**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **_________________**
 
 **Form
        10-Q**
 (Mark
        One)
 þ **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the quarterly period ended March 31, 2007**
 
 or
 
  ̈  **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15 (d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 **Commission
        file number: 000-25391**
 _________________
 
 **Capitol
        Federal Financial**
 *(* *Exact
        name of registrant as specified in its charter)*
 
 **United
        States**  **48-1212142**
 *(State
        or other jurisdiction of
        incorporation                                                           (I.R.S.
        Employer*
 *or
        organization)                                                                                      Identification
        No.)*
 
 **700
        Kansas Avenue, Topeka,
        Kansas                                                66603**
 ** *(Address
        of principal executive
        offices)                                                                        (Zip
        Code)*
 
 **Registrant’s
        telephone number, including area code:**
 **(785)
        235-1341**
 
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports) and (2) has been subject to such requirements for the
        past
        90 days. Yes þ No  ̈
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
        accelerated filer þ Accelerated
        filer  ̈ Non-accelerated
        filer  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange
        Act).     Yes  ̈ No þ
 
 As
        of April 30, 2007, there were 74,271,720 shares of Capitol Federal Financial
        Common Stock outstanding.
 
 
 
  1
   PART
                  I -- FINANCIAL INFORMATION
              Page
                NumberItem
                  1.  Financial Statements (Unaudited):Consolidated
                  Balance Sheetsat
                  March 31, 2007 and September 30, 2006
              3Consolidated
                  Statements of Incomefor the three and six months endedMarch
                  31, 2007 and March 31, 2006
              4Consolidated
                  Statement of Stockholders’ Equityfor the six months endedMarch
                  31, 2007
              5Consolidated
                  Statements of Cash Flowsfor the six months endedMarch
                  31, 2007 and March 31, 2006
              6Notes
                  to Consolidated Interim Financial Statements
              8Item
                  2.Management’s
                  Discussion and Analysisof
                  Financial Condition andResults
                  of Operations
              9Item
                  3.Quantitative
                  and Qualitative Disclosure about Market Risk
              43Item
                  4.Controls
                  and Procedures
              51PART
                  II -- OTHER INFORMATIONItem
                  1.Legal
                  Proceedings
              51Item
                  1A.Risk
                  Factors
              51Item
                  2.UnregisteredSales of Equity Securities and Use of Proceeds
              52Item
                  3.Defaults
                  Upon Senior Securities
              52Item
                  4.Submission
                  of Matters to a Vote of Security Holders
              52Item
                  5.Other
                  Information
              52Item
                  6.Exhibits
              52Signature
                  Page
              53INDEX
                  TO EXHIBITS
              54
 
  2
  **PART
        I -- FINANCIAL INFORMATION**
 **Item
        1. Financial Statements**
 CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        BALANCESHEETS
 (Dollars
        in thousands except per share data and amounts)
 
 March
                  31,
              
              September
                  30,2007
              
              
              2006ASSETS:
              
              
              (Unaudited
              )Cash
                  and cash equivalents
              
              $
              242,186
              
              $
              183,242Investment
                  securities:Available-for-sale(“AFS”)
                  at market (amortized cost of $131,060 and $189,275)
              
              
              131,167
              
              
              189,480Held-to-maturity(“HTM”),
                  at cost (market value of $637,279 and $233,525)
              
              
              642,237
              
              
              240,000Mortgage-related
                  securities:Trading,
                  at market
              
              
              --
              
              
              396,904AFS,
                  at market (amortized cost of $453,625 and $558,939)
              
              
              454,114
              
              
              556,248HTM,
                  at cost (market value of $1,128,515 and $1,101,159)
              
              
              1,149,329
              
              
              1,131,634Loans
                  receivable held-for-sale, net
              
              
              266
              
              
              1,440Loans
                  receivable, net
              
              
              5,215,701
              
              
              5,221,117Mortgage
                  servicing rights ("MSR")
              
              
              6,304
              
              
              6,917Capital
                  stock of Federal Home Loan Bank ("FHLB"), at cost
              
              
              157,344
              
              
              165,130Accrued
                  interest receivable
              
              
              37,712
              
              
              38,032Premises
                  and equipment, net
              
              
              28,344
              
              
              26,500Real
                  estate owned, net
              
              
              1,905
              
              
              2,409Income
                  taxes receivable, net
              
              
              7,119
              
              
              5,359Deferred
                  income taxes, net
              
              
              9,164
              
              
              20,967Other
                  assets
              
              
              14,401
              
              
              13,694TOTAL
                  ASSETS
              
              $
              8,097,293
              
              $
              8,199,073LIABILITIES:Deposits
              
              $
              4,002,866
              
              $
              3,900,431Advances
                  from FHLB
              
              
              3,074,973
              
              
              3,268,705Other
                  borrowings, net
              
              
              53,495
              
              
              53,467Advance
                  payments by borrowers for taxes and insurance
              
              
              33,877
              
              
              48,353Accounts
                  payable and accrued expenses
              
              
              61,458
              
              
              64,898Total
                  liabilities
              
              
              7,226,669
              
              
              7,335,854STOCKHOLDERS'
                  EQUITY:Preferred
                  stock ($0.01 par value) 50,000,000 shares authorized; none
                  issued
              
              
              --
              
              
              --Common
                  stock ($0.01 par value) 450,000,000 shares authorized; 91,512,287shares
                  issued as of March 31, 2007 and September 30, 2006
              
              
              915
              
              
              915Additional
                  paid-in capital
              
              
              435,643
              
              
              429,286Unearned
                  compensation, Employee Stock Ownership Plan ("ESOP")
              
              
              (13,106
              )
              
              (14,784
              )Unearned
                  compensation, Recognition and Retention Plan ("RRP")
              
              
              (803
              )
              
              (825
              )Retained
                  earnings
              
              
              757,281
              
              
              760,890Accumulated
                  other comprehensive gain (loss)
              
              
              370
              
              
              (1,543
              )Less
                  shares held in treasury (17,242,193 and 17,480,537 shares as
                  ofMarch
                  31, 2007 and September 30, 2006, at cost)
              
              
              (309,676
              )
              
              (310,720
              )Total
                  stockholders' equity
              
              
              870,624
              
              
              863,219TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              8,097,293
              
              $
              8,199,073
 
 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 Ended
              
              For
                  the Six Months EndedMarch
                  31,
              
              March
                  31,2007
              
              2006
              
              2007
              
              2006INTEREST
                  AND DIVIDEND INCOME:Loans
                  receivable
              
              $
              73,990
              
              $
              75,505
              
              $
              147,182
              
              $
              150,665Mortgage-related
                  securities
              
              
              17,317
              
              
              18,950
              
              
              36,838
              
              
              38,294Investment
                  securities
              
              
              9,262
              
              
              4,425
              
              
              15,946
              
              
              9,319Capital
                  stock of FHLB
              
              
              2,544
              
              
              2,473
              
              
              5,243
              
              
              4,856Cash
                  and cash equivalents
              
              
              1,460
              
              
              605
              
              
              4,530
              
              
              684Total
                  interest and dividend income
              
              
              104,573
              
              
              101,958
              
              
              209,739
              
              
              203,818INTEREST
                  EXPENSE:Deposits
              
              
              36,267
              
              
              28,974
              
              
              71,736
              
              
              56,219FHLB
                  advances
              
              
              38,508
              
              
              38,176
              
              
              79,249
              
              
              77,980Other
                  borrowings
              
              
              1,101
              
              
              993
              
              
              2,230
              
              
              1,948Total
                  interest expense
              
              
              75,876
              
              
              68,143
              
              
              153,215
              
              
              136,147NET
                  INTEREST AND DIVIDEND INCOME
              
              
              28,697
              
              
              33,815
              
              
              56,524
              
              
              67,671PROVISION
                  (RECOVERY) FOR LOAN LOSSES
              
              
              55
              
              
              (138
              )
              
              (225
              )
              
              130NET
                  INTEREST AND DIVIDEND INCOME AFTERPROVISION
                  (RECOVERY) FOR LOAN LOSSES
              
              
              28,642
              
              
              33,953
              
              
              56,749
              
              
              67,541OTHER
                  INCOME:Retail
                  fees and charges
              
              
              3,543
              
              
              3,914
              
              
              7,831
              
              
              8,263Loan
                  fees
              
              
              551
              
              
              435
              
              
              1,212
              
              
              910Insurance
                  commissions
              
              
              513
              
              
              808
              
              
              954
              
              
              1,232Gain
                  on trading securities, net
              
              
              --
              
              
              --
              
              
              34
              
              
              --Loss
                  on sale of available-for-sale securities
              
              
              --
              
              
              --
              
              
              (47
              )
              
              --Other,
                  net
              
              
              824
              
              
              858
              
              
              1,662
              
              
              1,452Total
                  other income
              
              
              5,431
              
              
              6,015
              
              
              11,646
              
              
              11,857OTHER
                  EXPENSES:Salaries
                  and employee benefits
              
              
              10,373
              
              
              10,185
              
              
              20,494
              
              
              20,120Occupancy
                  of premises
              
              
              3,529
              
              
              3,185
              
              
              6,399
              
              
              6,283Regulatory
                  and outside services
              
              
              1,490
              
              
              1,102
              
              
              3,133
              
              
              2,301Deposit
                  and loan transaction costs
              
              
              950
              
              
              1,103
              
              
              2,000
              
              
              2,212Advertising
              
              
              1,223
              
              
              868
              
              
              2,112
              
              
              1,565Other,
                  net
              
              
              2,455
              
              
              1,493
              
              
              3,513
              
              
              3,047Total
                  other expenses
              
              
              20,020
              
              
              17,936
              
              
              37,651
              
              
              35,528INCOME
                  BEFORE INCOME TAX EXPENSE
              
              
              14,053
              
              
              22,032
              
              
              30,744
              
              
              43,870INCOME
                  TAX EXPENSE
              
              
              5,597
              
              
              8,445
              
              
              12,037
              
              
              16,970NET
                  INCOME
              
              $
              8,456
              
              $
              13,587
              
              $
              18,707
              
              $
              26,900Basic
                  earnings per common share
              
              $
              0.12
              
              $
              0.19
              
              $
              0.26
              
              $
              0.37Diluted
                  earnings per common share
              
              $
              0.12
              
              $
              0.19
              
              $
              0.26
              
              $
              0.37Dividends
                  declared per share
              
              $
              0.50
              
              $
              0.50
              
              $
              1.09
              
              $
              1.30Weighted
                  average number of common shares outstanding:Basic
              
              
              72,812
              
              
              72,647
              
              
              72,718
              
              
              72,649Diluted
              
              
              72,955
              
              
              72,923
              
              
              72,895
              
              
              72,947
 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, 2006
              $       915
              $  429,286
              $         (14,784)
              $           (825)
              $      760,890
              $           (1,543)
              $ (310,720)
              $       863,219Comprehensive
                  income:Net
                  income
              
              
              
              
              18,707
              
              
              18,707Changes
                  in unrealized gains onavailable-for-sale
                  securities, net ofdeferred income
                  taxes of $1.2 million
              
              
              
              
              1,913
              
              1,913Total
                  comprehensive income
              
              
              
              
              
              
              
              20,620Tax
                  benefit of market value change in vestedRRP
                  shares
              
              26
              
              
              
              
              
              26Common
                  stock committed to be released forallocation
                  - ESOP
              
              2,824
              1,009
              
              
              
              
              3,833Acquisition
                  of treasury stock
              
              
              
              
              
              
              (1,516)
              (1,516)Stock
                  options exercised
              
              3,224
              
              
              
              
              2,518
              5,742Treasury
                  stock activity related to RRP, net
              
              138
              
              (190)
              
              
              42
              (10)Amortization
                  of unearned compensation - RRP
              
              
              
              212
              
              
              
              212Stock
                  based compensation expense
              
              145
              
              
              
              
              
              145Dividends
                  in excess of debt service cost - ESOP
              
              
              669
              
              
              
              
              669Dividends
                  on common stock to stockholders($1.09
                  per public share)
              
              
              
              
              (22,316)
              
              
              (22,316)Balance
                  at March 31, 2007
              $
                  915
              $
                  435,643
              $
                  (13,106)
              $
                  (803)
              $     757,281
              $          
                     370
              $  (309,676)
              $      
                  870,624
 
 
 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 Six Months EndedMarch
                  31,2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              18,707
              
              $
              26,900Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:FHLB
                  stock dividends
              
              
              (5,243
              )
              
              (4,856
              )Net
                  loan origination fees capitalized
              
              
              722
              
              
              1,288Amortization
                  of net deferred loan origination fees
              
              
              (776
              )
              
              (678
              )(Recovery)
                  provision for loan losses
              
              
              (225
              )
              
              130Originations
                  of loans receivable held-for-sale
              
              
              (1,667
              )
              
              (2,206
              )Proceeds
                  from sales of loans receivable held-for-sale
              
              
              2,910
              
              
              3,775Amortization
                  of MSR
              
              
              498
              
              
              368Impairment
                  (recovery of impairment) of MSR
              
              
              115
              
              
              (132
              )Amortization
                  and accretion of premiums and discounts onmortgage-related
                  securities and investment securities
              
              
              (551
              )
              
              4,082Principal
                  collected on trading securities
              
              
              7,729
              
              
              --Proceeds
                  from sale of trading securities
              
              
              389,209
              
              
              --Depreciation
                  and amortization of premises and equipment
              
              
              2,023
              
              
              1,769Amortization
                  of deferred debt issuance costs
              
              
              28
              
              
              28Common
                  stock committed to be released for allocation - ESOP
              
              
              3,833
              
              
              3,353RRP
                  shares sold, net of forfeitures
              
              
              (10
              )
              
              (11
              )Stock
                  based compensation - stock options and RRP
              
              
              357
              
              
              500Other,
                  net
              
              
              (327
              )
              
              (323
              )Changes
                  in:Accrued
                  interest receivable
              
              
              320
              
              
              874Other
                  assets
              
              
              (707
              )
              
              513Income
                  taxes payable/receivable and deferred income taxes
              
              
              8,900
              
              
              12,466Accounts
                  payable and accrued expenses
              
              
              2,828
              
              
              (2,710
              )Net
                  cash provided by operating activities
              
              
              428,673
              
              
              45,130CASH
                  FLOWS FROM INVESTING ACTIVITIES:Proceeds
                  from maturities or calls of investment securities AFS
              
              
              60,000
              
              
              50,000Purchases
                  of investment securities AFS
              
              
              (1,520
              )
              
              --Proceeds
                  from maturities or calls of investment securities HTM
              
              
              226,500
              
              
              --Purchases
                  of investment securities HTM
              
              
              (626,388
              )
              
              --Principal
                  collected on mortgage-related securities AFS
              
              
              108,407
              
              
              159,067Purchases
                  of mortgage-related securities AFS
              
              
              (19,912
              )
              
              --Proceeds
                  from sale of mortgage-related securities AFS
              
              
              15,237
              
              
              --Principal
                  collected on mortgage-related securities HTM
              
              
              116,655
              
              
              144,076Purchases
                  of mortgage-related securities HTM
              
              
              (134,878
              )
              
              (983
              )Proceeds
                  from the redemption of capital stock of FHLB
              
              
              13,029
              
              
              --Loan
                  originations, net of principal collected
              
              
              (40,738
              )
              
              (11,503
              )Loan
                  purchases, net of principal collected
              
              
              44,518
              
              
              (50,004
              )Purchases
                  of premises and equipment, net
              
              
              (3,871
              )
              
              (3,272
              )Proceeds
                  from sales of real estate owned, net
              
              
              2,694
              
              
              2,074Net
                  cash (used in) provided byinvesting
                  activities
              
              
              (240,267
              )
              
              289,455
 
 (Continued)
  6
  
 CASH
                  FLOWS FROM FINANCING ACTIVITIES:Dividends
                  paid
              
              
              (22,316
              )
              
              (26,616
              )Dividends
                  in excess of debt service cost of ESOP, net
              
              
              669
              
              
              (79
              )Deposits,
                  net of withdrawals
              
              
              102,435
              
              
              54,831Proceeds
                  from advances/line of credit from FHLB
              
              
              --
              
              
              629,100Repayments
                  on advances/line of credit from FHLB
              
              
              (200,000
              )
              
              (829,100
              )Change
                  in advance payments by borrowers for taxes
                  and insurance
              
              
              (14,476
              )
              
              (6,391
              )Acquisitions
                  of treasury stock
              
              
              (1,516
              )
              
              (10,056
              )Stock
                  options exercised
              
              
              3,264
              
              
              1,335Excess
                  tax benefits from stock options
              
              
              2,478
              
              
              --Net
                  cash used in financing activities
              
              
              (129,462
              )
              
              (186,976
              )NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              58,944
              
              
              147,609CASH
                  AND CASH EQUIVALENTS:Beginning
                  of period
              
              
              183,242
              
              
              58,566End
                  of period
              
              $
              242,186
              
              $
              206,175SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Income
                  tax payments
              
              $
              711
              
              $
              2,885Interest
                  payments, net of interest credited to deposits
              
              $
              78,920
              
              $
              84,633SUPPLEMENTAL
                  DISCLOSURE OF NON-CASHINVESTING
                  AND FINANCING ACTIVITIES:Loans
                  transferred to real estate owned
              
              $
              1,915
              
              $
              2,072Market
                  value change related to fair value hedge:Interest
                  rate swaps hedging FHLB advances
              
              $
              (6,268
              )
              $
              13,123
 
 (Concluded)
 See
        accompanying notes to consolidated interim financial statements.
 <Index>
  7
  **Notes
        to Consolidated Interim Financial Statements
        (Unaudited)**
 
 **1.   Basis
        of Financial Statement Presentation**
 The
        accompanying consolidated financial statements of Capitol Federal Financial
        and
        subsidiary (the “Company”) have been prepared in accordance with 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 2006 Annual Report on
        Form 10-K to the Securities and Exchange Commission (“SEC”). Interim results are
        not necessarily indicative of results for a full year.
 
 In
        preparing the financial statements, management is required to make estimates
        and
        assumptions that affect the reported amounts of assets and liabilities as
        of the
        date of the balance sheet and revenues and expenses for the period. Material
        estimates that are particularly susceptible to significant change in the
        near-term relate to the determination of the allowance for loan losses,
        other-than-temporary declines in the value of securities, the valuation of
        MSR
        and deferred income tax assets, and our policy regarding derivative instruments.
        See “Item 2- Management’s Discussion and Analysis of Financial Condition and
        Results of Operations - Critical Accounting Policies.”
 
 The
        Company is the sole stockholder of Capitol Federal Savings Bank (the “Bank”).
        The Company’s majority stockholder is Capitol Federal Savings Bank MHC (“MHC”),
        a federally chartered mutual holding company.
 
 **2.   Earnings
        Per Share**
 For
        the
        quarter ended March 31, 2007, basic and diluted earnings per share were $0.12.
        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 Ended
              
              For
                  the Six Months EndedMarch
                  31,
              
              March
                  31,2007(1)
                  (2)
              
              2006(3)
                  (4)
              
              2007(1)(2)
              
              2006(3)(4)(Dollars
                  in thousands, except per share amounts)Net
                  income
              
              $
              8,456
              
              $
              13,587
              
              $
              18,707
              
              $
              26,900Average
                  common shares outstanding
              
              
              72,760,899
              
              
              72,596,424
              
              
              72,692,770
              
              
              72,623,113Average
                  committed ESOP shares outstanding
              
              
              50,970
              
              
              50,970
              
              
              25,482
              
              
              25,482Total
                  basic average common shares outstanding
              
              
              72,811,869
              
              
              72,647,394
              
              
              72,718,252
              
              
              72,648,595Effect
                  of dilutive RRP shares
              
              
              5,173
              
              
              2,114
              
              
              6,547
              
              
              2,775Effect
                  of dilutive stock options
              
              
              138,109
              
              
              273,367
              
              
              169,829
              
              
              295,837Total
                  diluted average common shares outstanding
              
              
              72,955,151
              
              
              72,922,875
              
              
              72,894,628
              
              
              72,947,207Net
                  earnings per share:Basic
              
              $
              0.12
              
              $
              0.19
              
              $
              0.26
              
              $
              0.37Diluted
              
              $
              0.12
              
              $
              0.19
              
              $
              0.26
              
              $
              0.37
 
  8
  (1) Options
        to purchase 34,000 shares of common stock at $38.77 per share were outstanding
        as of March 31, 2007, but were not included in the computation of diluted
        EPS
        because they were anti-dilutive for the three months and the six months ended
        March 31, 2007.
 
 (2) At
        March
        31, 2007, there were 4,000 unvested RRP shares at $38.76 per share that were
        excluded from the computation of diluted EPS because they were anti-dilutive
        for
        the three months and the six months ended March 31, 2007.
 
 (3) At
        March
        31, 2006, there were 16,000 unvested RRP shares at $32.53 per share that
        were
        excluded from the computation of diluted EPS because they were anti-dilutive
        for
        the three months and the six months ended March 31, 2006.
 
 (4) Options
        to purchase 249,000 shares of common stock at prices between $32.48 per share
        and $36.19 per share were outstanding as of March 31, 2006, but were not
        included in the computation of diluted EPS because they were anti-dilutive
        for
        the three months and the six months ended March 31, 2006.
  **3.** **** **Recent
        Accounting Pronouncements**
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standard (“SFAS”) No. 155, “Accounting for
        Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
        of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid
        financial instrument that contains an embedded derivative that would otherwise
        require bifurcation, if the holder irrevocably elects to account for the
        whole
        instrument on a fair value basis, and clarifies various aspects of SFAS No.
        133
        and SFAS No. 140 relating to derivative financial instruments and qualifying
        special-purpose entities holding derivative financial instruments. The Company’s
        adoption of SFAS No. 155 had no impact on its financial condition or results
        of
        operations.
 
 In
        March
        2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets -
        an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity to
        recognize a servicing asset or servicing liability each time it undertakes
        an
        obligation to service a financial asset by entering into a servicing contract
        as
        defined in the SFAS. It requires all separately recognized servicing assets
        and
        servicing liabilities to be initially measured at fair value, if practicable,
        and allows an entity to choose between amortization or fair value measurement
        methods for each class of separately recognized servicing assets and servicing
        liabilities. It also permits a one-time reclassification of available-for-sale
        securities to trading without tainting the investment portfolio, provided
        the
        available-for-sale securities are identified in some manner as offsetting
        the
        entity’s exposure to changes in fair value of servicing assets or servicing
        liabilities. The Company’s adoption of SFAS No. 156 had no impact on its
        financial condition or results of operations, as management will continue
        to
        value MSR at the lower of cost or market.
 
 In
        February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
        Assets and Financial Liabilities” which permits an entity to measure certain
        financial assets and financial liabilities at fair value. The objective of
        SFAS
        No. 159 is to improve financial reporting by allowing entities to mitigate
        volatility in reported earnings caused by the measurement of related assets
        and
        liabilities using different attributes, without having to apply complex hedge
        accounting provisions. When a company elects to apply the fair value option
        to
        existing specific items, the company reports the difference between the items’
carrying value and their fair value as a cumulative-effect adjustment to
        the
        opening balance of retained earnings. When a company elects to apply the
        fair
        value option to new items, the company reports the change in the items value
        through current period income. SFAS No. 159 is effective for fiscal years
        beginning after November 15, 2007, which for the Company is October 1, 2008.
        An
        entity may elect to early adopt SFAS No. 159 if, among a number of conditions,
        it has not issued financial statements for any interim period within the
        fiscal
        year SFAS No. 159 is first adopted. The Company has not yet completed its
        assessment of the impact of SFAS No. 159.
 
 
 **Item
        2.   Management’s Discussion and Analysis of Financial Condition
        and Results of Operations**
 
 The
        Company and/or the Bank may from time to time make written or oral “forward
        looking statements,” including statements contained in the documents we file
        with or furnish to the SEC. These forward-looking statements may be included
        in
        this Quarterly Report on Form 10-Q and the exhibits attached to it, in the
        Company’s reports to stockholders and in other communications by the Company,
        which are made in good faith by us pursuant to the “safe harbor” provisions of
        the Private Securities Litigation Reform Act of 1995.
 
 These
        forward-looking statements include statements about our beliefs, plans,
        objectives, goals, expectations, anticipations, estimates and intentions,
        that
        are subject to significant risks and uncertainties, and are subject to change
        based on various factors, many of which are beyond our control. The words
“may,”
“could,” “should,”
  9
  “would,”
        “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar
        expressions are intended to identify forward-looking statements. The following
        factors, among others, could cause our future results to differ materially
        from
        the plans, objectives, goals, expectations, anticipations, estimates and
        intentions expressed in the forward-looking statements:
 
 ·
            our
                ability to continue to maintain overhead costs at reasonable levels; ·
            our
                ability to continue to originate a significant volume of one- to
                four-family mortgage loans in our market
                area; ·
            our
                ability to acquire funds from or invest funds in wholesale or secondary
                markets; ·
            the
                future earnings and capital levels of the Bank, which could affect
                the
                ability of the Company to pay dividends in accordance with its dividend
                policies; ·
            the
                credit risks of lending and investing activities, including changes
                in the
                level and direction of loan delinquencies and write-offs and changes
                in
                estimates of the adequacy of the allowance for loan
                losses; ·
            the
                strength of the U.S. economy in general and the strength of the local
                economies in which we conduct operations; ·
            the
                effects of, and changes in, trade, monetary and fiscal policies and
                laws,
                including interest rate policies of the Board of Governors of the
                Federal
                Reserve System; ·
            the
                effects of, and changes in, foreign and military policies of the
                United
                States Government; ·
            inflation,
                interest rate, market and monetary fluctuations; ·
            our
                ability to access cost-effective funding; ·
            the
                timely development of and acceptance of our new products and services
                and
                the perceived overall value of these products and services by users,
                including the features, pricing and quality compared to competitors’
                products and services; ·
            the
                willingness of users to substitute competitors’ products and services for
                our products and services; ·
            our
                success in gaining regulatory approval of our products and services,
                when
                required; ·
            the
                impact of changes in financial services laws and regulations, including
                laws concerning taxes, banking, securities and
                insurance; ·
            technological
                changes; ·
            acquisitions
                and dispositions; ·
            changes
                in consumer spending and saving habits;
                and ·
            our
                success at managing the risks involved in our
                business. 
 This
        list
        of important factors is not all inclusive. We do not undertake to update
        any
        forward-looking statement, whether written or oral, that may be made from
        time
        to time by or on behalf of the Company or the Bank.
 
 As
        used
        in this Form 10-Q, unless we specify otherwise, “the Company,” “we,” “us,” and
“our” refer to Capitol Federal Financial, a United States corporation. “Capitol
        Federal Savings,” and “the Bank,” refer to Capitol Federal Savings Bank, a
        federal savings bank and the wholly-owned subsidiary of the Company. “MHC”
refers to Capitol Federal Savings Bank MHC, a mutual holding company and
        majority-owner of the Company.
 
 The
        following discussion and analysis is intended to assist in understanding
        the
        financial condition and results of operations of the Company. It should be
        read
        in conjunction with the consolidated financial statements and notes presented
        in
        this report. The discussion includes comments relating to the Bank, since
        the
        Bank is wholly owned by the Company and comprises the majority of assets
        and is
        the principal source of income for the Company. This discussion and analysis
        should be read in conjunction with the management discussion and analysis
        included in the Company’s 2006 Annual Report on Form 10-K filed with the SEC.
 
 
 **Executive
        Summary**
 
 The
        following summary should be read in conjunction with our Management’s Discussion
        and Analysis of Financial Condition and Results of Operations in its
        entirety.
 
 Our
        principal business consists of attracting deposits from the general public
        and
        investing those funds primarily in permanent loans secured by first mortgages
        on
        owner-occupied, one- to four-family residences. We also originate consumer
        loans, loans secured by first mortgages on nonowner-occupied one- to four-family
        residences, permanent and construction loans secured by one- to four-family
        residences, commercial real estate loans and multi-family real estate loans.
        While our primary business is the origination of one- to four-family mortgage
        loans funded through
  10
  retail
        deposits, we also purchase whole loans and invest in certain investment and
        mortgage-related securities using FHLB advances as an additional funding
        source.
 
 The
        Company is significantly affected by prevailing economic conditions including
        federal monetary and fiscal policies and federal regulation of financial
        institutions. Deposit balances are influenced by a number of factors including
        interest rates paid on competing personal investments, the level of personal
        income, and the personal rate of savings within our market areas. Lending
        activities are influenced by the demand for housing and other loans, as well
        as
        interest rate pricing competition from other lending institutions. The primary
        sources of funds for lending activities include deposits, loan repayments,
        investment income, borrowings, and funds provided from operations.
 
 The
        Company’s results of operations are primarily dependent on net interest income,
        which is the difference between the interest earned on loans, mortgage-related
        securities, and investments, and the interest paid on deposits and borrowings.
        We generally price our loan and deposit products based upon an analysis of
        our
        competition and changes in market rates. On a weekly basis, management reviews
        deposit flows, loan demand, cash levels, and changes in several market rates
        to
        assess all pricing strategies. While we do not explicitly price our products
        at
        a margin to a specific market rate or index, our products tend to be priced
        at a
        margin to general market rates or indices. While national market rates change
        constantly, and rates offered by competitors with nationwide delivery channels
        may change during a business day, our offered rates generally remain available
        to customers for up to a week on deposit products and several days to a week
        on
        loan products. Our one- to four-family mortgage loans are generally priced
        based
        upon the 10-year Treasury rate while the rates on our deposits are generally
        priced based upon short-term Treasury rates. The majority of our loans are
        fixed-rate products with maturities up to 30 years, while the majority of
        our
        deposits have maturity or reprice dates of less than two years.
 
 During
        the quarter, the Federal Open Market Committee of the Federal Reserve Board
        (“FOMC”) maintained the Federal Funds rate at 5.25% for the sixth consecutive
        meeting, but indicated that inflation remained the main threat to the economic
        outlook, despite mixed economic indicators and evidence of modest economic
        growth. The Federal Funds rate is the rate at which depository institutions
        lend
        reserve requirement surplus balances at the Federal Reserve to other depository
        institutions in deficit of their reserve requirement. An increase in this
        rate
        does not directly impact the rates offered to loan and deposit consumers,
        but
        the trickle-down effect caused by an increase in borrowing costs for banks
        may
        be eventually realized in mortgage, consumer, and corporate loan rates and
        deposit rates. Previous FOMC meeting minutes discussed the potential impact
        of
        the slowdown in the housing market on the economy, but current data suggests
        stabilization, despite recent increases in delinquencies on subprime
        adjustable-rate mortgage (“ARM”) loans. Delinquency rates market-wide have
        prompted a tightening of credit standards, which could constrain home purchases
        and restrict recovery. See additional discussion under “Item 2- Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        -
        Lending Practices and Underwriting Standards.”
 
 During
        the second quarter of fiscal year 2007, the yield curve remained inverted,
        and
        is expected to remain inverted or flat through fiscal year 2007. This yield
        curve environment has resulted in the compression of the Company’s net interest
        margin, as the interest-earning assets of the Company generally take longer
        to
        reprice relative to its interest-bearing liabilities. The current inverted
        yield
        curve environment is likely to cause a continuation of the net interest margin
        compression during fiscal year 2007.
 
 Net
        income for the quarter ending March 31, 2007 was $8.5 million compared to
        $13.6
        million for the same period in the prior fiscal year. The $5.1 million decrease
        in net income was primarily a result of an increase in interest expense of
        $7.7
        million, which was partially offset by an increase of $2.6 million in interest
        and dividend income. The increase in interest expense was mainly attributable
        to
        higher rates on the certificate of deposit and money market portfolios, and,
        to
        a lesser extent, the interest rate swaps which are all generally priced based
        upon short-term interest rates (two year and shorter maturities). The increase
        in interest and dividend income was primarily a result of an increase in
        the
        yields on all interest-earning assets, partially offset by a decrease in
        the
        average balance of the loan and mortgage-related securities
        portfolios.
 
 During
        fiscal year 2006, management implemented an asset management strategy of
        shortening the average life of the Bank’s assets to address the interest rate
        sensitivity that has occurred during the current interest rate environment.
        Management has been purchasing short-term securities and adjustable-rate
        securities with terms to maturity or reprice of generally two years or less.
        The
        purchases have primarily been investment securities. Management intends to
        continue purchasing these types of securities for the foreseeable
        future.
 
 In
        January 2007, management did not renew $200.0 million of maturing FHLB advances,
        as the renewal rate on the advances was approximately 5.30% compared to the
        rate
        on the maturing advances of 3.37%. Subsequent to March
  11
  31,
        2007,
        management did not renew an additional $200.0 million of maturing FHLB advances,
        as the renewal rate on the advances was approximately 5.00% compared to the
        rate
        on the maturing advances of 3.49%. The advances were not renewed because
        the
        interest rate available on the Bank’s short-term investment opportunities for
        these funds was less than or equal to what the rate would have been on the
        new
        advances. Management will continue to monitor the Bank’s investment
        opportunities and balance those opportunities with the cost of FHLB advances
        or
        other funding sources. See additional discussion of interest rate risk in
        "Item
        7A. Quantitative and Qualitative Disclosure About Market Risk."
 
 **Available
        Information**
 
 Company
        and financial information, including press releases, Annual Reports on Form
        10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
        amendments to those reports can be obtained free of charge from our investor
        relations website, http://ir.capfed.com. SEC filings are available on our
        website immediately after they are electronically filed with or furnished
        to the
        SEC, and are also available on the SEC’s website at www.sec.gov.
 
 
 **Critical
        Accounting Policies**
 
 Our
        most
        critical accounting policies are the methodologies used to determine the
        allowance for loan losses, other-than-temporary declines in the value of
        securities, the valuation of MSR and deferred income tax assets, and our
        policy
        regarding derivative instruments. These policies are important to the
        presentation of our financial condition and results of operations, involve
        a
        high degree of complexity, and require management to make difficult and
        subjective judgments that may require assumptions or estimates about highly
        uncertain matters. The use of different judgments, assumptions, and estimates
        could cause reported results to differ materially. These critical accounting
        policies and their application are reviewed at least annually by our audit
        committee and board of directors. The following is a description of our critical
        accounting policies and an explanation of the methods and assumptions underlying
        their application.
 
 **Allowance
        for Loan Losses.** Management maintains an allowance for loan losses to absorb losses known
        and
        inherent in the loan portfolio based upon ongoing quarterly assessments of
        the
        loan portfolio. Our methodology for assessing the appropriateness of the
        allowance consists of several key elements, which includes a formula allowance,
        specific allowances for identified problem loans and portfolio segments,
        and
        knowledge of economic conditions that may lead to credit risk concerns about
        the
        loan portfolio or segments of the loan portfolio. In addition, the allowance
        incorporates the results of measuring impaired loans as provided in SFAS
        No.
        114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118,
“Accounting by Creditors for Impairment of a Loan - Income Recognition and
        Disclosures.” These accounting standards prescribe the measurement methods,
        income recognition and disclosures related to impaired loans.
 
 One-
        to
        four-family mortgage loans and consumer loans that are not impaired, as defined
        in SFAS No. 114 and No. 118, are collectively evaluated for impairment using
        a
        formula allowance as permitted by SFAS No. 5, “Accounting for Contingencies”.
        Loans on residential properties with greater than four units, residential
        construction loans and commercial properties that are delinquent or where
        the
        borrower’s total loan concentration balance is greater than $1.5 million
        (excluding one- to four-family mortgage loans) are evaluated for impairment
        on a
        loan by loan basis at least annually. If no impairment exists, these loans
        are
        included in the formula allowance. The formula allowance is calculated by
        applying loss factors to outstanding loans based on the internal risk evaluation
        of pools of loans. Changes in risk evaluations of both performing and
        non-performing loans affect the amount of the formula allowance. Loss factors
        are based both on our historical loss experience and on significant factors
        that, in management’s judgment, affect the collectibility of the portfolio as of
        the evaluation date. Loan loss factors for portfolio segments are representative
        of the credit risks associated with loans in those segments. The greater
        the
        credit risks associated with a particular segment, the greater the loss factor.
        Loss factors increase as individual loans become classified, delinquent,
        the
        foreclosure process begins, or as economic conditions warrant.
 
 Management
        reviews the appropriateness of the allowance based upon its evaluation of
        then-existing economic and business conditions affecting our key lending
        areas.
        Other conditions management considers in determining the appropriateness
        of the
        allowance include, but are not limited to, changes in our underwriting
        standards, credit quality trends (including changes in the balance and
        characteristics of non-performing loans expected to result from existing
        economic conditions), trends in collateral values, loan volumes and
        concentrations, and recent loss experience in particular segments of the
        portfolio as of the balance sheet date. Management also measures the impact
        that
        such conditions were believed to have had on the collectibility of impaired
        loans.
  12
  Senior
        management reviews these conditions quarterly. To the extent that any of
        these
        conditions are evidenced by a specifically identifiable problem loan or
        portfolio segment as of the evaluation date, management’s estimate of the effect
        of such condition may be reflected as a specific allowance applicable to
        such
        loan or loans. Where any of these conditions are not evidenced by a specifically
        identifiable problem loan or portfolio segment as of the evaluation date,
        management’s evaluation of the loss related to these conditions is reflected in
        the allowance associated with our homogeneous population of mortgage loans.
        The
        evaluation of the inherent loss with respect to these conditions is subject
        to a
        higher degree of uncertainty because they are not identified with specific
        problem loans or portfolio segments.
 
 The
        amounts actually observed with respect to these losses can vary significantly
        from the estimated amounts. Our methodology permits adjustments to any loss
        factor used in the computation of the formula allowance in the event that,
        in
        management’s judgment, significant factors which affect the collectibility of
        the portfolio, as of the evaluation date, are not reflected in the current
        loss
        factors. By assessing the estimated losses inherent in our loan portfolios
        on a
        quarterly basis, we can adjust specific and inherent loss estimates based
        upon
        more current information.
 
 Assessing
        the adequacy of the allowance for loan losses is inherently subjective as
        it
        requires making material estimates, including the amount and timing of future
        cash flows expected to be received on impaired loans, and changes in the
        market
        value of collateral securing loans, which may be susceptible to volatility.
        In
        the opinion of management, the allowance, when taken as a whole, is adequate
        to
        absorb reasonable estimated loan losses inherent in our loan
        portfolios.
 
 **Securities
        Impairment.** Management regularly monitors the investment and mortgage-related security
        portfolios for impairment on a security by security basis. Many factors are
        considered in determining whether the impairment is deemed to be
        other-than-temporary, including, but not limited to, the length of time the
        security has had a market value less than the cost basis, the severity of
        the
        loss, the intent and ability of the Bank to hold the security for a period
        of
        time sufficient for a substantial recovery of its investment, recent events
        specific to the issuer or industry including the issuer’s financial condition
        and current ability to make future payments in a timely manner, external
        credit
        ratings and recent downgrades in such ratings. If management deems such 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.
 
 **Valuation
        of Mortgage Servicing Rights.** The Bank
        records MSR as a result of retaining the servicing of loans that are owned
        by
        another entity. Impairment exists if the carrying value of MSR exceeds the
        estimated fair value of the MSR. MSR are stratified by the underlying loan
        term
        and by interest rate. Individual impairment allowances for each stratum are
        established when necessary and then adjusted in subsequent periods to reflect
        changes in the measurement of impairment. The estimated fair value of each
        MSR
        stratum is determined through analysis of future cash flows incorporating
        numerous assumptions including: servicing income, servicing costs, market
        discount rates, prepayment speeds, and other market driven data.
 
 The
        fair
        value of MSR is highly sensitive to changes in assumptions. Changes in
        prepayment speed assumptions have the most significant impact on the fair
        value
        of MSR. Generally, as interest rates decline, prepayments accelerate due
        to
        increased refinance activity, which results in a decrease in the fair value
        of
        MSR. As interest rates rise, prepayments slow which generally results in
        an
        increase in the fair value of MSR. All assumptions are reviewed for
        reasonableness on a quarterly basis and adjusted as necessary to reflect
        current
        and anticipated market conditions. Thus, any measurement of the fair value
        of
        MSR is limited by the conditions existing and the assumptions utilized as
        of a
        particular point in time, and those assumptions may not be appropriate if
        applied at a different point in time. We receive an independent appraisal
        of the
        fair value of our MSR at least annually.
 
 **Valuation
        of Deferred Income Tax Assets.** Management assesses the available positive and negative evidence surrounding
        the
        recoverability of deferred income tax assets on a quarterly basis. A valuation
        allowance will be recorded to reduce deferred income tax assets when it is
        more
        likely than not that the assets will not be realized.
 
 **Derivative
        Instruments.** The Bank
        has entered into interest rate swap agreements to hedge certain FHLB advances
        (“swapped FHLB advances”). When the Bank entered into the interest rate swap
        agreements, they were designated as fair value hedges. All terms of the interest
        rate swap agreements relating to the pay, fixed-rate components, and timing
        of
        cash flows match the terms of the swapped FHLB advances. Therefore, the Bank
        has
        assumed no ineffectiveness in the hedging relationship and accounts for the
        interest rate swaps using the shortcut method, under which any gain or loss
        in
        the fair value of the interest rate swaps is recorded as an other asset or
        liability and is offset by a gain or loss on the hedged FHLB
        advances.
  13
  
 Before
        entering into the interest rate swap agreements, management formally documented
        its risk management objectives and strategy, and the relationship between
        the
        interest rate swap agreements and the swapped FHLB advances. To qualify for
        hedge accounting, the interest rate swaps and the related FHLB advances must
        be
        designated as a hedge. Both at the inception of the hedge and on an ongoing
        basis, management assesses whether the hedging relationship is expected to
        be
        highly effective in offsetting changes in fair values of the swapped FHLB
        advances. If at some point it is determined that the interest rate swaps
        are not
        highly effective as a hedge, hedge accounting will be discontinued. If hedge
        accounting is discontinued, changes in the fair value of the interest rate
        swaps
        will be recorded in earnings and the swapped FHLB advances will no longer
        be
        adjusted for changes in fair value.
 
 **Financial
        Condition**
 
 Total
        assets decreased from $8.20 billion at September 30, 2006 to $8.10 billion
        at
        March 31, 2007 primarily as a result of not renewing maturing FHLB advances.
        The
        $101.8 million decrease in assets was primarily attributed to a $481.3 million
        decrease in the mortgage-related securities portfolio, partially offset by
        a
        $343.9 million increase in the investment securities portfolio. During the
        first
        quarter of fiscal year 2007, all trading mortgage-related securities were
        sold
        and the majority of the proceeds were invested in short-term investment
        securities, generally with terms to maturity or reprice of two years or less.
        Proceeds of principal repayments, maturities and calls from the mortgage-related
        and investment securities portfolios were utilized to pay off maturing FHLB
        advances.
 
 Total
        liabilities decreased from $7.34 billion at September 30, 2006 to $7.23 billion
        at March 31, 2007. The $109.2 million decrease in liabilities was due primarily
        to the maturity of a $200.0 million FHLB advance that was not renewed, partially
        offset by an increase in deposits of $102.4 million, particularly in the
        checking and money market portfolios due to the timing of payroll deposits.
 
 Stockholders’
        equity increased $7.4 million to $870.6 million at March 31, 2007, from $863.2
        million at September 30, 2006.
 
 The
        following table presents selected balance sheet data for the Company at the
        dates indicated.
 Balance
                  atMarch
                  31,
              
              December
                  31,
              
              September
                  30,
              
              March
                  31,2007
              
              2006
              
              2006
              
              2006(Dollars
                  in thousands, except per share amounts)Selected
                  Balance Sheet Data:Total
                  assets
              
              $
              8,097,293
              
              $
              8,205,833
              
              $
              8,199,073
              
              $
              8,252,195Cash
                  and cash equivalents
              
              
              242,186
              
              
              187,479
              
              
              183,242
              
              
              206,175Investment
                  securities
              
              
              773,404
              
              
              844,514
              
              
              429,480
              
              
              380,518Mortgage-related
                  securities
              
              
              1,603,443
              
              
              1,668,548
              
              
              2,084,786
              
              
              1,839,593Loans
                  receivable, net
              
              
              5,215,701
              
              
              5,229,032
              
              
              5,221,117
              
              
              5,522,825MSR
              
              
              6,304
              
              
              6,508
              
              
              6,917
              
              
              2,633Capital
                  stock of FHLB
              
              
              157,344
              
              
              167,829
              
              
              165,130
              
              
              187,115Deposits
              
              
              4,002,866
              
              
              3,934,707
              
              
              3,900,431
              
              
              4,015,128Advances
                  from FHLB
              
              
              3,074,973
              
              
              3,270,125
              
              
              3,268,705
              
              
              3,213,342Other
                  borrowings
              
              
              53,495
              
              
              53,481
              
              
              53,467
              
              
              53,438Stockholders'
                  equity
              
              
              870,624
              
              
              867,139
              
              
              863,219
              
              
              861,813Accumulated
                  other comprehensive gain (loss)
              
              
              370
              
              
              (457
              )
              
              (1,543
              )
              
              (3,397
              )Equity
                  to total assets at end of period
              
              
              10.75
              %
              
              10.57
              %
              
              10.53
              %
              
              10.44
              %Book
                  value per share
              
              $
              11.94
              
              $
              11.92
              
              $
              11.89
              
              $
              11.87Shares
                  outstanding
              
              
              72,932,544
              
              
              72,725,595
              
              
              72,589,660
              
              
              72,598,164
 
  14
  
 The
        following table presents rate information at the dates
        indicated.
 March
                    31,
                
                December
                    31,
                
                September
                    30,
                
                
                March
                    31,2007
                
                2006
                
                2006
                
                
                2006Average
                    Yield / Cost at End of Period: (annualized)Loans
                    receivable
                5.72
                %
                
                5.66
                %
                
                5.64
                %
                
                
                5.55
                %Mortgage-related
                    securities
                4.27
                
                
                4.26
                
                
                4.54
                
                
                
                4.01Investment
                    securities
                4.76
                
                
                4.82
                
                
                4.46
                
                
                
                4.41Deposits
                3.76
                
                
                3.68
                
                
                3.61
                
                
                
                3.07FHLB
                    advances
                4.97
                
                
                4.88
                
                
                4.88
                
                
                
                4.70Borrowings,
                    other
                8.13
                
                
                8.14
                
                
                8.28
                
                
                
                7.37
  
  15
   **Loans
        Receivable** **.**  The
        loan
        portfolio remained relatively unchanged compared to September 30, 2006, at
        $5.22
        billion for both period ends. Purchased loans from nationwide lenders
        represented 19.5% of the loan portfolio at March 31, 2007 compared to 21.3%
        at
        September 30, 2006. As of March 31, 2007, the average balance of a purchased
        mortgage loan was approximately $348 thousand while the average balance of
        an
        originated mortgage loan was $115 thousand.
  Included
        in the loan portfolio at March 31, 2007 was $425.7 million of interest-only
        loans, which were primarily purchased from nationwide lenders during fiscal
        year
        2005. These loans do not typically require principal payments during their
        initial term. The interest-only loans in our portfolio have initial
        interest-only terms of either five or ten years, with approximately equal
        distribution between the two terms. Loans of this type generally are considered
        to be of greater risk to the lender because of the possibility that the borrower
        may default once principal payments are required. We attempt to mitigate
        the
        risk of interest-only loans by using prudent underwriting criteria. The
        interest-only loans we purchased have an average credit score of 734 and
        an
        average loan-to-value ratio not exceeding 80% at the time of purchase. As
        of
        March 31, 2007, the performance of our interest-only loans is comparable
        to the
        performance of the rest of our one- to four-family loan portfolio.
 
 Total
        one- to four-family loan originations during the current six month period
        were
        $268.7 million at an average rate of 5.90% compared to one- to four-family
        loan
        originations of $269.7 million at an average rate of 5.69% for the same period
        one year ago. Of the one- to four- family loans originated during the current
        six month period and the same period one year ago, $245.6 million and $249.2
        million, respectively, were fixed-rate. Generally, during the six months
        ended
        March 31, 2007, the Bank’s 30 year fixed-rate loans, with no points paid by the
        borrower, were priced at approximately 143 basis points above the average
        10-year Treasury rate, while the Bank’s 15 year fixed-rate loans were priced
        approximately 105 basis points above the average 10-year Treasury rate. The
        Bank’s loan pricing is comparable to the secondary mortgage market
        pricing.
 
 The
        following table summarizes the activity in the loan portfolio for the periods
        indicated, excluding changes in loans in process, deferred fees and allowance
        for loan losses. Included in the six months ending March 31, 2006 repayment
        amounts are $47.6 million of loans which were repurchased by a seller. These
        loans were purchased during fiscal year 2005.
 For
                  the Three Months EndedMarch
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006
              
              June
                  30, 2006Amount
              Rate
              
              
              Amount
              Rate
              
              
              Amount
              Rate
              
              
              Amount
              RateLoans
                  receivable:
              (Dollars
                  in thousands)Beginning
                  balance
              $
                  5,259,857
              5.57
              %
              
              $
                  5,257,473
              5.55
              %
              
              $
                  5,601,211
              5.51
              %
              
              $
                  5,554,691
              5.45
              %Originations
                  and refinances
              161,705
              6.31
              
              
              169,473
              6.39
              
              
              215,763
              6.63
              
              
              249,077
              6.46Purchases
              23,518
              5.75
              
              
              26,372
              5.98
              
              
              85,295
              6.08
              
              
              40,115
              5.99Repayments
              (194,085)
              
              
              
              (193,991)
              
              
              
              (240,209)
              
              
              
              (242,449)Principal
                  balance of loansexchanged
                  for securities(1)
              --
              --
              
              
              --
              --
              
              
              (404,819)
              5.72
              
              
              --
              --Other
              (1,202)
              
              
              
              530
              
              
              
              232
              
              
              
              (223)Ending
                  balance
              $
                  5,249,793
              5.59
              %
              
              $
                  5,259,857
              5.57
              %
              
              $
                  5,257,473
              5.55
              %
              
              $
                  5,601,211
              5.51
              %
 
 (1) During
        the quarter ended September 30, 2006, the Bank entered into a transaction
        with
        the Federal Home Loan Mortgage Corporation (“FHLMC”) whereby the Bank exchanged
        $404.8 million of fixed-rate mortgage loans for mortgage-related securities.
        These securities, which the Bank classified as trading, were sold subsequent
        to
        September 30, 2006.
   16
  
 For
                  the Six Months EndedMarch
                  31, 2007
              
              March
                  31, 2006Amount
              Rate
              
              
              Amount
              RateLoans
                  receivable:
              (Dollars
                  in thousands)Beginning
                  balance
              $
                  5,257,473
              5.55
              %
              
              $
                  5,494,387
              5.39
              %Originations
                  and refinances
              331,178
              6.35
              
              
              346,406
              6.14Purchases
              49,890
              5.87
              
              
              203,909
              5.20Repayments
              (388,076)
              
              
              
              (490,396)Other
              (672)
              
              
              
              385Ending
                  balance
              $
                  5,249,793
              5.59
              %
              
              $
                  5,554,691
              5.45
              %
 
  17
  The
        following table presents the Company’s loan portfolio at the dates indicated.
  March
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006Amount
              
              Average
                  Rate
              
              %
                  of Total
              
              Amount
              
              Average
                  Rate
              
              %
                  of Total
              
              Amount
              
              Average
                  Rate
              
              %
                  of Total(Dollars
                  in thousands)Real
                  Estate Loans:One-
                  to four-family
              $4,925,267
              
              5.46
              %
              
              93.82
              %
              
              $4,940,363
              
              5.44
              %
              
              93.93
              %
              
              $
                  4,931,505
              
              5.41
              %
              
              93.80
              %Multi-family
                  and commercial
              62,287
              
              6.48
              
              
              1.19
              
              
              58,793
              
              6.49
              
              
              1.12
              
              
              56,774
              
              6.48
              
              
              1.08Construction
                  and development
              41,765
              
              5.90
              
              
              0.79
              
              
              37,168
              
              5.94
              
              
              0.70
              
              
              45,452
              
              5.81
              
              
              0.87Total
                  real estate loans
              5,029,319
              
              5.47
              
              
              95.80
              
              
              5,036,324
              
              5.45
              
              
              95.75
              
              
              5,033,731
              
              5.43
              
              
              95.75Consumer
                  Loans:Savings
                  loans
              5,790
              
              6.34
              
              
              0.11
              
              
              6,161
              
              6.27
              
              
              0.12
              
              
              6,250
              
              6.12
              
              
              0.12Automobile
              4,316
              
              6.93
              
              
              0.08
              
              
              4,114
              
              6.87
              
              
              0.08
              
              
              3,660
              
              6.88
              
              
              0.07Home
                  equity
              209,788
              
              8.39
              
              
              4.00
              
              
              212,628
              
              8.39
              
              
              4.04
              
              
              213,182
              
              8.40
              
              
              4.05Other
              580
              
              9.15
              
              
              0.01
              
              
              630
              
              9.03
              
              
              0.01
              
              
              650
              
              9.03
              
              
              0.01Total
                  consumer loans
              220,474
              
              8.31
              
              
              4.20
              
              
              223,533
              
              8.31
              
              
              4.25
              
              
              223,742
              
              8.31
              
              
              4.25Total
                  loans receivable
              5,249,793
              
              5.59
              %
              
              100.00
              %
              
              5,259,857
              
              5.57
              %
              
              100.00
              %
              
              5,257,473
              
              5.55
              %
              
              100.00
              %Less:Loans
                  in process
              20,634
              
              
              
              
              
              
              
              17,244
              
              
              
              
              
              
              
              22,605Unearned
                  loan fees and deferred costs
              9,265
              
              
              
              
              
              
              
              9,438
              
              
              
              
              
              
              
              9,318Allowance
                  for losses
              4,193
              
              
              
              
              
              
              
              4,143
              
              
              
              
              
              
              
              4,433Total
                  loans receivable, net
              $5,215,701
              
              
              
              
              
              
              
              $5,229,032
              
              
              
              
              
              
              
              $5,221,117
 
 
   18
   
  **Lending
        Practices and Underwriting Standards**
 
 The
        Bank’s primary lending activity is the origination of loans and purchase of
        loans from a select group of correspondent lenders. These loans are secured
        by
        first mortgages on owner-occupied one- to four-family residences in the Bank’s
        market areas and select market areas in Missouri. Additional lending volume
        is
        generated by purchasing whole one- to four-family mortgage loans from nationwide
        lenders. These purchases allow the Bank to attain geographic diversification
        and
        manage credit concentration risks and rate risk in its loan portfolio. The
        Bank’s one- to four-family loans are primarily fully amortizing loans with
        contractual maturities of up to 30 years, except for interest-only loans
        during
        the interest-only period, 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. Negative amortization of principal is not allowed. Borrowers are
        qualified based on the principal, interest, taxes and insurance payment at
        the
        initial rate for three, five and seven year ARM loans.
 
 The
        Bank
        also originates interest-only ARM loans that do not require principal payments
        for a period of up to ten years. Borrowers are qualified based on a fully
        amortizing payment at the initial loan rate. The Bank is more restrictive
        on
        debt-to-income 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.
 
 The
        Bank
        offers existing loan customers the opportunity to modify their original loan
        terms to new loan terms generally consistent with those currently being offered
        in our market areas. This is a convenient tool for customers who may have
        considered refinancing from an ARM loan to a fixed rate loan or would like
        to
        reduce their term and take advantage of lower rates associated with a shorter
        term loan. The program helps ensure the Bank maintains the relationship with
        the
        customer and significantly reduces the amount of time it takes for customers
        to
        obtain current market pricing and terms without having to refinance their
        loans.
        The Bank charges a fee for this service generally comparable to fees charged
        on
        new loans.
 
 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
        FHLMC and Federal National Mortgage Corporation (“FNMA”) underwriting
        guidelines. The automated underwriting system analyzes the applicant’s data,
        with emphasis on credit history, employment and income history, qualifying
        ratios reflecting the applicant’s ability to repay, asset reserves and
        loan-to-value ratio. Loans that do not meet the automated underwriting standards
        are referred to a staff underwriter for manual underwriting. Full documentation
        to support the applicant’s credit, income, and sufficient funds to cover all
        applicable fees and reserves at closing are required on all loans. Properties
        securing one- to four-family loans are appraised by either staff appraisers
        or
        independent fee appraisers approved by the board of directors who are
        independent of the loan origination function.
 
 Presently,
        the Bank lends up to 105% of the lesser of the appraised value or purchase
        price
        for one- to four-family mortgage loans. At March 31, 2007, less than 1% of
        the
        balance of the loan portfolio had a loan-to-value ratio greater than 100%.
        For
        loans with a loan-to-value ratio in excess of 80%, private mortgage insurance
        is
        required in order to reduce the Bank’s loss exposure.
 
 The
        underwriting standards of the lenders from whom the Bank purchases loans
        are
        generally similar to the Bank’s internal underwriting standards. “No Doc” or
“Stated Income, Stated Assets” loans are not permitted. Lenders are required to
        fully document all data sources for each application. Management believes
        these
        requirements reduce the credit risk associated with these loans. Before
        committing to purchase a pool of loans, the Bank’s Chief Lending Officer or
        Secondary Marketing Manager reviews specific criteria such as loan amount,
        credit scores, loan-to-value ratios, geographic location, and debt ratios
        of
        each loan in the pool. If the specific criteria does not meet the Bank’s
        underwriting standards and compensating factors are not sufficient, then
        a loan
        may be removed from the pool. Once the review of the specific criteria is
        complete and loans not meeting the Bank’s standards are removed from the pool,
        changes are sent back to the lender for acceptance and pricing. Before the
        pool
        is funded, a Bank underwriter reviews 25% of the loan files and the supporting
        documentation in the pool. If a loan does not meet the Bank’s underwriting
        standards for these loans, it is removed from the pool prior to funding.
  19
  
 The
        underwriting standard for loans purchased under contractual agreement through
        correspondent lenders is generally performed by a third party underwriter
        who is
        under contract to use the Bank’s internal underwriting standards. Correspondent
        lenders are located within the metropolitan Kansas City and Wichita, Kansas
        market areas and select market areas in Missouri. The loan product is originated
        to the Bank’s specifications including interest rates, product description and
        underwriting standards. The Bank purchases approved loans and the servicing
        rights, on a loan-by-loan basis.
 
 The
        Bank
        also originates construction-to-permanent loans primarily secured by one-
        to
        four-family residential real estate. Presently, all of these loans are secured
        by property located within the Bank’s market areas. Construction loans are
        obtained primarily by homeowners who will occupy the property when construction
        is complete. Construction loans to builders for speculative purposes are
        not
        permitted. The application process includes submission of complete plans,
        specifications and costs of the project to be constructed. These items are
        used
        as a basis to determine the appraised value of the subject property. All
        construction loans are manually underwritten using the Bank’s internal
        underwriting standards. The construction and permanent loan are closed at
        the
        same time allowing the borrower to secure the interest rate at the beginning
        of
        the construction period and throughout the permanent loan. Construction draw
        requests and the supporting documentation are reviewed and approved by
        management. The Bank also performs regular documented inspections of the
        construction project to ensure the funds are being used for the intended
        purpose
        and the project is being completed according to the plans and specifications
        provided.
 
 The
        Bank
        offers a variety of secured consumer loans, including home equity loans and
        lines of credit, home improvement loans, auto loans, student loans and loans
        secured by savings deposits. The Bank also originates a very limited amount
        of
        unsecured loans. The Bank does not originate any consumer loans on an indirect
        basis, such as contracts purchased from retailers of goods or services which
        have extended credit to their customers. Currently, all consumer loans are
        originated in the Bank’s market areas. Home equity loans may be originated in
        amounts, together with the amount of the existing first mortgage, of up to
        100%
        of the value of the property securing the loan. In order to minimize risk
        of
        loss, home equity loans that are greater than 90% 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. 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. Unused 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%. Since May 2006, the rates on existing
        home
        equity loans have not been increased, despite the increase in the prime rate.
        This action was taken to retain home equity loans that might otherwise have
        been
        refinanced.
 
 The
        underwriting standards for consumer loans include a determination of the
        applicant’s payment history on other debts and an assessment of their ability to
        meet existing obligations and payments on the proposed loan. Although
        creditworthiness of the applicant is a primary consideration, the underwriting
        process also includes a comparison of the value of the security in relation
        to
        the proposed loan amount.
 
 The
        Bank’s multi-family and commercial real estate loans are secured primarily by
        multi-family dwellings and small office buildings generally located in the
        Bank’s market areas. These loans are granted based on the income producing
        potential of the property and the financial strength of the borrower.
        Loan-to-value ratios on multi-family and commercial real estate loans usually
        do
        not exceed 80% of the appraised value of the property securing the loans.
        The
        net operating income, which is the income derived from the operation of the
        property less all operating expenses, must be sufficient to cover the payments
        related to the outstanding debt. The Bank generally requires personal guarantees
        of the borrowers covering a portion of the debt in addition to the security
        property as collateral for such loans. The Bank also generally requires an
        assignment of rents or leases in order to be assured that the cash flow from
        the
        project will be used to repay the debt. Appraisals on properties securing
        these
        loans are performed by independent state certified fee appraisers approved
        by
        the board of directors. While maximum maturities may extend to 30 years,
        loans
        frequently have shorter maturities and may not be fully amortizing, requiring
        balloon payments of unamortized principal at maturity.
 
 Loans
        over $500 thousand must be underwritten by two senior level underwriters.
        Any
        loan greater than $750 thousand must be approved by the Asset and Liability
        Management Committee (“ALCO”) and loans over $1.5 million must be approved by
        the board of directors. For loans requiring ALCO and/or board of directors’
approval,
  20
  management
        is responsible for presenting to the ALCO and/or board of directors information
        about the creditworthiness of the borrower and the estimated value of the
        subject property. Information pertaining to the creditworthiness of the borrower
        generally consists of a summary of the borrower’s credit history, employment
        stability, sources of income, net worth, and debt ratios. The estimated value
        of
        the property must be supported by an independent appraisal report prepared
        in
        accordance with our appraisal policy.
 
 **Asset
        Quality**
  During
        the current quarter, our methodology for calculating the number of days
        delinquent changed with the conversion of our core information processing
        system. For mortgage loans, the new system utilizes a 30/360 calculation,
        which
        is consistent with industry standards. Our former core system calculated
        days
        delinquent based upon actual days. The method of calculating days delinquent
        for
        home equity loans did not change with the core conversion.
 
 Non-performing
        loans consist primarily of loans 90 or more days delinquent and loans in
        the
        process of foreclosure. Non-performing loans increased $1.2 million from
        $5.6
        million at September 30, 2006 to $6.8 million at March 31, 2007. The increase
        in
        non-performing loans increased our ratio of non-performing loans to total
        loans
        from 0.11% as of September 30, 2006 to 0.13% at March 31, 2007. Of the $6.8
        million, $4.7 million, or 69%, of non-performing loans are secured by property
        located in our market areas.
 
 Loans
        30
        to 89 days delinquent, which are not included in non-performing loans, decreased
        approximately $1.6 million from $20.5 million at September 30, 2006 to $18.9
        million at March 31, 2007. Of the $18.9 million at March 31, 2007, $10.6
        million, or 56% of 30-89 day delinquent loans represent loans secured by
        property located in our market areas.
 
 The
        risk
        that our non-performing and other delinquent loans may increase is primarily
        driven by the state of the local economies in which we lend. Since the loans
        we
        originate in our market areas are geographically concentrated, we attempt
        to
        mitigate the risks of this concentration by purchasing loans from outside
        our
        market areas. At March 31, 2007, the asset quality of our purchased loans
        was
        essentially the same as loans originated locally. In most of our market areas,
        the economy has continued to be generally stable. Other risks to our loan
        portfolio remained largely unchanged from September 30, 2006.
 
 The
        following table presents the Company’s 30-89 day delinquent loans,
        non-performing loans, and real estate owned at the dates indicated. The ratios
        of non-performing loans to total loans and non-performing assets to total
        assets
        do not include loans that are 30-89 days delinquent. Non-performing assets
        include non-performing loans and real estate owned.
 March
                  31,
              
              December
                  31,
              
              September
                  30,
              March
                  31,2007
              
              2006
              
              2006
              2006Asset
                  quality information:
              (Dollars
                  in thousands)Loans
                  30-89 days delinquent
              $
                  18,883
              
              
              $
                  24,716
              
              
              $
                  20,478
              
              $
                  23,027Non-performing
                  loans
              6,833
              
              
              6,681
              
              
              5,609
              
              8,682Real
                  estate owned
              1,905
              
              
              1,770
              
              
              2,401
              
              1,932Asset
                  quality ratios:Non-performing
                  assets to total assets
              0.11
              %
              
              0.10
              %
              
              0.10
              %
              0.13
              %Non-performing
                  loans to total loans
              0.13
              %
              
              0.13
              %
              
              0.11
              %
              0.16
              %
 
 The
        allowance for loan losses as a percentage of non-performing loans was 61.36%
        at
        March 31, 2007, compared to 79.03% at September 30, 2006 and 53.91% at March
        31,
        2006. The decrease in the ratio of allowance for loan losses to non-performing
        loans since September 30, 2006 primarily resulted from an increase in
        non-performing loans. Charge-offs, net of recoveries, totaled $15 thousand
        for
        the current six months and represented 0.24% of average non-performing loans
        and
        less than 0.01% of the average outstanding balance of loans receivable.
  21
  The
        following table presents the Company’s activity for the allowance for loan
        losses and related ratios at the dates and for the periods
        indicated.
 For
                  the Three Months Ended
              
              For
                  the Six Months EndedMarch
                  31,
              
              March
                  31,2007
              
              2006
              
              2007
              
              2006Allowance
                  for loan losses:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              4,143
              
              $
              4,832
              
              $
              4,433
              
              $
              4,598Losses
                  charged against the allowance:One-
                  to four-family loans
              
              
              --
              
              
              12
              
              
              9
              
              
              33Multi-family
                  loans
              
              
              --
              
              
              --
              
              
              --
              
              
              --Commercial
                  and other loans
              
              
              --
              
              
              --
              
              
              --
              
              
              --Consumer
                  loans
              
              
              5
              
              
              3
              
              
              6
              
              
              16Total
                  charge-offs
              
              
              5
              
              
              15
              
              
              15
              
              
              49Recoveries
              
              
              --
              
              
              1
              
              
              --
              
              
              1Provision
                  (recovery) charged to expense
              
              
              55
              
              
              (138
              )
              
              (225
              )
              
              130Ending
                  balance
              
              $
              4,193
              
              $
              4,680
              
              $
              4,193
              
              $
              4,680Allowance
                  for loan losses to non-performing
                  loans at period end
              
              
              
              
              
              
              
              
              61.36
              %
              
              53.91
              %Allowance
                  for loan losses to loansreceivable,
                  net at period end
              
              
              
              
              
              
              
              
              0.08
              %
              
              0.08
              %
 
 
 
  22
   **Mortgage-Related
        Securities.** The
        balance of mortgage-related securities decreased $481.3 million from $2.08
        billion at September 30, 2006 to $1.60 billion at March 31, 2007. The decrease
        in the portfolio was primarily a result of the sale of the trading securities
        in
        the first quarter of fiscal year 2007 which were received in the loan swap
        transaction with FHLMC in the quarter ended September 30, 2006, and principal
        repayments. The proceeds from the sale of the trading securities were used
        to
        purchase short-term investment securities.
 
 The
        following tables provide a summary of the activity in our portfolio of
        mortgage-related securities for the periods presented. The yields and weighted
        average life (“WAL”) for purchases are presented as recorded at the time of
        purchase. The yields for the beginning and ending balances are as of the
        period
        presented and are generally derived from recent prepayment activity on the
        securities in the portfolio as of the dates presented. The beginning and
        ending
        WAL is the estimated remaining maturity of the underlying collateral after
        projected prepayment speeds have been applied. The decrease in the yield
        and WAL
        at March 31, 2007 compared to September 30, 2006 was primarily a result of
        the
        sale of the trading securities which had a net yield and WAL greater than
        that
        of the existing portfolio. Excluding the yield and WAL on the trading
        securities, the portfolio yield would have been 4.26% and the WAL would have
        been 3.74 years at September 30, 2006.
 
 For
                  the Three Months EndedMarch
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006
              
              June
                  30, 2006Amount
              Yield
              
              WAL
              
              Amount
              Yield
              
              WAL
              
              Amount
              Yield
              
              WAL
              
              Amount
              Yield
              
              WALMortgage-related
                  securities:
              (Dollars
                  in thousands)Beginning
                  balance
              $   1,668,548
              4.26
              %
              3.48
              
              $    2,084,786
              4.54
              %
              4.39
              
              $    1,788,858
              4.14
              %
              3.85
              
              $      1,839,593
              4.01
              %
              3.30Maturities
                  and repayments
              (112,054)
              
              
              
              
              (120,737)
              
              
              
              
              (124,473)
              
              
              
              
              (135,663)Sale
                  of securities, net of gains
              --
              
              
              
              
              (404,459)
              
              
              
              
              --
              
              
              
              
              --Net
                  amortization of premiums/discounts
              (988)
              
              
              
              
              (1,075)
              
              
              
              
              (1,222)
              
              
              
              
              (1,709)Purchases:Fixed
              1,983
              5.65
              
              18.18
              
              --
              --
              
              --
              
              --
              --
              
              --
              
              10,092
              6.50
              
              1.65Adjustable
              44,672
              4.60
              
              1.24
              
              108,135
              5.17
              
              1.76
              
              22,239
              5.95
              
              1.88
              
              77,792
              5.98
              
              2.14Fair
                  value of securities received in exchange of loans
              --
              --
              
              --
              
              --
              --
              
              --
              
              395,828
              5.73
              
              7.15
              
              --
              --
              
              --Other-than-temporary
                  impairment of AFS securities
              --
              
              
              
              
              --
              
              
              
              
              (472)
              
              
              
              
              --Change
                  in valuation of AFS securities
              1,282
              
              
              
              
              1,898
              
              
              
              
              4,028
              
              
              
              
              (1,247)Ending
                  balance
              $   1,603,443
              4.27
              %
              3.40
              
              $    1,668,548
              4.26
              %
              3.48
              
              $    2,084,786
              4.54
              %
              4.39
              
              $      1,788,858
              4.14
              %
              3.85
 
  23
  
 For
                  the Six Months EndedMarch
                  31, 2007
              
              March
                  31, 2006Amount
              Yield
              
              WAL
              
              Amount
              Yield
              
              WALMortgage-related
                  securities:
              (Dollars
                  in thousands)Beginning
                  balance
              $   2,084,786
              4.54
              %
              4.39
              
              $    2,145,254
              3.71
              %
              3.38Maturities
                  and repayments
              (232,791)
              
              
              
              
              (303,143)Sale
                  of securities, net of gains
              (404,459)
              
              
              
              
              --Net
                  amortization of premiums/discounts
              (2,063)
              
              
              
              
              (4,101)Purchases:Fixed
              1,983
              5.65
              
              18.18
              
              983
              5.65
              
              7.88Adjustable
              152,807
              5.00
              
              1.61
              
              --
              --
              
              --Change
                  in valuation of AFS
              3,180
              
              
              
              
              600Ending
                  balance
              $   1,603,443
              4.27
              %
              3.40
              
              $    1,839,593
              4.01
              %
              3.30
 
 
 
  24
   
 **Investment
        Securities.** Investment securities, which consist of agency bonds (primarily issued by
        FNMA,
        FHLMC, or FHLB) and municipal investments, increased $343.9 million from
        $429.5
        million at September 30, 2006 to $773.4 million at March 31, 2007. The following
        tables provide a summary of the activity of investment securities for the
        periods presented. The yields for the beginning and ending balances are as
        of
        the periods presented. The increase in the yield at March 31, 2007 compared
        to
        September 30, 2006 was a result of security purchases with net yields greater
        than the overall portfolio yield. The beginning and ending WAL represent
        the
        estimated remaining maturity of the underlying collateral after projected
        call
        dates have been considered, based upon market rates at each date presented.
        The
        decrease in the WAL at March 31, 2007 compared to September 30, 2006 was
        primarily due to purchases with a net WAL less than that of the overall
        portfolio WAL.
 
 For
                  the Three Months EndedMarch
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006
              
              June
                  30, 2006Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WALInvestment
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              844,514
              
              
              4.82
              %
              
              1.66
              
              $
              429,480
              
              
              4.46
              %
              
              2.63
              
              $
              382,128
              
              
              4.35
              %
              
              3.09
              
              $
              380,518
              
              
              4.41
              %
              
              2.84Maturities
                  and calls
              
              
              (229,500
              )
              
              
              
              
              
              
              
              (57,000
              )
              
              
              
              
              
              
              
              (10,000
              )
              
              
              
              
              
              
              
              (140,510
              )Net
                  amortization of premiums/discounts
              
              
              1,572
              
              
              
              
              
              
              
              
              1,042
              
              
              
              
              
              
              
              
              114
              
              
              
              
              
              
              
              
              10Purchases
                  - Fixed
              
              
              156,768
              
              
              5.34
              
              
              1.44
              
              
              471,140
              
              
              5.18
              
              
              0.68
              
              
              56,730
              
              
              5.36
              
              
              1.72
              
              
              142,413
              
              
              5.32
              
              
              1.27Change
                  in valuation of AFS securities
              
              
              50
              
              
              
              
              
              
              
              
              (148
              )
              
              
              
              
              
              
              
              508
              
              
              
              
              
              
              
              
              (303
              )Ending
                  balance
              
              $
              773,404
              
              
              4.76
              %
              
              1.72
              
              $
              844,514
              
              
              4.82
              %
              
              1.66
              
              $
              429,480
              
              
              4.46
              %
              
              2.63
              
              $
              382,128
              
              
              4.35
              %
              
              3.09For
                  the Six Months EndedMarch
                  31, 2007
              March
                  31, 2006Amount
              
              
              Yield
              
              
              WAL
              
              
              Amount
              
              
              Yield
              
              
              WALInvestment
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              429,480
              
              
              4.46
              %
              
              2.63
              
              $
              430,499
              
              
              4.54
              %
              
              2.48Maturities
                  and calls
              
              
              (286,500
              )
              
              
              
              
              
              
              
              (50,000
              )Net
                  amortization of premiums/discounts
              
              
              2,614
              
              
              
              
              
              
              
              
              19Purchases
                  - Fixed
              
              
              627,908
              
              
              5.22
              
              
              0.87
              
              
              --
              
              
              --
              
              
              --Change
                  in valuation of AFS securities
              
              
              (98
              )
              
              
              
              
              
              
              
              --Ending
                  balance
              
              $
              773,404
              
              
              4.76
              %
              
              1.72
              
              $
              380,518
              
              
              4.41
              %
              
              2.84
 
 
  25
   **Liabilities.** Total liabilities decreased from $7.34 billion at September 30, 2006 to $7.23
        billion at March 31, 2007. The $109.2 million decrease in liabilities was
        due
        primarily to the maturity of $200.0 million of FHLB advances that were not
        renewed, partially offset by an increase in deposits of $102.4 million,
        particularly in the checking and money market portfolios due to the timing
        of
        payroll deposits.
 
 At
        March
        31, 2007, $218.5 million of our $2.49 billion in certificates were brokered
        and
        public unit deposits, compared to $233.5 million in brokered and public unit
        deposits at September 30, 2006. The $15.0 million decrease between September
        30,
        2006 and March 31, 2007 was primarily attributed to maturities of public
        unit
        deposits that were not retained because the Bank did not price at the top
        market
        rate for public units. Management will continue to monitor the wholesale
        deposit
        market for attractive opportunities.
 
 At
              
              At
              
              At
              
              AtMarch
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006
              
              June
                  30, 2006Average
              
              %
                  of
              
              
              
              Average
              
              %
                  of
              
              
              
              Average
              
              %
                  of
              
              
              
              Average
              
              %
                  ofAmount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total(Dollars
                  in thousands)Checking
              
              $
              435,300
              
              
              0.21
              %
              
              10.87
              %
              $
              423,907
              
              
              0.21
              %
              
              10.77
              %
              $
              402,898
              
              
              0.21
              %
              
              10.33
              %
              $
              420,933
              
              
              0.21
              %
              
              10.80
              %Savings(1)
              
              
              247,844
              
              
              2.99
              
              
              6.19
              
              
              101,960
              
              
              0.65
              
              
              2.59
              
              
              106,347
              
              
              0.65
              
              
              2.73
              
              
              113,018
              
              
              0.65
              
              
              2.90Money
                  market
              
              
              825,432
              
              
              3.28
              
              
              20.62
              
              
              823,151
              
              
              3.33
              
              
              20.92
              
              
              808,910
              
              
              3.31
              
              
              20.74
              
              
              834,419
              
              
              3.15
              
              
              21.42Certificates(1)
              
              
              2,494,290
              
              
              4.62
              
              
              62.32
              
              
              2,585,689
              
              
              4.48
              
              
              65.72
              
              
              2,582,276
              
              
              4.35
              
              
              66.20
              
              
              2,527,499
              
              
              4.14
              
              
              64.88Total
                  deposits
              
              $
              4,002,866
              
              
              3.76
              %
              
              100.00
              %
              $
              3,934,707
              
              
              3.68
              %
              
              100.00
              %
              $
              3,900,431
              
              
              3.61
              %
              
              100.00
              %
              $
              3,895,869
              
              
              3.40
              %
              
              100.00
              %
 
 (1)  During
        the current quarter, variable-rate retirement certificates of deposit were
        reclassified to Savings as the accounts did not have a stated maturity date
        as a
        result of changes required by the new core information technology processing
        system. The balance of the reclassified variable-rate certificates of deposit
        at
        March 31, 2007 was $141.5 million. The amount of variable-rate certificates
        of
        deposit included in Certificates at December 31, 2006, September 30, 2006
        and
        June 30, 2006 were $144.9 million, $153.0 million and $154.0 million,
        respectively .
  26
   **Stockholders’
        Equity.** Stockholders’
        equity increased $7.4 million from $863.2 million at September 30, 2006 to
        $870.6 million at March 31, 2007.
 
 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 March 31, 2007. The unvested shares in the ESOP receive cash equal to
        the
        dividends paid on the public shares. The cash received is used first to repay
        the annual debt obligation on the loan taken out by the ESOP from the Company
        at
        the time of the mutual-to-stock conversion of the Bank to purchase shares
        for
        the ESOP. Cash received in excess of the debt obligation is distributed to
        participants in the plan. Because these shares are held in trust for a future
        employee benefit, they are excluded from the calculation of public
        shares.
 
 Total
                  voting shares outstanding at September 30, 2006
              
              
              74,031,930Treasury
                  stock acquisitions(1)
              
              
              (38,345
              )RRP
                  grants, net
              
              
              4,600Options
                  exercised, net
              
              
              271,909Total
                  voting shares outstanding at March 31, 2007
              
              
              74,270,094Unvested
                  shares in ESOP
              
              
              (1,411,470
              )Shares
                  held by MHC
              
              
              (52,192,817
              )Total
                  public shares March 31, 2007
              
              
              20,665,807
 
  (1) Treasury
        stock acquisitions represent shares that were received in exchange for the
        exercise of options.
   27
  The
        following table presents quarterly dividends paid in calendar years 2007,
        2006
        and 2005. The dollar amounts represent dividends paid during the quarter.
        The
        actual amount of dividends to be paid during the quarter ending June 30,
        2007,
        as declared on April 24, 2007, will be based upon the number of shares
        outstanding on the record date of May 4, 2007. All shares outstanding presented
        in the table below, except for the quarter ending June 30, 2007, are as of
        the
        date of record per the dividend declaration. For the purposes of the table
        below, the number of dividend shares for the quarter ending June 30, 2007
        is
        based upon shares outstanding on April 30, 2007. 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 April
        30,
        2007.
  
 Calendar
                  Year2007
              
              2006
              
              2005(Dollars
                  in thousands, except per share amounts)Quarter
                  ended March 31Number
                  of dividend shares
              
              
              20,519,318
              
              
              20,457,283
              
              
              20,634,728Dividend
                  per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              $
              10,261
              
              $
              10,229
              
              $
              10,317Quarter
                  ended June 30Number
                  of dividend shares
              
              
              20,667,433
              
              
              20,257,420
              
              
              20,393,519Dividend
                  per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              $
              10,334
              
              $
              10,129
              
              $
              10,197Quarter
                  ended September 30Number
                  of dividend shares
              
              
              
              
              
              20,250,134
              
              
              20,363,619Dividend
                  per share
              
              
              
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              
              
              
              $
              10,125
              
              $
              10,182Quarter
                  ended December 31Number
                  of dividend shares
              
              
              
              
              
              20,432,393
              
              
              20,483,464Dividend
                  per share
              
              
              
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              
              
              
              $
              10,216
              
              $
              10,242Special
                  year end dividendNumber
                  of dividend shares
              
              
              
              
              
              20,432,793
              
              
              20,483,464Dividend
                  per share
              
              
              
              
              $
              0.09
              
              $
              0.30Total
                  dividends paid
              
              
              
              
              $
              1,839
              
              $
              6,145Calendar
                  year-to-date dividends per share
              
              $
              1.00
              
              $
              2.09
              
              $
              2.30
 
 
  28
   **Analysis
        of Net Interest Income**
 
 Net
        interest income represents the difference between interest income earned
        on
        interest-earning assets, such as mortgage loans, investment securities, and
        mortgage-backed securities, and interest paid on interest-bearing liabilities,
        such as deposits and FHLB advances. Net interest income depends on the balance
        of interest-earning assets and interest-bearing liabilities, and the interest
        rates earned or paid on them.
 
 **Average
        Balance Sheet:** The
        following table presents the average balances of our assets, liabilities
        and
        stockholders’ equity and the related annualized yields and costs on our
        interest-earning assets and interest-bearing liabilities for the periods
        indicated. Average yields are derived by dividing annualized income by the
        average balance of the related assets and average costs are derived by dividing
        recorded expense by the average balance of the related liabilities, for the
        periods shown. Average balances for interest-earning assets and interest-bearing
        liabilities are derived from average daily balances. Average balances for
        other
        non-interest-earning assets, other non-interest-bearing liabilities and
        stockholders’ equity are calculated using month end balances. The yields and
        costs include amortization of fees, costs, premiums and discounts which are
        considered adjustments to interest rates. Yields on tax-exempt securities
        were
        not calculated on a tax-equivalent basis.
 For
                  the Three Months EndedMarch
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006
              
              March
                  31, 2006Average
              
              
              
              Average
              
              
              
              Average
              
              
              
              AverageOutstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              RateAssets:
              (Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable(1)
              $
                  5,223,416
              
              5.67
              %
              $
                  5,235,039
              
              5.59
              %
              $
                  5,502,349
              
              5.60
              %
              $
                  5,538,579
              
              5.46
              %Mortgage-related
                  securities
              1,633,477
              
              4.24
              
              1,803,033
              
              4.33
              
              1,826,499
              
              4.23
              
              1,914,287
              
              3.96Investment
                  securities
              776,143
              
              4.77
              
              574,857
              
              4.65
              
              412,013
              
              4.42
              
              397,463
              
              4.45Cash
                  and cash equivalents
              114,528
              
              5.17
              
              236,522
              
              5.15
              
              93,095
              
              5.03
              
              57,048
              
              4.30Capital
                  stock of FHLB
              159,171
              
              6.48
              
              165,159
              
              6.48
              
              163,997
              
              6.23
              
              184,670
              
              5.43Total
                  interest-earning assets(1)
              7,906,735
              
              5.30
              
              8,014,610
              
              5.24
              
              7,997,953
              
              5.23
              
              8,092,047
              
              5.05Other
                  non-interest-earning assets
              170,200
              
              
              
              192,225
              
              
              
              164,325
              
              
              
              152,641Total
                  assets
              $
                  8,076,935
              
              
              
              $
                  8,206,835
              
              
              
              $
                  8,162,278
              
              
              
              $
                  8,244,688Liabilities
                  and stockholders' equity:Interest-bearing
                  liabilities:Deposits
              $
                  3,917,104
              
              3.75
              
              $
                  3,855,407
              
              3.65
              
              $
                  3,881,477
              
              3.55
              
              $
                  3,953,841
              
              2.97FHLB
                  advances(2)
              3,110,915
              
              4.95
              
              3,271,001
              
              4.89
              
              3,215,093
              
              4.89
              
              3,268,757
              
              4.68Other
                  borrowings
              53,486
              
              8.24
              
              53,472
              
              8.26
              
              53,457
              
              8.36
              
              53,193
              
              7.47Total
                  interest-bearing liabilities
              7,081,505
              
              4.31
              
              7,179,880
              
              4.25
              
              7,150,027
              
              4.19
              
              7,275,791
              
              3.77Other
                  non-interest-bearing liabilities
              126,904
              
              
              
              161,865
              
              
              
              150,838
              
              
              
              105,852Stockholders'
                  equity
              868,526
              
              
              
              865,090
              
              
              
              861,413
              
              
              
              863,045Total
                  liabilities andstockholders'
                  equity
              $
                  8,076,935
              
              
              
              $
                  8,206,835
              
              
              
              $
                  8,162,278
              
              
              
              $
                  8,244,688(Continued)
 
  29
  
 Net
                  interest rate spread
              
              
              0.99
              %
              
              
              0.99
              %
              
              
              1.04
              %
              
              
              1.28
              %Net
                  interest-earning assets
              $
                  825,230
              
              
              
              $
                  834,730
              
              
              
              $
                  847,926
              
              
              
              $
                  816,256Net
                  interest margin
              
              
              1.45
              %
              
              
              1.39
              %
              
              
              1.43
              %
              
              
              1.67
              %Ratio
                  of interest-earning assetsto
                  interest-bearing liabilities
              
              
              1.12
              
              
              
              1.12
              
              
              
              1.12
              
              
              
              1.11Selected
                  performance ratios:Return
                  on average assets (annualized)
              
              
              0.42
              %
              
              
              0.50
              %
              
              
              0.49
              %
              
              
              0.66
              %Return
                  on average equity (annualized)
              
              
              3.89
              %
              
              
              4.74
              %
              
              
              4.60
              %
              
              
              6.30
              %Average
                  equity to average assets
              
              
              10.75
              %
              
              
              10.54
              %
              
              
              10.55
              %
              
              
              10.47
              %
 
 (1) Calculated
        net of deferred loan fees, loan discounts, and loans in process. Non-accruing
        loans are included in the loans receivable average balance with a yield of
        zero
        percent.
  (2) Includes
        net interest expense of $3.3 million, $3.4 million, $3.4 million and $1.7
        million related to the interest rate swaps for the three months ended March
        31,
        2007, December 31, 2006, September 30, 2006 and March 31, 2006,
        respectively.
  
  (Concluded)
   30
   
 The
        following table presents selected income statement information for the quarters
        indicated.
  For
                  the Three Months EndedMarch
                  31,
              
              December
                  31,
              
              September
                  30,
              
              June
                  30,
              
              March
                  31,2007
              
              2006
              
              2006
              
              2006
              
              2006Selected
                  income statement data:
              
              (Dollars
                  in thousands, except per share amounts)Interest
                  and dividend income:Loans
                  receivable
              
              $
              73,990
              
              $
              73,192
              
              $
              77,034
              
              $
              76,123
              
              $
              75,505Mortgage-related
                  securities
              
              
              17,317
              
              
              19,521
              
              
              19,337
              
              
              18,175
              
              
              18,950Investment
                  securities
              
              
              9,262
              
              
              6,684
              
              
              4,558
              
              
              4,170
              
              
              4,425Other
                  interest and dividend income
              
              
              4,004
              
              
              5,769
              
              
              3,754
              
              
              3,959
              
              
              3,078Total
                  interest and dividend income
              
              
              104,573
              
              
              105,166
              
              
              104,683
              
              
              102,427
              
              
              101,958Interest
                  expense:Deposits
              
              
              36,267
              
              
              35,469
              
              
              34,741
              
              
              31,588
              
              
              28,974FHLB
                  advances
              
              
              38,508
              
              
              40,741
              
              
              40,212
              
              
              39,005
              
              
              38,176Other
                  borrowings
              
              
              1,101
              
              
              1,129
              
              
              1,142
              
              
              1,070
              
              
              993Total
                  interest expense
              
              
              75,876
              
              
              77,339
              
              
              76,095
              
              
              71,663
              
              
              68,143Provision
                  (recovery) for loan losses
              
              
              55
              
              
              (280
              )
              
              77
              
              
              40
              
              
              (138
              )Net
                  interest and dividend income(after
                  provision (recovery) forloan
                  losses)
              
              
              28,642
              
              
              28,107
              
              
              28,511
              
              
              30,724
              
              
              33,953Other
                  income
              
              
              5,431
              
              
              6,215
              
              
              6,878
              
              
              6,069
              
              
              6,022Other
                  expenses
              
              
              20,020
              
              
              17,631
              
              
              19,175
              
              
              18,174
              
              
              17,943Income
                  tax expense
              
              
              5,597
              
              
              6,440
              
              
              6,303
              
              
              7,313
              
              
              8,445Net
                  income
              
              $
              8,456
              
              $
              10,251
              
              $
              9,911
              
              $
              11,306
              
              $
              13,587Efficiency
                  ratio
              
              
              58.90
              %
              
              51.74
              %
              
              54.11
              %
              
              49.41
              %
              
              45.15
              %Basic
                  earnings per share
              
              $
              0.12
              
              $
              0.14
              
              $
              0.14
              
              $
              0.16
              
              $
              0.19Diluted
                  earnings per share
              
              $
              0.12
              
              $
              0.14
              
              $
              0.14
              
              $
              0.15
              
              $
              0.19Dividends
                  declared per share
              
              $
              0.50
              
              $
              0.59
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50
 
  
 
   31
   **Comparison
        of Operating Results for the Three Months Ended March 31, 2007 and
        2006**
  Net
        income for the quarter ending March 31, 2007 was $8.5 million compared to
        $13.6
        million for the same period in the prior fiscal year. The $5.1 million decrease
        in net income was primarily a result of an increase in interest expense of
        $7.7
        million, which was partially offset by an increase of $2.6 million in interest
        and dividend income.
 
 Total
        interest and dividend income for the quarter was $104.6 million compared
        to
        $102.0 million for the prior year quarter. The $2.6 million increase was
        primarily a result of an increase in interest income on investment securities
        and cash and cash equivalents, partially offset by a decrease in interest
        income
        on loans receivable and mortgage-related securities.
 
 Interest
        income on loans receivable for the quarter was $74.0 million compared to
        $75.5
        million for the prior year quarter. The $1.5 million decrease in interest
        income
        was primarily a result of a $315.2 million decrease in the average balance
        of
        the loan portfolio between the two periods due to the exchange of loans for
        securities transaction with FHLMC during the fourth quarter of fiscal year
        2006.
        The decrease in the average balance was partially offset by an increase of
        21
        basis points in the weighted average yield of the loan portfolio to 5.67%
        for
        the current quarter. The increase in the weighted average yield can be
        attributed to loans originated at rates higher than the portfolio rate, ARM
        loans repricing to higher rates and a change in the interest accrual calculation
        as a result of the implementation of the Bank’s new core information technology
        processing system. Under the old system, for a particular scheduled interest
        payment, interest was accrued from the day after the due date of the prior
        scheduled interest payment through the due date of the current scheduled
        interest payment. Under the new system, interest is accrued from the due
        date of
        the prior scheduled interest payment through the day before the due date
        of the
        current scheduled interest payment. This change resulted in a one-time 5
        basis
        point increase in yield in the loan portfolio for the quarter ending March
        31,
        2007.
 
 Interest
        income on mortgage-related securities for the quarter was $17.3 million compared
        to $19.0 million for the prior year quarter. The $1.7 million decrease in
        interest income was due to a decrease in the average balance of $280.8 million,
        partially offset by an increase in the average yield. The decrease in the
        average balance was a result of the timing of investments and management’s
        decision to primarily invest the proceeds from the sale of trading securities
        into investment securities instead of mortgage-related securities. The weighted
        average yield of the mortgage-related securities portfolio increased by 28
        basis
        points between the two periods as a result of adjustable-rate securities
        in the
        portfolio repricing to higher rates and 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 $9.3 million compared
        to
        $4.4 million for the prior year quarter. The $4.9 million increase in interest
        income was primarily a result of a $378.7 million increase in the average
        balance of the portfolio and, to a lesser extent, a 32 basis point increase
        in
        the weighted average portfolio yield to 4.77% for the current quarter. The
        increase in the average balance was a result of investing proceeds from the
        sale
        of the trading securities during the first quarter of fiscal year 2007 into
        short-term investment securities. The increase in the weighted average yield
        of
        the portfolio was attributed to purchases of agency securities with weighted
        average yields greater than that of the portfolio.
 
 Interest
        income on cash and cash equivalents for the quarter was $1.5 million compared
        to
        $605 thousand for the prior year quarter. The $855 thousand increase in interest
        income was primarily a result of a $57.5 million increase in the average
        balance
        for the quarter, earning an average yield of 5.17% compared to 4.30% in the
        prior year quarter. The increase in the average balance of cash and cash
        equivalents related primarily to the accumulation of cash in anticipation
        of
        paying off maturing FHLB advances. The increase in the average yield was
        due to
        an increase in short-term interest rates.
 
 Interest
        expense on deposits for the current quarter was $36.3 million compared to
        $29.0
        million for the prior year quarter. The $7.3 million increase in interest
        expense was primarily a result of an increase in the average rate paid on
        the
        certificate of deposit and money market portfolios. The weighted average
        rate of
        the certificate of deposit portfolio for the current quarter was 4.55% compared
        to 3.71% for the prior year quarter. The weighted average rate of the money
        market portfolio for the current quarter was 3.32% compared to 2.35% for
        the
        prior year quarter. The Bank has increased retail deposit rates in response
        to
        the general trend of all rates increasing to remain competitive in its markets,
        which has resulted in an increase in the weighted average rate of the
        certificate of deposit and money market portfolios.
 
 Interest
        expense on FHLB advances for the current quarter was $38.5 million compared
        to
        $38.2 million for the prior year quarter. The $332 thousand increase in interest
        expense was a result of an increase in the paying rate on
  32
  the
        interest rate swaps, offset by a decrease in the average balance due to maturing
        advances that were not renewed. The weighted average paying rate on the
        variable-rate interest rate swaps was 7.80% for the current quarter compared
        to
        7.01% for the prior year quarter. The 79 basis point increase was due to
        the
        increase in the one month LIBOR rate between the two periods. Currently,
        the
        Bank is in a net paying position on the interest rate swaps. If the one month
        LIBOR rate remains higher than 3.68% (weighted average break even LIBOR rate),
        then the Bank will continue to be in a paying position on the interest rate
        swaps. The interest rate swap agreements are summarized by maturity date
        under
“Item 3 - Quantitative and Qualitative Disclosure About Market Risk.”
 
 Total
        other income for the current quarter was $5.4 million compared to $6.0 million
        in the prior year quarter. The $584 thousand decrease in other income was
        due to
        a decrease in retail service fees of $371 thousand primarily related to the
        discontinuation of certain fees due to the implementation of the Bank’s new core
        information technology processing system, a decrease in insurance commissions
        of
        $295 thousand due to the claim experience of the insurance companies with
        which
        the Bank does business, partially offset by an increase in loan fees of $116
        thousand due primarily to an increase in MSR, as a result of the exchange
        of
        loans for securities.
 
 Total
        other expenses for the current quarter increased $2.1 million to $20.0 million
        compared to $17.9 million in the prior year quarter. The increase was due
        primarily to an increase in other, net expenses of $962 thousand, regulatory
        and
        outside services of $388 thousand, advertising expense of $355 thousand,
        and an
        increase in occupancy expense of $344 thousand. The increase in other, net
        expense was due primarily to an increase in office supplies and postage of
        $466
        thousand, an increase in amortization of MSR of $132 thousand, a recovery
        of MSR
        impairment in prior year quarter of $131 thousand with no similar occurrence
        in
        the current quarter, and an increase in other miscellaneous operating expenses.
        The increase in office supplies and postage was due primarily to mailings
        and
        customer statement printing changes related to the core conversion, and,
        to a
        lesser extent, an increase in postage rates which occurred in January 2006.
        The
        increase in regulatory and outside services was due to consulting fees related
        to Sarbanes-Oxley Act of 2002 Section 404 (“SOX 404”) and other professional
        services. The increase in advertising expense was due to scheduled
        network television advertising campaigns during
        the quarter. The increase in occupancy expense related to depreciation of
        the
        new core information technology assets.
 
 The
        Bank
        completed the implementation of its new core information technology processing
        system during January 2007. As of March 31, 2007, the Bank has capitalized
        $6.8
        million of costs directly associated with the required hardware upgrades
        and the
        software and services related to the installation of the core system and
        $1.0
        million of capitalized payroll costs. Both of these amounts began amortizing
        during the second quarter of fiscal year 2007. The amortization period will
        not
        exceed five years.
 
 Income
        tax expense for the current quarter was $5.6 million compared to $8.4 million
        in
        the prior year quarter. The decrease in income tax expense was a direct result
        of a decrease in earnings compared to the prior year quarter. The effective
        tax
        rate for the current quarter was 39.8%, compared to 38.3% for the prior year
        quarter. The increase in the effective tax rate was primarily a result of
        the
        accrual for taxes due as a result of the state audit that was completed during
        the current quarter, and the amendment of the fiscal year 2005 and 2006 returns
        based upon the audit results. These items resulted in an increase of 103
        basis
        points in the current quarter effective tax rate.
 
  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 March 31, 2007 to the quarter ended
        March 31, 2006. For each category of interest-earning assets and
        interest-bearing liabilities, information is provided on changes attributable
        to
        (1) changes in volume, which are changes in the average balance multiplied
        by
        the previous year’s average rate and (2) changes in rate, which are changes in
        the average rate multiplied by the average balance from the previous year.
        The
        net changes attributable to the combined impact of both rate and volume have
        been allocated proportionately to the changes due to volume and the changes
        due
        to rate.
 
 Quarter
                  Ended March 31,2007
                  vs. 2006Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              (4,263
              )
              $
              2,748
              
              $
              (1,515
              )Mortgage-related
                  securities
              
              
              (2,913
              )
              
              1,280
              
              
              (1,633
              )Investment
                  securities
              
              
              4,498
              
              
              339
              
              
              4,837Capital
                  stock of FHLB
              
              
              (374
              )
              
              446
              
              
              72Cash
                  equivalents
              
              
              712
              
              
              142
              
              
              854Total
                  interest-earning assets
              
              $
              (2,340
              )
              $
              4,955
              
              $
              2,615Interest-bearing
                  liabilities:Savings(1)
              
              $
              206
              
              $
              908
              
              $
              1,114Checking
              
              
              1
              
              
              --
              
              
              1Money
                  market
              
              
              (244
              )
              
              1,991
              
              
              1,747Certificates(1)
              
              
              (774
              )
              
              5,205
              
              
              4,431FHLB
                  advances and other borrowings
              
              
              (1,684
              )
              
              2,124
              
              
              440Total
                  interest-bearing liabilities
              
              $
              (2,495
              )
              $
              10,228
              
              $
              7,733Net
                  change in net interest and dividend income
              
              $
              155
              
              $
              (5,273
              )
              $
              (5,118
              )
 
 (1) The
        increase in the volume and the rate in the savings accounts are related to
        the
        variable-rate retirement certificate of deposits that were reclassified to
        savings from certificates as the accounts did not have a stated maturity
        date as
        a result of changes required by the new core information technology processing
        system.
 
 
  34
   
 **Comparison
        of Operating Results for the Six Months Ended March 31, 2007 and
        2006**
  For
        the
        six months ended March 31, 2007, the Company recognized net income of $18.7
        million, compared to net income of $26.9 million for the six months ended
        March
        31, 2006. The $8.2 million decrease in net income was primarily a result
        of an
        increase in interest expense on deposits of $15.5 million and an increase
        in
        other expenses of $2.1 million. The increase in expenses was partially offset
        by
        an increase in total interest and dividend income of $5.9 million and a decrease
        in income tax expense of $4.9 million as a result of a reduction in
        earnings.
 
 Total
        interest and dividend income for the current six months was $209.7 million
        compared to $203.8 million for the six months ended March 31, 2006. The $5.9
        million increase was primarily a result of an increase in interest income
        on
        investment securities of $6.6 million and cash and cash equivalents of $3.8
        million, partially offset by a decrease in interest income on loans receivable
        of $3.5 million and mortgage-related securities of $1.5 million.
 
 Interest
        income on loans receivable for the current six months was $147.2 million
        compared to $150.7 million for the six months ended March 31, 2006. The $3.5
        million decrease in interest income was primarily a result of a decrease
        in the
        average balance of the portfolio as a result of the exchange of loans for
        securities in the fourth quarter of fiscal year 2006, partially offset by
        an
        increase in the average yield of the portfolio of 19 basis points. The increase
        in the weighted average yield can be attributed to loans originated at rates
        higher than the portfolio rate, ARM loans repricing to higher rates and a
        change
        in the interest accrual calculation as a result of the implementation of
        the
        Bank’s new core information technology processing system. Under the old system,
        for a particular scheduled interest payment, interest was accrued from the
        day
        after the due date of the prior scheduled interest payment through the due
        date
        of the current scheduled interest payment. Under the new system, interest
        is
        accrued from the due date of the prior scheduled interest payment through
        the
        day before the due date of the current scheduled interest payment. This change
        resulted in a one-time 3 basis point increase in the yield in the loan portfolio
        for the six months ending March 31, 2007.
 
 Interest
        income on mortgage-related securities for the current six months was $36.8
        million compared to $38.3 million for the six months ended March 31, 2006.
        The
        $1.5 million decrease in interest income was due to a decrease in the average
        balance partially offset by an increase in the portfolio yield. The decrease
        in
        the average balance was due to the sale of the trading securities during
        the
        first quarter of fiscal year 2007. The portfolio yield increased 44 basis
        points
        between the two periods as a result of adjustable-rate securities in the
        portfolio repricing to higher rates, the purchase of mortgage-related securities
        with yields higher than that of the existing portfolio, and trading securities
        held during a portion of the first quarter of fiscal year 2007 which also
        had
        yields higher than that of the existing portfolio.
 
 Interest
        income on investment securities for the current six months was $15.9 million
        compared to $9.3 million for the six months ended March 31, 2006. The $6.6
        million increase was primarily a result of a $260.2 million increase in the
        average balance for the six months due to the reinvestment of proceeds from
        the
        sale of trading securities into investment securities during the first quarter
        of fiscal year 2007, in addition to an increase in the average yield of the
        portfolio of 23 basis points as a result of securities purchased with yields
        higher than that of the existing portfolio.
 
 Interest
        income on cash and cash equivalents for the current six months was $4.5 million
        compared to $684 thousand for the same period in the prior year. The $3.8
        million increase in interest income was primarily a result of an increase
        in the
        average balance for the six months due to the timing of the reinvestment
        of
        proceeds from the sale of the trading securities.
 
 Interest
        expense on deposits for the current six months was $71.7 million compared
        to
        $56.2 million for the same period in the prior year. The $15.5 million increase
        in interest expense was primarily a result of an increase in the average
        rate
        paid on the certificate of deposit and money market portfolios. As previously
        discussed, the Bank has raised certain retail interest rates to remain
        competitive in our markets.
 
 Interest
        expense on FHLB advances for the current six months was $79.2 million compared
        to $78.0 million for the same period in the prior year. The $1.2 million
        increase in interest expense was primarily a result of an increase in the
        paying rate on the interest rate swaps. The weighted
        average paying rate on the variable-rate interest rate swaps was 7.81% for
        the
        current six month period compared to 6.78% for the six months ended March
        31,
        2006. The
        increase in FHLB advance interest expense was partially offset by a decrease
        in
        the average balance of FHLB advances due to maturing advances in the first
        and
        second quarters of fiscal year 2007 that were not renewed.
  35
  The
        Bank
        recorded a recovery for loan losses of $225 thousand during the current six
        months, compared to a provision of $130 thousand in the same period in the
        prior
        year due to changes in the current year to the risk assessments of certain
        categories of loans to better reflect the inherent risk of those
        categories.
  Total
        other income decreased $211 thousand to $11.6 million for the current six
        months
        compared to $11.9 million for the six months ended March 31, 2006. The decrease
        was due to a decrease in retail fees and charges and insurance commissions,
        partially offset by an increase of $302 thousand in loan fees due to an increase
        in MSR as a result of the loan swap transaction and an increase of $210 thousand
        in other income, net related to other miscellaneous operating income. As
        previously indicated in our Form 10-K for the year ended September 30, 2006,
        we
        would not collect fees for transactions originated electronically following
        the
        core conversion. Fees charged for the processing of insufficient fund (“NSF”)
        transactions decreased due to fewer incidents of NSF. Fees generally charged
        to
        our customers relating to their usage of ATM’s not owned by the Bank were not
        charged during the quarter. Management believes this unanticipated missed
        ATM
        fee opportunity will be corrected during the quarter ending June 30, 2007.
        In
        addition, waived fees increased $151 thousand, due primarily to fees assessed
        to
        customers that were waived immediately following the conversion as customers
        were becoming accustomed to new interfaces. The waived fees and ATM service
        charges that were not charged are expected to be a one-time conversion-related
        incident. T he
        extent
        to which NSF fee income will return to previous levels is uncertain. The
        decrease in insurance commissions of $278 thousand was due to the claim
        experience of the insurance companies with whom the Bank does business.
 
 Total
        other expenses for the current six month period increased $2.1 million to
        $37.7
        million compared to $35.5 million for the six months ended March 31, 2006.
        The
        increase can be attributed to increases in regulatory and outside services,
        advertising expenses, salaries and employee benefits, and other, net expenses.
        The $832 thousand increase in regulatory and outside services was due primarily
        to an increase in consulting fees related to compliance with the SOX 404 and
        other
        professional services, as the Company’s internal control environment must be
        completely reviewed under the new core computer systems .
        The
        $547 thousand increase in advertising expense is due to scheduled network
        television and radio campaigns. The $374 thousand increase in salaries and
        employee benefits is a result of an increase in payroll expense and related
        taxes largely attributed to overtime paid following our core computer conversion
        for additional staffing required to address customer service issues, partially
        offset by capitalized payroll expense related to the computer conversion. The
        increase in other, net expense is due primarily to a $795 thousand increase
        in
        office supplies and postage due primarily to mailings and customer statement
        printing changes related to the core conversion, and, to a lesser extent,
        an
        increase in postage rates which occurred in January 2006.
 
 Income
        tax expense for the six months was $12.0 million compared to $17.0 million
        for
        the six months ended March 31, 2006. The decrease in income tax expense was
        primarily due to a decrease in earnings for the current six months. The
        effective tax rate for the current six month period was 39.2% compared to
        38.7%
        for the six months ended March 31, 2006. The increase in the effective tax
        rate
        was primarily due to the accrual of taxes as a result of the state audit
        that
        was completed during the current quarter, and the amendment of the fiscal
        year
        2005 and 2006 returns based upon the audit results. These items resulted
        in an
        increase of 47 basis points in the effective tax rate for the current six
        months.
 
  36
  The
        following table presents the average balances of our assets, liabilities
        and
        stockholders’ equity and the related yields and costs on our interest-earning
        assets and interest-bearing liabilities for the periods indicated. Average
        yields are derived by dividing recorded income by the average balance of
        the
        related assets and average costs are derived by dividing recorded expense
        by the
        average balance of the related liabilities, for the periods shown. Average
        balances of interest-earning assets and interest-bearing liabilities are
        derived
        from average daily balances. Average balances for other non-interest-earning
        assets, other non-interest-bearing liabilities and stockholders’ equity are
        calculated using month end balances. The yields and costs include amortization
        of fees, costs, premiums and discounts which are considered adjustments to
        interest rates.
 For
                  the Six Months EndedMarch
                  31, 2007
              
              March
                  31, 2006Average
              
              
              
              AverageOutstanding
              
              Yield/
              
              Outstanding
              
              Yield/Balance
              
              Rate
              
              Balance
              
              RateAssets:
              
              (Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable(1)
              
              $
              5,229,290
              
              
              5.63
              %
              $
              5,541,348
              
              
              5.44
              %Mortgage-related
                  securities
              
              
              1,719,138
              
              
              4.29
              
              
              1,991,710
              
              
              3.85Investment
                  securities
              
              
              674,394
              
              
              4.73
              
              
              414,166
              
              
              4.50Cash
                  and cash equivalents
              
              
              176,195
              
              
              5.16
              
              
              32,587
              
              
              4.21Capital
                  stock of FHLB
              
              
              162,198
              
              
              6.48
              
              
              183,453
              
              
              5.31Total
                  interest-earning assets(1)
              
              
              7,961,215
              
              
              5.27
              
              
              8,163,264
              
              
              5.00Other
                  noninterest-earning assets
              
              
              171,534
              
              
              
              
              
              145,106Total
                  assets
              
              $
              8,132,749
              
              
              
              
              $
              8,308,370Liabilities
                  and stockholders' equity:Interest-bearing
                  liabilities:Deposits
              
              $
              3,885,554
              
              
              3.71
              
              $
              3,926,067
              
              
              2.87FHLB
                  advances(2)
              
              
              3,191,838
              
              
              4.91
              
              
              3,356,052
              
              
              4.60Other
                  borrowings
              
              
              53,479
              
              
              8.25
              
              
              53,305
              
              
              7.23Total
                  interest-bearing liabilities
              
              
              7,130,871
              
              
              4.28
              
              
              7,335,424
              
              
              3.69Other
                  noninterest-bearing liabilities
              
              
              135,117
              
              
              
              
              
              108,344Stockholders'
                  equity
              
              
              866,761
              
              
              
              
              
              864,602Total
                  liabilities and stockholders' equity
              
              $
              8,132,749
              
              
              
              
              $
              8,308,370Net
                  interest rate spread
              
              
              
              
              
              .99
              %
              
              
              
              
              1.31
              %Net
                  interest-earning assets
              
              $
              830,344
              
              
              
              
              $
              827,840Net
                  interest margin
              
              
              
              
              
              1.42
              %
              
              
              
              
              1.66
              %Ratio
                  of interest-earning assetsto
                  interest-bearing liabilities
              
              
              
              
              
              1.12
              
              
              
              
              
              1.11Selected
                  Performance Ratios:Return
                  on average assets (annualized)
              
              
              
              
              
              0.46
              %
              
              
              
              
              0.65
              %Return
                  on average equity (annualized)
              
              
              
              
              
              4.32
              %
              
              
              
              
              6.22
              %Average
                  equity to average assets
              
              
              
              
              
              10.66
              %
              
              
              
              
              10.41
              %
 
 (1) Calculated
        net of deferred loan fees, loan discounts, and loans in process. Non-accruing
        loans are included in the loans receivable average balance with a yield of
        zero
        percent.
  (2) Includes
        net interest expense of $6.7 million and $2.5 million related to the interest
        rate swaps for the six months ended March 31, 2007 and March 31, 2006,
        respectively.
   37
  
  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 six months ended March 31, 2007 to the six months
        ended March 31, 2006. For each category of interest-earning assets and
        interest-bearing liabilities, information is provided on changes attributable
        to
        (1) changes in volume, which are changes in the average balance multiplied
        by
        the previous year’s average rate and (2) changes in rate, which are changes in
        the average rate multiplied by the average balance from the previous year.
        The
        net changes attributable to the combined impact of both rate and volume have
        been allocated proportionately to the changes due to volume and the changes
        due
        to rate.
 
 For
                  the Six Months EndedMarch
                  31, 2007 vs. March 31, 2006Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              (8,374
              )
              $
              4,891
              
              $
              (3,483
              )Mortgage-related
                  securities
              
              
              (5,569
              )
              
              4,113
              
              
              (1,456
              )Investment
                  securities
              
              
              6,131
              
              
              496
              
              
              6,627Capital
                  stock of FHLB
              
              
              (607
              )
              
              994
              
              
              387Cash
                  and cash equivalents
              
              
              3,659
              
              
              187
              
              
              3,846Total
                  interest-earning assets
              
              $
              (4,760
              )
              $
              10,681
              
              $
              5,921Interest-bearing
                  liabilities:Savings(1)
              
              $
              125
              
              $
              959
              
              $
              1,084Checking
              
              
              2
              
              
              20
              
              
              22Money
                  market
              
              
              (599
              )
              
              4,179
              
              
              3,580Certificates(1)
              
              
              (464
              )
              
              11,295
              
              
              10,831FHLB
                  advances and other borrowings
              
              
              (3,043
              )
              
              4,594
              
              
              1,551Total
                  interest-bearing liabilities
              
              $
              (3,979
              )
              $
              21,047
              
              $
              17,068Net
                  change in net interest and dividend income
              
              $
              (781
              )
              $
              (10,366
              )
              $
              (11,147
              )
 
 (1) The
        increase in the volume and the rate in the savings accounts are related to
        the
        variable-rate retirement certificate of deposits that were reclassified to
        savings from certificates as the accounts did not have a stated maturity
        date as
        a result of changes required by the new core information technology processing
        system.
 
 **Comparison
        of Operating Results for the Three Months Ended March 31, 2007 and December
        31,
        2006**
 
 For
        the
        quarter ended March 31, 2007, the Company recognized net income of $8.5 million,
        compared to net income of $10.3 million for the quarter ended December 31,
        2006.
        The $1.8 million decrease in net income was primarily a result of an increase
        of
        $2.4 million in other expenses, partially offset by a $535 thousand increase
        in
        net interest and dividend income, after provision for loan loss.
 
 Total
        interest and dividend income for the quarter was $104.6 million compared
        to
        $105.2 million for the quarter ended December 31, 2006. The $593 thousand
        decrease was primarily a result of a decrease in interest income on
        mortgage-related securities of $2.2 million and cash and cash equivalents
        of
        $1.6 million, offset by an increase in interest income from investment
        securities of $2.6 million and loans receivable of $798 thousand.
 
 Interest
        income on loans receivable for the current quarter was $74.0 million compared
        to
        $73.2 million for the quarter ended December 31, 2006. The $798 thousand
        increase in interest income was primarily a result of an additional day of
        accrued interest in the current quarter as a result of the implementation
        of the
        Bank’s new core information technology processing system. Under the old system,
        for a particular scheduled interest payment, interest was accrued from the
        day
        after the due date of the prior scheduled interest payment through the due
        date
        of the current scheduled interest payment. Under the new system, interest
        is
        accrued from the due date of the prior scheduled interest payment through
        the
        day before the due date of the current scheduled interest payment. This
  38
  change
        resulted in a one-time 5 basis point increase in yield in the loan portfolio
        for
        the quarter ending March 31, 2007.
 
 Interest
        income on mortgage-related securities for the current quarter was $17.3 million
        compared to $19.5 million for the quarter ended December 31, 2006. The $2.2
        million decrease was primarily a result of a decrease in the average portfolio
        balance due to the timing of the sale of trading securities during the December
        2006 quarter and principal repayments and maturities.
 
 Interest
        income on investment securities for the current quarter was $9.3 million
        compared to $6.7 million for the quarter ended December 31, 2006. The $2.6
        million increase was primarily a result of an increase in the average balance
        for the current quarter due to purchases.
 
 Interest
        income on cash and cash equivalents for the current quarter was $1.5 million
        compared to $3.1 million for the prior quarter. The $1.6 million decrease
        in
        interest income was primarily a result of a $122.0 million decrease in the
        average balance for the current quarter due to the timing of the reinvestment
        of
        proceeds from the sale of the trading securities in the previous quarter
        and the
        timing of the repayment of maturing FHLB advances in the current quarter.
 
 Interest
        expense decreased $1.5 million to $75.9 million for the current quarter from
        $77.3 million for the quarter ended December 31, 2006. The decrease was due
        to a
        decrease in interest expense on FHLB advances of $2.2 million as a result
        of the
        advances that matured and were not renewed in January 2007 and to fewer days
        to
        accrue interest in the quarter ending March 31, 2007. The decrease in interest
        expense on FHLB advances was partially offset by an increase in interest
        expense
        on deposits of $798 thousand as a result of an increase in the average rate
        paid
        on the certificate of deposit portfolio.
 
 Total
        other income decreased $784 thousand to $5.4 million for the current quarter
        compared to $6.2 million for the quarter ended December 31, 2006. The decrease
        in other income was due primarily to a decrease in retail service fees of
        $745
        thousand related to the implementation of the new core information technology
        processing system. Retail fees and charges decreased to $3.5 million for
        the
        current quarter from $4.3 million for the quarter ended December 31, 2006
        as a
        result of fees not collected as a result of the conversion to our new core
        information technology processing system. As previously indicated in our
        Form
        10-K for the year ended September 30, 2006, we would not collect fees for
        transactions originated electronically following the conversion. Fees collected
        for the processing of NSF transactions decreased primarily due to fewer
        incidents of NSF. The extent to which NSF fee income will return to previous
        levels is uncertain. Fees generally charged to our customers relating to
        their
        usage of ATM’s not owned by the Bank were not charged during the quarter.
        Management believes the unanticipated missed ATM fee opportunity will be
        corrected during the quarter ending June 30, 2007. In addition, the Bank
        waived
        fees assessed to customers immediately following the conversion as customers
        were becoming accustomed to the new interfaces. The waived fees and ATM service
        charges that were not charged are expected to be a one-time conversion-related
        incident.
 
 Total
        other expenses for the current quarter increased $2.4 million to $20.0 million
        compared to $17.6 million for the quarter ended December 31, 2006. The increase
        can be attributed to an increase in other, net expense, occupancy, and
        advertising expenses. Other,
        net expense increased $1.3 million relative to a decrease of approximately
        $1.0
        million in miscellaneous operating expenses in the prior quarter, without
        a
        similar event in the current quarter. Occupancy expense increased by $659
        thousand primarily as a result of depreciation expense related to the core
        conversion assets. The
        $335
        thousand increase in advertising was due
        primarily to scheduled network television advertising campaigns.
 
 Income
        tax expense for the current quarter was $5.6 million compared to $6.4 million
        for the quarter ended December 31, 2006. The decrease in income tax expense
        was
        primarily due to a decrease in earnings for the current quarter. The effective
        tax rate for the current quarter was 39.8% compared to 38.6% for the quarter
        ended December 31, 2006. The increase in the effective tax rate was primarily
        due to the accrual of taxes as a result of the state audit that was completed
        during the current quarter, and the amendment of the fiscal year 2005 and
        2006
        returns based upon the audit results. These items resulted in an increase
        of 103
        basis points in the current quarter effective tax rate.
  39
  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 March 31, 2007 to the quarter ended
        December 31, 2006. For each category of interest-earning assets and
        interest-bearing liabilities, information is provided on changes attributable
        to
        (1) changes in volume, which are changes in the average balance multiplied
        by
        the previous year’s average rate and (2) changes in rate, which are changes in
        the average rate multiplied by the average balance from the previous year.
        The
        net changes attributable to the combined impact of both rate and volume have
        been allocated proportionately to the changes due to volume and the changes
        due
        to rate.
 
 Quarter
                  EndedMarch
                  31, 2007 vs. December 31, 2006Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              (181
              )
              $
              979
              
              $
              798Mortgage-related
                  securities
              
              
              (1,804
              )
              
              (400
              )
              
              (2,204
              )Investment
                  securities
              
              
              2,398
              
              
              180
              
              
              2,578Capital
                  stock of FHLB
              
              
              (154
              )
              
              (1
              )
              
              (155
              )Cash
                  and cash equivalents
              
              
              (1,622
              )
              
              12
              
              
              (1,610
              )Total
                  interest-earning assets
              
              $
              (1,363
              )
              $
              770
              
              $
              (593
              )Interest-bearing
                  liabilities:Savings(1)
              
              $
              236
              
              $
              909
              
              $
              1,145Checking
              
              
              7
              
              
              (30
              )
              
              (23
              )Money
                  market
              
              
              50
              
              
              20
              
              
              70Certificates(1)
              
              
              (832
              )
              
              438
              
              
              (394
              )FHLB
                  advances and other borrowings
              
              
              (1,847
              )
              
              (414
              )
              
              (2,261
              )Total
                  interest-bearing liabilities
              
              $
              (2,386
              )
              $
              923
              
              $
              (1,463
              )Net
                  change in net interest and dividend income
              
              $
              1,023
              
              $
              (153
              )
              $
              870
 
 (1) The
        increase in the volume and the rate in the savings accounts are related to
        the
        variable-rate retirement certificate of deposits that were reclassified to
        savings from certificates as the accounts did not have a stated maturity
        date as
        a result of changes required by the new core information technology processing
        system.
 
 **Liquidity
        and Capital Resources**
 
 Liquidity
        management is both a daily and long-term function of our business management.
        The Bank’s most available liquid assets, represented by cash and cash
        equivalents, available-for-sale mortgage-related and investment securities,
        and
        short-term investment securities, are a product of its operating, investing
        and
        financing activities. The Bank’s primary sources of funds are deposits, FHLB
        advances, repayments on and maturities of outstanding loans and mortgage-related
        securities, other short-term investments and funds provided from operations.
        While scheduled payments from the amortization of loans and mortgage-related
        securities and payments on short-term investments are relatively predictable
        sources of funds, deposit flows and prepayments on loans and mortgage-related
        securities are greatly influenced by general interest rates, economic conditions
        and competition and are less predictable sources of funds. To the extent
        possible, the Bank manages the cash flows of its portfolios by the rates
        it
        offers customers. Sources of funds are used primarily to meet our ongoing
        operations, to pay maturing certificates of deposit and savings withdrawals
        and
        to fund loan commitments. At March 31, 2007, approximately $1.55 billion
        of our
        $2.49 billion in certificates of deposit were scheduled to mature within
        one
        year. Based on past experience and our pricing strategy, we expect that a
        majority of these maturing deposits will renew, although no assurance can
        be
        given in this regard.
 
 At
        March
        31, 2007, cash and cash equivalents totaled $242.2 million. In January 2007,
        the
        Bank did not renew $200.0 million of maturing FHLB advances. Subsequent to
        March
        31, 2007, an additional $200.0 million of FHLB advances matured and were
        not
        renewed. Cash on hand and cash received from repayments and maturing investments
        subsequent to March 31, 2007 were utilized to repay these advances.
   40
  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 March 31, 2007, the Bank’s ratio of the face amount of advances to
        total assets, as reported to the Office of Thrift Supervision (“OTS”), was 38%.
        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. In July 2006, the president of FHLB Topeka approved
        a
        renewal of our request to increase the Bank’s borrowing limit to 45% of total
        assets for one year. Currently, the blanket pledge is sufficient collateral
        for
        the FHLB advances. It is possible that increases in our borrowings or decreases
        in our loan portfolio could require the Bank to pledge securities as collateral
        on the FHLB advances. The Bank’s policy allows borrowing from FHLB of up to 55%
        of total assets. In the past, the Bank has utilized other sources for liquidity,
        such as secondary market repurchase agreements, but in recent years it has
        relied primarily on the FHLB advances.
  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.
  Even
        with
        the current challenging rate environment, it is management’s and the board of
        directors’ intention to continue to pay regular quarterly dividends of $0.50 per
        share for the foreseeable future. At March 31, 2007, Capitol Federal Financial,
        at the holding company level, had $115.3 million in cash and certificates
        of
        deposit at the Bank.
  In
        December 2005, the Bank entered into a series of agreements with third party
        entities in connection with the planned replacement of the Bank’s core
        information technology processing system. The agreements provide for the
        Bank’s
        purchase of hardware, purchase and licensing of software and receipt of
        maintenance, support and other services. The principal software maintenance
        agreement has an initial term of five and one-half years, renewable thereafter
        for successive terms of 33 months. Also in connection with the replacement
        of
        its core information technology processing system, the Bank entered into
        a
        license and service agreement with a third party for the use of the third
        party’s proprietary mortgage loan origination system software. Under this
        agreement, maintenance services are to be provided for an initial term of
        five
        years, renewable thereafter for additional one-year terms. The replacement
        of
        the core technology processing system was completed in January 2007. The
        costs
        associated with the replacement of core information technology processing
        system
        were $6.8 million for hardware, software and services and $1.0 million in
        capitalized payroll costs. Both of these amounts started being depreciated
        during the current quarter. The depreciation period will not exceed five years.
        Management anticipates incurring an amount not greater than $900 thousand
        during
        fiscal year 2007 as a result of documenting and testing controls of the new
        core
        information technology processing system to comply with SOX 404. During the
        first six months of fiscal year 2007, $306 thousand of consulting fees were
        incurred related to the compliance with SOX 404.
 
  **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.  41
  The
        Company’s contractual obligations related to operating leases and debentures
        have not changed significantly from September 30, 2006. The following table
        summarizes our other contractual obligations as of March 31, 2007.
 
 **Maturity
                  Range****Less
                  than**
              
              **1
                  - 3**
              
              **3
                  - 5**
              
              **More
                  than****Total**
              
              **1
                  year**
              
              **years**
              
              **years**
              
              **5
                  years**(Dollars
                  in thousands)FHLB
                  Advances
              
              $
              3,096,000
              
              $
              1,050,000
              
              $
              1,520,000
              
              $
              526,000
              
              $
              -Certificates
                  of Deposit
              
              
              2,494,290
              
              
              1,554,035
              
              
              864,250
              
              
              74,395
              
              
              1,610Commitments
                  to originate andpurchase
                  mortgage loans
              
              
              85,163
              
              
              85,163
              
              
              --
              
              
              --
              
              
              --Commitments
                  to fund unused homeequity
                  lines of credit
              
              
              273,403
              
              
              273,403
              
              
              --
              
              
              --
              
              
              --Unadvanced
                  portion ofconstruction
                  loans
              
              
              20,634
              
              
              20,634
              
              
              --
              
              
              --
              
              
              --
 
 The
        maturity schedule for our certificate of deposit portfolio at March 31, 2007
        is
        located under “Item 3. Quantitative and Qualitative Disclosure About Market
        Risk”.  We
        anticipate that we will continue to have sufficient funds, through repayments
        and maturities of loans and securities, deposits and borrowings, to meet
        our
        current commitments.
  The
        following table presents the maturity of FHLB advances at par as of March
        31,
        2007. As
        previously discussed, subsequent to March 31, 2007, $200.0 million of maturing
        FHLB advances were not renewed. The
        balance of advances excludes the $21.0 million unrealized loss adjustment on
        the
        swapped FHLB advances.
 
  Actual
                  rates
              
              Effectivewithout
              
              rates
                  withMaturity
                  by
              
              interest
                  rate
              
              interest
                  rateFiscal
                  year
              Amount
              swaps
              
              swaps(Dollars
                  in thousands)2007
              $
                  550,000
              3.58
              %
              3.58
              %2008
              1,125,000
              4.23
              
              4.642009
              620,000
              4.27
              
              4.272010
              775,000
              5.90
              
              7.002011
              26,000
              5.09
              
              5.09Total
              $
                  3,096,000
              4.55
              %
              4.97
              %
 
 The
        following table presents the maturity of FHLB advances by quarter for fiscal
        year 2007 as of March 31, 2007.
 WeightedAverageMaturity
                  by Quarter End
              Amount
              Rate(Dollars
                  in thousands)June
                  30, 2007
              $
                  200,000
              3.49
              %September
                  30, 2007
              350,000
              3.63$
                  550,000
              3.58
              %
 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.
   42
  
  Management
        has entered into interest rate swap agreements with an aggregate notional
        principal amount of $800.0 million to modify the Bank’s interest rate risk
        profile. The counterparties with whom we have entered into the interest rate
        swap agreements are rated as AA- or higher per our internal policies.
        Counterparties to the interest rate swaps require collateral for their exposure
        to the Bank’s net payable mark-to-market position under the terms of the
        interest rate swap agreements. The exposure is estimated daily by the
        counterparties calculating a market value for each swap on a net settlement
        basis. When the valuation indicates that the Bank has a net payable to the
        counterparty, the Bank may be required to post collateral sufficient to satisfy
        the counterparty’s exposure. When required, the collateral pledged to the
        counterparty would be restricted and not available-for-sale. Each counterparty
        has different collateralization requirements. At March 31, 2007, the Bank
        had
        posted available-for-sale mortgage-related securities with an estimated market
        value of $34.4 million. If the future obligation indicates that the Bank
        has a
        net receivable mark-to-market position from the counterparties, the Bank
        could
        have a certain level of exposure to the extent the counterparties are not
        able
        to satisfy their obligations to the Bank.
  
  **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.
  
 **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 $790.8 million at March
        31,
        2007, or 9.7% of total Bank assets on that date. As of March 31, 2007, the
        Bank
        exceeded all capital requirements of the OTS. The following table presents
        the
        Bank’s regulatory capital ratios at March 31, 2007 based upon regulatory
        guidelines.
 
 RegulatoryRequirementBank
              
              For
                  “WellRatios
              
              Capitalized”
                  StatusCore
                  capital
              9.7%
              
              5.0%Tier
                  I risk-based capital
              22.4%
              
              6.0%Total
                  risk-based capital
              22.3%
              
              10.0%
 
  The
        long-term ability of the Company to pay dividends to its stockholders is
        based
        primarily upon the ability of the Bank to make capital distributions to the
        Company. Under OTS safe harbor regulations, the Bank may distribute to the
        Company capital not exceeding net income for the current calendar year and
        the
        prior two calendar years. Due to the impact refinancing the FHLB advances
        had on
        earnings in 2004, the Bank cannot distribute capital to the Company unless
        it
        receives waivers of the safe harbor regulation from the OTS during the current
        waiver period. The Bank had previously reported that a waiver would be required
        for capital distributions through at least December 31, 2007. As a result
        of net
        interest margin compression, earnings have not been at the levels originally
        forecasted which would likely result in a waiver being required through December
        31, 2008. Currently, the Bank has authorization from the OTS to distribute
        capital from the Bank to the Company through the quarter ending June 30,
        2007.
        So long as the Bank continues to maintain excess capital, operate in a safe
        and
        sound manner, and comply with the interest rate risk management guidelines
        of
        the OTS, it is management’s belief that the Bank will continue to receive
        waivers allowing it to distribute the net income of the Bank to the Company,
        although no assurance can be given in this regard.
  
 **Item
        3.   Quantitative and Qualitative Disclosure About Market
        Risk**
 
 For
        a
        complete discussion of the Company’s asset and liability management policies, as
        well as the potential impact of interest rate changes upon the market value
        of
        the Company’s portfolios, see “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations - Asset and Liability Management and
        Market
        Risk” in the Company’s Annual Report to Stockholders for the year ended
        September 30, 2006, attached as Exhibit 13 to the
  43
  Company’s
        Annual Report on Form 10-K for the year ended September 30, 2006.
 
 ALCO
        regularly reviews the interest rate risk exposure of the Bank by forecasting
        the
        impact of hypothetical, alternative interest rate environments on net interest
        income and measuring the market value of portfolio equity (“MVPE”) at various
        dates. The MVPE is defined as the net of the present value of the cash flows
        of
        an institution’s existing assets, liabilities and off-balance sheet instruments.
        The present values are determined in alternative interest rate environments
        providing potential changes in MVPE under those alternative interest rate
        environments. The Bank’s analysis of its MVPE at March 31, 2007 indicates no
        significant increase in its risk exposure as compared to September 30, 2006.
        The
        Bank’s analysis of the sensitivity of its net interest income to parallel
        changes in interest rates at March 31, 2007 indicates no significant increase
        since September 30, 2006.
 
 
 
  
  44
   **Gap
        Table** :
        The
        following gap table summarizes the anticipated maturities or repricing of
        our
        interest-earning assets and interest-bearing liabilities as of March 31,
        2007,
        based on the information and assumptions set forth in the notes
        below .
 Within
                  Three Months
              Three
                  Months To One Year
              More
                  Than One Year to Three Years
              More
                  Than Three Years to Five Years
              Over
                  Five Years
              TotalInterest-earning
                  assets:
              
              (Dollars
                  in thousands)Loans
                  receivable(1)(2):Mortgage
                  loans:Fixed
              
              $        63,580
              $        376,349
              $        988,138
              $        587,183
              $  1,173,773
              $  3,189,023Adjustable
              
              85,865
              510,216
              929,702
              280,301
              18,495
              1,824,579Other
                  loans
              
              139,630
              5,688
              9,161
              6,839
              58,986
              220,304Securities:Non-mortgage(3)
              
              178,546
              374,733
              211,254
              460
              8,303
              773,296Mortgage-related
                  securities(4)
              
              214,050
              593,881
              497,922
              110,692
              186,409
              1,602,954Other
                  interest-earning assets
              
              197,407
              --
              --
              --
              --
              197,407Total
                  interest-earning assets
              
              879,078
              1,860,867
              2,636,177
              985,475
              1,445,966
              7,807,563Interest-bearing
                  liabilities:Deposits:Savings(5)
              
              144,077
              7,455
              17,203
              12,877
              66,232
              247,844Checking(5)
              
              18,246
              50,211
              100,483
              63,006
              203,354
              435,300Money
                  market(5)
              
              20,408
              57,838
              130,408
              90,947
              525,831
              825,432Certificates
              
              569,086
              1,002,440
              847,503
              73,867
              1,394
              2,494,290Borrowings(6)
              
              1,000,000
              850,000
              1,020,000
              226,000
              53,609
              3,149,609Total
                  interest-bearing liabilities
              
              1,751,817
              1,967,944
              2,115,597
              466,697
              850,420
              7,152,475Excess
                  (deficiency) of interest-earning assets overinterest-bearing
                  liabilities
              
              (872,739)
              (107,077)
              520,580
              518,778
              595,546
              655,088Cumulative
                  excess (deficiency) of interest-earningassets
                  over interest-bearing liabilities
              
              (872,739)
              (979,816)
              (459,236)
              59,542
              655,088Cumulative
                  excess (deficiency) of interest-earningassets
                  over interest-bearing liabilities as apercent
                  of total assets at March 31, 2007
              
              (10.78)%
              (12.10)%
              (5.67)%
              0.74%
              8.09%Cumulative
                  one-year gap at September 30, 2006
              
              
              (13.62)Cumulative
                  one-year gap at September 30, 2005
              
              
              (4.01)
 
  45
   (1)  Adjustable-rate
        loans are included in the period in which the rate is next scheduled to adjust,
        rather than in the period in which the loans are due or in the period in
        which
        repayments are expected to occur prior to their next rate adjustment. Fixed-rate
        loans are included in the periods in which they are scheduled to be repaid,
        based on scheduled amortization and prepayment assumptions.
 (2)  Balances
        have been reduced for non-performing loans, which totaled $6.6 million,
        excluding accrued interest, at March 31, 2007.
 (3)  Based
        on
        contractual maturities or term to call date based on the current rate
        environment, and excludes the unrealized gain adjustment of $108 thousand
        on AFS
        investment securities.
 (4)  Reflects
        estimated prepayments of mortgage-related securities in our portfolio, and
        excludes the unrealized loss adjustment of $489 thousand on AFS mortgage-related
        securities.
 (5)  Although
        our checking, savings and money market accounts are subject to immediate
        withdrawal, management considers a substantial amount of such accounts to
        be
        core deposits having significantly longer effective maturities. The decay
        rates
        (the assumed rate at which the balance of existing accounts would decline)
        used
        on these accounts are based on assumptions developed based upon our actual
        experience with these accounts. If all of our checking, savings and money
        market
        accounts had been assumed to be subject to repricing within one year,
        interest-bearing liabilities which were estimated to mature or reprice within
        one year would have exceeded interest-earning assets with comparable
        characteristics by $2.19 billion, for a cumulative one-year gap of (27.05)%
        of
        total assets.
 (6)  Borrowings
        exclude the $21.0 million unrealized loss adjustment on the swapped FHLB
        advances and $114 thousand of capitalized debt issuance costs on other
        borrowings. These amounts are included in the Within Three Months category.
 
 The
        table
        on the previous page contains certain assumptions which affect the presentation.
        Although certain assets and liabilities may have similar maturities or periods
        to repricing, they may react in different degrees to changes in market interest
        rates. The interest rates on certain types of assets and liabilities may
        fluctuate in advance of changes in market interest rates, while interest
        rates
        on other types of assets and liabilities may lag behind changes in market
        interest rates. Certain assets, such as ARM loans, have features that restrict
        changes in interest rates on a short-term basis and over the life of the
        asset.
        In the event of a change in interest rates, prepayment and early withdrawal
        levels likely would deviate significantly from those assumed in calculating
        the
        gap table.
 
 The
        FHLB
        advances designated in hedging relationships have maturities ranging from
        May
        2008 to August 2010. At March 31, 2007, the Bank was in a paying position
        on the
        interest rate swaps. If the one month LIBOR rate remains higher than 3.68%
        (weighted average break even LIBOR rate), then the Bank will continue to
        be in a
        paying position on the interest rate swaps. The following summarizes the
        interest rate swap agreements by maturity date at March 31, 2007.
 March
                  31, 2007PayingFiscal
              
              Notional
              1
                  Month
              
              
              ReceivingYear
              Fair
              Principal
              LIBOR
              
              Interest
              InterestMaturity
              Value(1)
              Amount
              Rate(2)
              Margin
              Rate
              Rate
              Spread(Dollars
                  in thousands)2008
              $
                  (4,420)
              $
                  225,000
              5.32%
              2.41%
              7.73%
              5.68%
              (2.05)%2010
              (16,607)
              575,000
              5.32
              2.51
              7.83
              6.35
              (1.48)$
                  (21,027)
              $
                  800,000
              5.32%
              2.48%
              7.80%
              6.16%
              (1.64)%
 
 (1)  The
        one
        month LIBOR rate as of March 30, 2007 was 5.32%. This rate was used to calculate
        the fair value of the interest rate swaps at March 31, 2007.
 (2)  The
        one
        month LIBOR rate as of February 27, 2007 was 5.32%. This rate plus the margin
        noted above was the paying interest rate during March 2007.
 
  46
  **Changes
        in portfolio composition.** The
        following tables provide information regarding the fixed- and adjustable-rate
        composition of our loan, investment and mortgage-related security portfolios
        as
        well as the change in the composition of these portfolios from September
        30,
        2006 to March 31, 2007. Also presented is the maturity information for our
        certificate of deposit portfolio, which shows the change in composition between
        periods.
 
 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 EndedMarch
                  31, 2007
              
              March
                  31, 2006Amount
              
              Rate
              
              %
                  of Total
              
              Amount
              
              Rate
              
              %
                  of TotalFixed-rate:
              
              (Dollars
                  in thousands)One-
                  to four-family:<=
                  15 years
              
              $
              22,816
              
              
              5.64
              %
              
              12.32
              %
              $
              16,946
              
              
              5.65
              %
              
              8.28
              %>
                  15 years
              
              
              97,122
              
              
              5.98
              
              
              52.43
              
              
              79,795
              
              
              6.05
              
              
              38.99Other
                  real estate
              
              
              3,100
              
              
              6.50
              
              
              1.67
              
              
              640
              
              
              6.25
              
              
              0.31Non
                  real estate
              
              
              7,960
              
              
              8.13
              
              
              4.30
              
              
              10,530
              
              
              7.57
              
              
              5.15Total
                  fixed-rate
              
              
              130,998
              
              
              6.06
              
              
              70.72
              
              
              107,911
              
              
              6.14
              
              
              52.73Adjustable-rate:One-
                  to four-family:<=
                  36 months
              
              
              8,515
              
              
              5.31
              
              
              4.60
              
              
              7,410
              
              
              5.21
              
              
              3.62>
                  36 months
              
              
              25,186
              
              
              5.59
              
              
              13.60
              
              
              65,394
              
              
              5.41
              
              
              31.95Non
                  real estate
              
              
              20,524
              
              
              8.57
              
              
              11.08
              
              
              23,942
              
              
              8.30
              
              
              11.70Total
                  adjustable-rate
              
              
              54,225
              
              
              6.68
              
              
              29.28
              
              
              96,746
              
              
              6.11
              
              
              47.27Total
                  loan originations and purchases
              
              $
              185,223
              
              
              6.24
              %
              
              100.00
              %
              $
              204,657
              
              
              6.12
              %
              
              100.00
              %Purchased
                  loans included above:Fixed-rate
                  purchased loans
              
              $
              9,333
              
              
              6.01
              %
              
              
              
              $
              11,793
              
              
              6.12
              %Adjustable-rate
                  purchased loans
              
              $
              14,185
              
              
              5.57
              %
              
              
              
              $
              42,124
              
              
              5.34
              %
 
  47
  
 For
                  the Six Months Ended
              
              For
                  the Six Months EndedMarch
                  31, 2007
              
              March
                  31, 2006Amount
              
              Rate
              
              %
                  of Total
              
              Amount
              
              Rate
              
              %
                  of TotalFixed-Rate:
              
              (Dollars
                  in thousands)One-
                  to four-family:<=
                  15 years
              
              $
              43,423
              
              
              5.69
              %
              
              11.40
              %
              $
              56,607
              
              
              5.46
              %
              
              10.28
              %>
                  15 years
              
              
              202,161
              
              
              6.04
              
              
              53.05
              
              
              192,631
              
              
              5.92
              
              
              35.00Other
                  real estate
              
              
              3,873
              
              
              6.54
              
              
              1.02
              
              
              6,697
              
              
              6.28
              
              
              1.22Non
                  real estate
              
              
              17,007
              
              
              8.02
              
              
              4.46
              
              
              19,851
              
              
              7.50
              
              
              3.61Total
                  fixed-rate
              
              
              266,464
              
              
              6.12
              
              
              69.93
              
              
              275,786
              
              
              5.95
              
              
              50.11Adjustable-Rate:One-
                  to four-family:<=
                  36 months
              
              
              14,407
              
              
              5.35
              
              
              3.78
              
              
              48,529
              
              
              4.75
              
              
              8.82>
                  36 months
              
              
              58,566
              
              
              5.66
              
              
              15.37
              
              
              175,881
              
              
              5.20
              
              
              31.96Non
                  real estate
              
              
              41,631
              
              
              8.58
              
              
              10.92
              
              
              50,118
              
              
              8.00
              
              
              9.11Total
                  adjustable-rate
              
              
              114,604
              
              
              6.67
              
              
              30.07
              
              
              274,528
              
              
              5.63
              
              
              49.89Total
                  loan originations and purchases
              
              $
              381,068
              
              
              6.29
              %
              
              100.00
              %
              $
              550,314
              
              
              5.79
              %
              
              100.00
              %Purchased
                  loans included above:Fixed-rate
                  purchased loans
              
              $
              21,009
              
              
              6.10
              %
              
              
              
              $
              45,875
              
              
              5.76
              %Adjustable-rate
                  purchased loans
              
              $
              28,882
              
              
              5.69
              %
              
              
              
              $
              158,034
              
              
              5.04
              %
 
 
 
  48
   The
        following table presents the distribution of our loan portfolio at the dates
        indicated. Our loan portfolio remains primarily weighted in fixed-rate loans.
 March
                    31, 2007
                
                December
                    31, 2006
                
                September
                    30, 2006Amount
                
                Rate
                
                %
                    of Total
                
                Amount
                
                Rate
                
                %
                    of Total
                
                Amount
                
                Rate
                
                %
                    of Total(Dollars
                    in thousands)Fixed-rate
                    loans:One-
                    to four- family:<=
                    15 years(1)
                
                $
                1,134,151
                
                
                5.37
                %
                
                21.61
                %
                $
                1,152,290
                
                
                5.36
                %
                
                21.90
                %
                $
                1,166,880
                
                
                5.35
                %
                
                22.19
                %>
                    15 years(1)
                
                
                1,974,136
                
                
                5.93
                
                
                37.60
                
                
                1,923,923
                
                
                5.93
                
                
                36.58
                
                
                1,864,854
                
                
                5.93
                
                
                35.47Other
                    real estate
                
                
                94,027
                
                
                6.30
                
                
                1.79
                
                
                85,031
                
                
                6.35
                
                
                1.62
                
                
                86,761
                
                
                6.34
                
                
                1.65Non
                    real estate
                
                
                72,985
                
                
                7.69
                
                
                1.39
                
                
                70,798
                
                
                7.63
                
                
                1.35
                
                
                67,083
                
                
                7.57
                
                
                1.28Total
                    fixed-rate loans
                
                
                3,275,299
                
                
                5.79
                
                
                62.39
                
                
                3,232,042
                
                
                5.78
                
                
                61.45
                
                
                3,185,578
                
                
                5.76
                
                
                60.59Adjustable-rate
                    loans:One-
                    to four- family:<=
                    36 months(2)
                
                
                1,067,303
                
                
                4.83
                
                
                20.33
                
                
                1,032,723
                
                
                4.80
                
                
                19.63
                
                
                989,316
                
                
                4.76
                
                
                18.82>
                    36 months(2)
                
                
                749,677
                
                
                5.23
                
                
                14.28
                
                
                831,427
                
                
                5.18
                
                
                15.81
                
                
                910,455
                
                
                5.13
                
                
                17.32Other
                    real estate
                
                
                10,025
                
                
                5.73
                
                
                0.19
                
                
                10,930
                
                
                5.66
                
                
                0.21
                
                
                15,465
                
                
                5.33
                
                
                0.29Non
                    real estate
                
                
                147,489
                
                
                8.62
                
                
                2.81
                
                
                152,735
                
                
                8.62
                
                
                2.90
                
                
                156,659
                
                
                8.63
                
                
                2.98Total
                    adjustable-rate loans
                
                
                1,974,494
                
                
                5.27
                
                
                37.61
                
                
                2,027,815
                
                
                5.25
                
                
                38.55
                
                
                2,071,895
                
                
                5.22
                
                
                39.41Total
                    loans
                
                
                5,249,793
                
                
                5.60
                %
                
                100.00
                %
                
                5,259,857
                
                
                5.57
                %
                
                100.00
                %
                
                5,257,473
                
                
                5.55
                %
                
                100.00
                %Less:Loans
                    in process
                
                
                20,634
                
                
                
                
                
                
                
                
                17,244
                
                
                
                
                
                
                
                
                22,605Unearned
                    fees and deferred costs
                
                
                9,265
                
                
                
                
                
                
                
                
                9,438
                
                
                
                
                
                
                
                
                9,318Allowance
                    for loan losses
                
                
                4,193
                
                
                
                
                
                
                
                
                4,143
                
                
                
                
                
                
                
                
                4,433Total
                    loans receivable, net
                
                $
                5,215,701
                
                
                
                
                
                
                
                $
                5,229,032
                
                
                
                
                
                
                
                $
                5,221,117
  (1)
            Loans
                are reported based on their remaining term to maturity, with consideration
                for historical curtailments, as of the date
                indicated. (2)
            Loans
                are reported based on their term to next rate reset as of the date
                indicated. 
   49
   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 58.3% of these portfolios at March 31, 2007 compared
        to
        51.5% at September 30, 2006. The WAL is the estimated remaining maturity
        of the
        underlying collateral after projected prepayment speeds have been applied.
        The
        decrease in the WAL between September 30, 2006 and March 31, 2007 was due
        to the
        purchase of investments with terms to maturity or reprice of generally less
        than
        two years. The increase in the yield between September 30, 2006 and March
        31,
        2007 as a result of the yield on the securities purchased being greater than
        that of the overall portfolio yield.
  March
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006Balance
              
              WAL
              
              Yield
              
              Balance
              
              WAL
              
              Yield
              
              Balance
              
              WAL
              
              Yield(Dollars
                  in thousands)Fixed-rate
                  investments:Agency
                  bonds
              
              $
              763,971
              
              
              1.66
              
              
              4.77
              %
              $
              837,693
              
              
              1.62
              
              
              4.83
              %
              $
              428,074
              
              
              2.62
              
              
              4.46
              %Mortgage-related
                  securities, at cost
              
              
              613,127
              
              
              4.01
              
              
              4.56
              
              
              635,904
              
              
              4.09
              
              
              4.55
              
              
              662,480
              
              
              4.29
              
              
              4.58Municipal
                  bonds
              
              
              9,326
              
              
              6.96
              
              
              3.61
              
              
              6,764
              
              
              7.05
              
              
              3.61
              
              
              1,201
              
              
              6.09
              
              
              3.90Total
                  fixed-rate investments
              
              
              1,386,424
              
              
              2.73
              
              
              4.67
              
              
              1,480,361
              
              
              2.71
              
              
              4.70
              
              
              1,091,755
              
              
              3.64
              
              
              4.53Adjustable-rate
                  investments:Mortgage-related
                  securities, at cost
              
              
              989,827
              
              
              3.02
              
              
              4.09
              
              
              1,033,437
              
              
              3.10
              
              
              4.08
              
              
              1,028,093
              
              
              3.38
              
              
              4.04Total
                  adjustable-rate investments
              
              
              989,827
              
              
              3.02
              
              
              4.09
              
              
              1,033,437
              
              
              3.10
              
              
              4.08
              
              
              1,028,093
              
              
              3.38
              
              
              4.04Total
                  investment portfolio, at cost
              
              $
              2,376,251
              
              
              2.85
              
              
              4.43
              %
              $
              2,513,798
              
              
              2.87
              
              
              4.45
              %
              $
              2,119,848
              
              
              3.51
              
              
              4.29
              %
 
  The
        certificate of deposit portfolio decreased $80.0 million from September 30,
        2006
        to March 31, 2007 and the average cost of the portfolio increased 27 basis
        points between the two reporting dates. Certificates maturing in one year
        or
        less at March 31, 2007 were $1.55 billion with an average cost of 4.54%.
        The
        following table presents the maturity of certificates of deposit at the dates
        indicated.
 March
                  31, 2007
              
              December
                  31, 2006
              
              September
                  30, 2006Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              Rate(Dollars
                  in thousands)Certificates
                  maturing within:0
                  to 3 months
              
              $
              442,706
              
              
              4.40
              %
              $
              321,975
              
              
              4.02
              %
              $
              518,974
              
              
              4.40
              %3
                  to 6 months
              
              
              357,839
              
              
              4.41
              
              
              460,940
              
              
              4.41
              
              
              314,279
              
              
              4.046
                  months to one year
              
              
              753,490
              
              
              4.68
              
              
              674,221
              
              
              4.44
              
              
              825,885
              
              
              4.45One
                  year to two years
              
              
              680,400
              
              
              4.81
              
              
              858,453
              
              
              4.70
              
              
              695,580
              
              
              4.38After
                  two years
              
              
              259,855
              
              
              4.62
              
              
              270,100
              
              
              4.54
              
              
              227,558
              
              
              4.23Total
                  certificates
              
              $
              2,494,290
              
              
              4.62
              %
              $
              2,585,689
              
              
              4.48
              %
              $
              2,582,276
              
              
              4.35
              %Average
                  maturity (in years)
              
              
              0.97
              
              
              
              
              
              1.04
              
              
              
              
              
              0.94
 
 
  50
   **Item
        4** **.
        Controls and Procedures**
 John
        B.
        Dicus, the Company’s President and Chief Executive Officer, and Kent G.
        Townsend, the Company’s Executive Vice President, Chief Financial Officer and
        Treasurer, have evaluated the Company’s disclosure controls and procedures (as
        defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended,
        the “Act”) as of March 31, 2007. Based upon their evaluation, they have
        concluded that as of March 31, 2007, such disclosure controls and procedures
        were effective to ensure that information required to be disclosed by the
        Company in the reports it files or submits under the Act is accumulated and
        communicated to the Company’s management (including the Chief Executive Officer
        and Chief Financial Officer) to allow timely decisions regarding required
        disclosure, and is recorded, processed, summarized and reported within the
        time
        periods specified in the SEC’s rules and forms.
 
 **Changes
        in Internal Control Over Financial Reporting**
 As
        previously disclosed, the Company, through its primary subsidiary the Bank,
        completed the installation and implementation of a new core processing system
        during January 2007. The conversion to a new core processing system was made
        in
        the ordinary course of business due to obsolescence of the previous computer
        hardware and software platform. In connection with this conversion, management
        modified previously established internal controls where applicable, and has
        implemented, or is in the process of implementing, additional controls and
        processes to maintain the strength of the overall system of internal controls.
        Management does not believe any of the changes currently underway in the
        Bank's
        systems of internal controls, or any other factors that could significantly
        affect internal controls, have resulted in any material weaknesses in the
        Company's internal control over financial reporting. Other than changes relating
        to the core conversion, there has been no change in our internal control
        over
        financial reporting as
        defined by Rule 13a-15(d) of the Act during
        our second fiscal quarter that has materially affected, or is reasonably
        likely
        to materially affect, our 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
        has
        been no material change to our risk factors since September 30, 2006. For
        a
        summary of risk factors relevant to our operations, see Part I,
        Item 1A in our 2006 Annual Report on Form 10-K.
  51
  
 **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 March 31, 2007 and additional information regarding our share repurchase
        program. All shares repurchased during the quarter were tendered to the Company
        by holders of stock options in lieu of paying the option exercise price in
        cash.
        Our current repurchase plan of 500,000 shares was announced on May 26, 2006.
        The
        plan has no expiration date and had 461,316 shares remaining as of March
        31,
        2007. The Company intends to repurchase shares from time to time, depending
        on
        market conditions, at prevailing market prices in open-market and other
        transactions. The shares would be held as treasury stock for general corporate
        use.
  Total
              
              Total
                  Number of
              Maximum
                  NumberNumber
                  of
              Average
              Shares
                  Purchased as
              of
                  Shares that MayShares
              Price
                  Paid
              Part
                  of Publicly
              Yet
                  Be PurchasedPeriod
              Purchased
              per
                  Share
              Announced
                  Plans(1)
              Under
                  the PlanJanuary
                  1, 2007 throughJanuary
                  31, 2007
              --
              --
              --
              498,548February
                  1, 2007 throughFebruary
                  28, 2007
              37,232
              --(1)
              37,232
              461,316March
                  1, 2007 throughMarch
                  31, 2007
              --
              --
              --
              461,316Total
              37,232
              
              37,232
              461,316
 (1)  All
        shares repurchased during the quarter were in exchange for the exercise of
        options.
 
 <Index>
 **Item
        3.  Defaults Upon Senior Securities**
 Not
        applicable
 
 **<Index>**
 **Item
        4.  Submission of Matters to a Vote of Security Holders**
 The
        Annual Meeting of Stockholders for the fiscal year ended September 30, 2006,
        was
        held on January 23, 2007. Two matters were presented to the stockholders.
        The
        results were previously included in Part 2, Item 4 in the Form 10-Q for the
        period ended December 31, 2006.
 
 **<Index>**
 **Item
        5.  Other Information**
 Not
        applicable
 
 **<Index>**
 **Item
        6.  Exhibits**
 See
        Index
        to Exhibits
  52
  **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:   May
        7, 2007    By: /s/
        John B.
        Dicus
 John B. Dicus, President and
 Chief Executive Officer
 
 
 Date:   May
        7,
        2007  By: /s/
        Kent G.
        Townsend
 Kent G. Townsend, Executive Vice President,
 Chief Financial Officer and Treasurer
 
 
 <Index>
 
  53
   **INDEX
        TO EXHIBITS**
 Exhibit
                Number
              Document2.0
              
              Plan
                  of Reorganization and Stock Issuance Plan*3(i)
              
              Federal
                  Stock Charter of Capitol Federal Financial*3(ii)
              
              Bylaws
                  of Capitol Federal Financial filed on August 4, 2004 as Exhibit
                  3(ii) tothe
                  June 30, 2004 Form 10-Q 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 debt10.1
              
              Registrant’s
                  Thrift and Stock Ownership Plan filed on December 14, 2005 as Exhibit
                  10.1
                  tothe
                  Annual Report on Form 10-K and incorporated herein by
                  reference10.2
              
              Registrant’s
                  2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
                  April 13,2000
                  as Appendix A to Registrant’s Revised Proxy Statement (File No. 000-25391)
                  and incorporated herein by reference10.3
              
              Registrant’s
                  2000 Recognition and Retention Plan (the “RRP”) filed on April 13, 2000 asAppendix
                  B to Registrant’s Revised Proxy Statement (File No. 000-25391) and
                  incorporated herein by reference10.4
              
              Capitol
                  Federal Financial Deferred Incentive Bonus Plan filed on December
                  14, 2006as
                  Exhibit 10.4 to the Annual Report on Form 10-K and incorporated
                  herein by
                  reference10.5
              
              Form
                  of Incentive Stock Option Agreement under the Stock Option Plan
                  filed on
                  February 4, 2005as
                  Exhibit 10.5 to the December 31, 2004 Form 10-Q and incorporated
                  herein by
                  reference10.6
              
              Form
                  of Non-Qualified Stock Option Agreement under the Stock Option
                  Plan filed
                  on February 4,2005
                  as Exhibit 10.6 to the December 31, 2004 Form 10-Q and incorporated
                  herein
                  by reference10.7
              
              Form
                  of Restricted Stock Agreement under the RRP filed on February 4,
                  2005 as
                  Exhibit 10.7 to theDecember
                  31, 2004 Form 10-Q and incorporated herein by reference10.8
              
              Description
                  of Named Executive Officer Salary and Bonus Arrangements filed
                  on December
                  14,2006
                  as Exhibit 10.8 to the Annual Report on Form 10-K and incorporated
                  herein
                  by reference10.9
              
              Description
                  of Director Fee Arrangements filed on February 5, 2007 as Exhibit
                  10.9 to
                  the December 31, 2006 Form 10-Q and incorporated herein by
                  reference10.10
              
              Short-term
                  Performance Plan filed on December 14, 2005 as Exhibit 10.10 to
                  the
                  AnnualReport
                  on Form 10-K for the fiscal year ended September 30, 2005 and incorporated
                  herein by reference11
              
              Statement
                  re: computation of earnings per share**31.1
              
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made
                  by John B.
                  Dicus, President and Chief Executive Officer31.2
              
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made
                  by Kent G.
                  Townsend, Executive Vice President, Chief Financial Officer and
                  Treasurer32
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chief Executive
                  Officer, and Kent G. Townsend, Executive Vice President, Chief
                  Financial
                  Officer and Treasurer
 
 *Incorporated
        by reference from Capitol Federal Financial’s Registration Statement on Form S-1
        (File No. 333-68363) filed on February 11, 2000, as amended and declared
        effective on the same date.
 **No
        statement is provided because the computation of per share earnings on both
        a
        basic and fully diluted basis can be clearly determined from the Financial
        Statements included in this report.