      investments:Mortgage-related
      securities
                  986,908
                  
                  6.68
                  
                  4.75
                  
                  
                  1,034,734
                  
                  5.21
                  
                  4.76
                  
                  
                  878,005
                  
                  4.17
                  
                  4.62Trust
      preferred securities
                  3,842
                  
                  28.48
                  
                  3.66
                  
                  
                  3,859
                  
                  28.73
                  
                  4.48
                  
                  
                  3,869
                  
                  28.98
                  
                  4.44Total
      adjustable-rate investments
                  990,750
                  
                  6.79
                  
                  4.75
                  
                  
                  1,038,593
                  
                  5.32
                  
                  4.76
                  
                  
                  881,874
                  
                  4.28
                  
                  4.62Total
      investment portfolio, at cost
                  $       2,259,336
                  
                  5.71
                  
                  4.75
                  %
                  
                  $     2,386,293
                  
                  5.11
                  
                  4.77
                  %
                  
                  $    2,219,384
                  
                  4.32
                  
                  4.70
                  %







46


The
certificate of deposit portfolio decreased $90.5 million from September 30, 2008
to December 31, 2008 and the average cost of the portfolio decreased 27 basis
points between the two reporting dates.  The decrease was primarily
due to maturing brokered deposits which were not
replaced.  Certificates maturing in one year or less at December 31,
2008 were $1.44 billion with an average cost of 3.38%.  The following
table presents the maturity of certificates of deposit at the dates
indicated.







December
      31, 2008
                
                
                September
      30, 2008
                
                
                June
      30, 2008
                
                
                March
      31, 2008Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate(Dollars
      in thousands)Certificates
      maturing within:0
      to 3 months
                
                $
                333,638
                
                
                
                3.14
                %
                
                $
                494,370
                
                
                
                4.53
                %
                
                $
                454,875
                
                
                
                4.71
                %
                
                $
                574,897
                
                
                
                4.84
                %3
      to 6 months
                
                
                363,499
                
                
                
                3.28
                
                
                
                327,479
                
                
                
                3.26
                
                
                
                489,029
                
                
                
                4.57
                
                
                
                448,972
                
                
                
                4.746
      months to one year
                
                
                741,881
                
                
                
                3.54
                
                
                
                658,537
                
                
                
                3.43
                
                
                
                567,943
                
                
                
                3.40
                
                
                
                634,845
                
                
                
                4.36One
      year to two years
                
                
                496,201
                
                
                
                4.15
                
                
                
                631,061
                
                
                
                4.26
                
                
                
                638,300
                
                
                
                4.10
                
                
                
                508,283
                
                
                
                4.20After
      two years
                
                
                493,310
                
                
                
                3.90
                
                
                
                407,549
                
                
                
                3.93
                
                
                
                347,496
                
                
                
                4.19
                
                
                
                371,621
                
                
                
                4.64Total
      certificates
                
                $
                2,428,529
                
                
                
                3.64
                %
                
                $
                2,518,996
                
                
                
                3.91
                %
                
                $
                2,497,643
                
                
                
                4.16
                %
                
                $
                2,538,618
                
                
                
                4.54
                %Average
      maturity (in years)
                
                
                1.15
                
                
                
                
                
                
                
                1.09
                
                
                
                
                
                
                
                1.03
                
                
                
                
                
                
                
                0.95





47


Item
4.  Controls and
Procedures


John B.
Dicus, the Company’s Chairman, 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-15(e) under the Securities Exchange Act of 1934, as amended, the “Act”)
as of December 31, 2008.  Based upon their evaluation, they have
concluded that as of December 31, 2008, 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, 2008, there were no changes in the Company’s
internal control over financial reporting as defined by Rule 13a-15(d) of the
Act that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.





Part II -   OTHER
INFORMATION





Item 1.  Legal Proceedings


We are
not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business.  We believe
that these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operations.





Item 1A.  Risk Factors


There
have been no material changes to our risk factors since September 30,
2008.  For a summary of other risk factors relevant to our operations,
see Part I, Item 1A in our 2008 Annual Report on Form
10-K.





48





<Index>


Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds


See
“Liquidity and Capital Resources - Capital” in “Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” regarding the OTS
restrictions on dividends from the Bank to the Company.





The
following table summarizes our share repurchase activity during the three months
ended December 31, 2008 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 166,569 shares remaining as of December 31, 2008.  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.  The Company purchased shares to mitigate the effect of
options exercised during the quarter.  There were 49,075 options
exercised during the quarter at an average price of $20.76.




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, 2008 throughOctober
      31, 2008
              --
              --
              --
              186,431November
      1, 2008 throughNovember
      30, 2008(1)
              6,824
              --
              6,824
              179,607December
      1, 2008 throughDecember
      31, 2008
              13,038
              42.90
              13,038
              166,569Total
              19,862
              
              19,862
              166,569







(1)
There were 6,824 shares purchased during the current quarter that were then
reissued upon the exercise of options.







<Index>


Item
3.  Defaults Upon Senior Securities


Not
applicable.





<Index>


49


Item
4.  Submission of Matters to a Vote of Security Holders


At the Annual Meeting of Stockholders for the fiscal year ended
September 30, 2008, held January 14, 2009, two matters were presented to
stockholders.  Stockholders elected B.B. Andersen and Morris J. Huey
to three-year terms as directors.  Stockholders also ratified the
appointment of Deloitte & Touche, LLP as auditors for the fiscal year ending
September 30, 2009.  The votes cast as to each matter are set forth
below:





Number
      of VotesFor
              Against
              AbstainProposal
      1.Election
      of the following directors for the termsindicated:B.B.
      Andersen (three years)
              72,571,410
              298,415
              --Morris
      J. Huey (three years)
              72,750,460
              119,365
              --The
      following directors had their term of officecontinue
      after the meeting:John
      B. DicusJeffrey
      M. JohnsonMichael
      T. McCoy, M.D.Jeffrey
      R. ThompsonMarilyn
      WardProposal
      2.Ratification
      of Deloitte & Touche LLP
              72,579,574
              231,335
              58,816as
      auditors.





<Index>


Item
5.  Other Information


Not
applicable.





<Index>


Item
6.  Exhibits


See Index
to Exhibits.


50


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,
2009                                              By: /s/ John B.
Dicus


John B. Dicus, Chairman, President and


Chief Executive Officer








Date:  February
4,
2009                                               By: /s/ Kent G.
Townsend


Kent G. Townsend, Executive Vice President and


Chief Financial Officer








<Index>


51


INDEX TO EXHIBITS


Exhibit
              Number
            Document2.0
            
            Plan
      of Reorganization and Stock Issuance Plan*3(i)
            
            Federal
      Stock Charter of Capitol Federal Financial*3(ii)
            
            Bylaws
      of Capitol Federal Financial filed on November 29, 2007 as Exhibit 3(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference4(i)
            
            Form
      of Stock Certificate of Capitol Federal Financial*4(ii)
            
            The
      Registrant agrees to furnish to the Securities and Exchange Commission,
      upon request, theinstruments
      defining the rights of the holders of the Registrant’s long-term
      debt.10.1(i)
            
            Registrant’s
      Thrift Plan filed on November 29, 2007 as Exhibit 10.1(i)
    tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.1(ii)
            
            Registrant’s
      Stock Ownership Plan filed on November 29, 2007 as Exhibit 10.1(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.2
            
            Registrant’s
      2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
      April 13,2000
      as Appendix A to Registrant’s Revised Proxy Statement (File No. 000-25391)
      and incorporated herein by reference10.3
            
            Registrant’s
      2000 Recognition and Retention Plan (the “RRP”) filed on April 13, 2000
      asAppendix
      B to Registrant’s Revised Proxy Statement (File No. 000-25391) and
      incorporated herein by reference10.4
            
            Capitol
      Federal Financial Deferred Incentive Bonus Plan, as amended, filed on
      August 4, 2008 as Exhibit 10.4 to the June 30, 2008 Form
    10-Q10.5
            
            Form
      of Incentive Stock Option Agreement under the Stock Option Plan filed on
      February 4, 2005as
      Exhibit 10.5 to the December 31, 2004 Form 10-Q and incorporated herein by
      reference10.6
            
            Form
      of Non-Qualified Stock Option Agreement under the Stock Option Plan filed
      on February 4,2005
      as Exhibit 10.6 to the December 31, 2004 Form 10-Q and incorporated herein
      by reference10.7
            
            Form
      of Restricted Stock Agreement under the RRP filed on February 4, 2005 as
      Exhibit 10.7 to theDecember
      31, 2004 Form 10-Q and incorporated herein by reference10.8
            
            Description
      of Named Executive Officer Salary and Bonus Arrangements filed on December
      1,2008
      as Exhibit 10.8 to the Annual Report on Form 10-K and incorporated herein
      by reference10.9
            
            Description
      of Director Fee Arrangements10.10
            
            Short-term
      Performance Plan filed on December 14, 2005 as Exhibit 10.10 to the
      AnnualReport
      on Form 10-K for the fiscal year ended September 30, 2005 and incorporated
      herein by reference11
            
            Statement
      re: computation of earnings per share**31.1
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by John B.
      Dicus, Chairman, President and Chief Executive Officer31.2
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G.
      Townsend, Executive Vice President and Chief Financial
    Officer32
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President
      and Chief Executive Officer, and Kent G. Townsend, Executive Vice
      President and Chief Financial
Officer





52


*Incorporated
by reference from Capitol Federal Financial’s Registration Statement on Form S-1
(File No. 333-68363) filed on February 11, 1999, as amended and declared
effective on the same date.





**No
statement is provided because the computation of per share earnings on both a
basic and fully diluted basis can be clearly determined from the Financial
Statements included in this report.


53