UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549


_________________





Form
10-Q


(Mark
One)


þQUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended March 31, 2008





or





 ̈TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15 (d)


OF
      THE SECURITIES EXCHANGE ACT OF 1934





Commission
file number:  000-25391


_________________





Capitol
Federal Financial


(Exact name of registrant as
specified in its charter)






United
States                                             48-121214


(State
or other jurisdiction of
incorporation                                (I.R.S.
Employer


or
organization)                            
                               Identification
No.)


700
Kansas Avenue, Topeka,
Kansas            66603


(Address
of principal executive
offices)                                   (Zip
Code)





Registrant’s telephone number, including area code:


(785) 235-1341








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such requirements for the past
90 days.   Yes þ    No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer, large accelerated filer, and smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
accelerated filer    þ         Accelerated
filer     ̈        Non-accelerated
filer    ̈      Smaller
Reporting Company    ̈


(do
not check if a smaller


reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     Yes   ̈    No  þ





As
of April 28, 2008, there were 74,064,059 shares of Capitol Federal Financial
Common Stock outstanding.











1





PART I -- FINANCIAL INFORMATION
            Page
              NumberItem
      1.  Financial Statements (Unaudited):Consolidated Balance
      Sheets at March 31, 2008 and September 30, 2007
            3Consolidated
      Statements of Income for the three and six months
      endedMarch
      31, 2008 and March 31, 2007
            4Consolidated
      Statement of Stockholders’ Equity for the three and six months
      endedMarch
      31, 2008
            5Consolidated Statements of
      Cash Flows for the six months endedMarch
      31, 2008 and March 31, 2007
            6Notes to Consolidated Interim
      Financial Statements
            8Item
      2.  Management’s Discussion and Analysis of
      Financial Condition andResults
      of Operations
            11Item
      3.  Quantitative and Qualitative Disclosure about
      Market Risk
            45Item
      4.  Controls and Procedures
            51PART
      II -- OTHER INFORMATIONItem
      1.    Legal Proceedings
            51Item
      1A. Risk
      Factors
            51Item
      2.    Unregistered Sales 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 BALANCE SHEETS


(Dollars
in thousands except per share data and amounts)


March
      31,
            
            
            September
      30,2008
            
            
            2007ASSETS:
            
            (Unaudited)Cash
      and cash equivalents
            
            $
            264,501
            
            
            $
            162,791Investment
      securities:Available-for-sale
      ("AFS") at market (amortized cost of $2,696 and $102,331)
            
            
            2,786
            
            
            
            102,424Held-to-maturity
      ("HTM") at cost (market value of $86,718 and $418,940)
            
            
            85,811
            
            
            
            421,744Mortgage-related
      securities:AFS,
      at market (amortized cost of $1,164,810 and $400,705)
            
            
            1,174,699
            
            
            
            402,686HTM,
      at cost (market value of $904,250 and $995,415)
            
            
            902,067
            
            
            
            1,011,585Loans
      receivable held-for-sale, net
            
            
            866
            
            
            
            2,184Loans
      receivable, net
            
            
            5,292,866
            
            
            
            5,291,426Mortgage
      servicing rights ("MSR")
            
            
            4,734
            
            
            
            5,606Bank-owned
      life insurance ("BOLI")
            
            
            51,260
            
            
            
            50,027Capital
      stock of Federal Home Loan Bank ("FHLB"), at cost
            
            
            129,170
            
            
            
            139,661Accrued
      interest receivable
            
            
            31,538
            
            
            
            35,869Premises
      and equipment, net
            
            
            25,512
            
            
            
            26,610Real
      estate owned, net
            
            
            2,764
            
            
            
            2,097Income
      taxes receivable
            
            
            --
            
            
            
            6,620Deferred
      income tax assets, net
            
            
            --
            
            
            
            543Other
      assets
            
            
            66,088
            
            
            
            15,657TOTAL
      ASSETS
            
            $
            8,034,662
            
            
            $
            7,677,530LIABILITIES:Deposits
            
            $
            4,020,966
            
            
            $
            3,922,782Advances
      from FHLB
            
            
            2,547,588
            
            
            
            2,732,183Other
      borrowings, net
            
            
            453,552
            
            
            
            53,524Advance
      payments by borrowers for taxes and insurance
            
            
            44,909
            
            
            
            51,397Income
      taxes payable
            
            
            3,718
            
            
            
            --Deferred
      income tax liabilities, net
            
            
            4,818
            
            
            
            --Accounts
      payable and accrued expenses
            
            
            90,005
            
            
            
            50,013Total
      liabilities
            
            
            7,165,556
            
            
            
            6,809,899STOCKHOLDERS'
      EQUITY:Preferred
      stock ($0.01 par value) 50,000,000 shares authorized; none
      issued
            
            
            --
            
            
            
            --Common
      stock ($0.01 par value) 450,000,000 shares authorized,
      91,512,287shares
      issued;  74,063,559 and 74,258,977 shares
      outstanding
            
            
            915
            
            
            
            915as
      of March 31, 2008 and September 30, 2007, respectivelyAdditional
      paid-in capital
            
            
            441,834
            
            
            
            438,964Unearned
      compensation, Employee Stock Ownership Plan ("ESOP")
            
            
            (11,090
            )
            
            
            (12,098
            )Unearned
      compensation, Recognition and Retention Plan ("RRP")
            
            
            (725
            )
            
            
            (630
            )Retained
      earnings
            
            
            749,927
            
            
            
            750,186Accumulated
      other comprehensive gain
            
            
            6,215
            
            
            
            1,287Less
      shares held in treasury (17,448,728 and 17,253,310 shares as
      ofMarch
      31, 2008 and September 30, 2007, at cost)
            
            
            (317,970
            )
            
            
            (310,993
            )Total
      stockholders' equity
            
            
            869,106
            
            
            
            867,631TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            8,034,662
            
            
            $
            7,677,530


See
accompanying notes to consolidated interim financial statements.


<Index>


3


CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME  (Unaudited)


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





For
      the Three Months Ended
            
            
            For
      the Six Months EndedMarch
      31,
            
            
            March
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007INTEREST
      AND DIVIDEND INCOME:Loans
      receivable
            
            $
            75,276
            
            
            $
            73,990
            
            
            $
            151,539
            
            
            $
            147,182Mortgage-related
      securities
            
            
            20,246
            
            
            
            17,317
            
            
            
            37,373
            
            
            
            36,838Investment
      securities
            
            
            3,061
            
            
            
            9,262
            
            
            
            7,191
            
            
            
            15,946Capital
      stock of FHLB
            
            
            1,864
            
            
            
            2,544
            
            
            
            3,944
            
            
            
            5,243Cash
      and cash equivalents
            
            
            1,369
            
            
            
            1,460
            
            
            
            2,797
            
            
            
            4,530Total
      interest and dividend income
            
            
            101,816
            
            
            
            104,573
            
            
            
            202,844
            
            
            
            209,739INTEREST
      EXPENSE:Deposits
            
            
            35,145
            
            
            
            36,267
            
            
            
            73,178
            
            
            
            71,736FHLB
      advances
            
            
            31,796
            
            
            
            38,508
            
            
            
            65,957
            
            
            
            79,249Other
      borrowings
            
            
            3,873
            
            
            
            1,101
            
            
            
            6,080
            
            
            
            2,230Total
      interest expense
            
            
            70,814
            
            
            
            75,876
            
            
            
            145,215
            
            
            
            153,215NET
      INTEREST AND DIVIDEND INCOME
            
            
            31,002
            
            
            
            28,697
            
            
            
            57,629
            
            
            
            56,524PROVISION
      (RECOVERY) FOR LOAN LOSSES
            
            
            119
            
            
            
            55
            
            
            
            119
            
            
            
            (225
            )NET
      INTEREST AND DIVIDEND INCOME AFTERPROVISION
      (RECOVERY) FOR LOAN LOSSES
            
            
            30,883
            
            
            
            28,642
            
            
            
            57,510
            
            
            
            56,749OTHER
      INCOME:Retail
      fees and charges
            
            
            4,095
            
            
            
            3,588
            
            
            
            8,584
            
            
            
            8,076Income
      from BOLI
            
            
            612
            
            
            
            --
            
            
            
            1,233
            
            
            
            --Loan
      fees
            
            
            581
            
            
            
            551
            
            
            
            1,179
            
            
            
            1,212Insurance
      commissions
            
            
            697
            
            
            
            512
            
            
            
            1,175
            
            
            
            954Gains
      on securities and loans receivable, net
            
            
            180
            
            
            
            64
            
            
            
            257
            
            
            
            57Other,
      net
            
            
            1,817
            
            
            
            760
            
            
            
            2,665
            
            
            
            1,592Total
      other income
            
            
            7,982
            
            
            
            5,475
            
            
            
            15,093
            
            
            
            11,891OTHER
      EXPENSES:Salaries
      and employee benefits
            
            
            10,273
            
            
            
            10,373
            
            
            
            20,708
            
            
            
            20,494Occupancy
      of premises
            
            
            3,477
            
            
            
            3,529
            
            
            
            6,634
            
            
            
            6,399Regulatory
      and other services
            
            
            1,459
            
            
            
            1,490
            
            
            
            3,078
            
            
            
            3,133Deposit
      and loan transaction fees
            
            
            1,216
            
            
            
            950
            
            
            
            2,571
            
            
            
            2,000Advertising
            
            
            1,386
            
            
            
            1,223
            
            
            
            2,217
            
            
            
            2,112Other,
      net
            
            
            3,096
            
            
            
            2,499
            
            
            
            5,150
            
            
            
            3,758Total
      other expenses
            
            
            20,907
            
            
            
            20,064
            
            
            
            40,358
            
            
            
            37,896INCOME
      BEFORE INCOME TAX EXPENSE
            
            
            17,958
            
            
            
            14,053
            
            
            
            32,245
            
            
            
            30,744INCOME
      TAX EXPENSE
            
            
            6,231
            
            
            
            5,597
            
            
            
            11,405
            
            
            
            12,037NET
      INCOME
            
            $
            11,727
            
            
            $
            8,456
            
            
            $
            20,840
            
            
            $
            18,707Basic
      earnings per common share
            
            $
            0.16
            
            
            $
            0.12
            
            
            $
            0.29
            
            
            $
            0.26Diluted
      earnings per common share
            
            $
            0.16
            
            
            $
            0.12
            
            
            $
            0.29
            
            
            $
            0.26Dividends
      declared per public share
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            1.00
            
            
            $
            1.09Basic
      weighted average common shares
            
            
            72,875
            
            
            
            72,812
            
            
            
            72,916
            
            
            
            72,718Diluted
      weighted average common shares
            
            
            72,929
            
            
            
            72,955
            
            
            
            72,973
            
            
            
            72,895





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
            
            
            Stock
            
            
            TotalBalance
      at October 1, 2007
            
            $
            915
            
            
            $
            438,964
            
            
            $
            (12,098
            )
            
            $
            (630
            )
            
            $
            750,186
            
            
            $
            1,287
            
            
            $
            (310,993
            )
            
            $
            867,631Cumulative
      effect of Financial  Accounting Standards BoardInterpretation
      No. 48 adoption
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (339
            )
            
            
            
            
            
            
            
            
            
            
            (339
            )Balance
      at October 1, 2007
            
            $
            915
            
            
            $
            438,964
            
            
            $
            (12,098
            )
            
            $
            (630
            )
            
            $
            749,847
            
            
            $
            1,287
            
            
            $
            (310,993
            )
            
            $
            867,292Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20,840
            
            
            
            
            
            
            
            
            
            
            
            20,840Changes
      in unrealized gains onmortgage-related
      and investmentsecurities AFS, net of deferredincome
      taxes of $3.0 million
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,928
            
            
            
            
            
            
            
            4,928Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            25,768Tax
      benefit of market value changein
      vested RRP shares
            
            
            
            
            
            
            10
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10Common
      stock committed to bereleased
      for allocation - ESOP
            
            
            
            
            
            
            2,345
            
            
            
            1,008
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,353Acquisition
      of treasury stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,245
            )
            
            
            (7,245
            )Stock
      options exercised
            
            
            
            
            
            
            99
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            172
            
            
            
            271Treasury
      stock activity related to RRP, net
            
            
            
            
            
            
            216
            
            
            
            
            
            
            
            (322
            )
            
            
            
            
            
            
            
            
            
            
            96
            
            
            
            (10
            )Amortization
      of unearned compensation - RRP
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            227
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            227Stock
      based compensation expense
            
            
            
            
            
            
            200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            200Dividends
      on common stock to publicstockholders
      ($1.00 per public share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,760
            )
            
            
            
            
            
            
            
            
            
            
            (20,760
            )Balance
      at March 31, 2008
            
            $
            915
            
            
            $
            441,834
            
            
            $
            (11,090
            )
            
            $
            (725
            )
            
            $
            749,927
            
            
            $
            6,215
            
            
            $
            (317,970
            )
            
            $
            869,106








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
      31,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            20,840
            
            
            $
            18,707Adjustments
      to reconcile net income to net cash provided byoperating
      activities:FHLB
      stock dividends
            
            
            (3,944
            )
            
            
            (5,243
            )Provision (Recovery) for loan losses
            
            
            119
            
            
            
            (225
            )Originations
      of loans receivable held-for-sale
            
            
            (15,034
            )
            
            
            (1,667
            )Proceeds
      from sales of loans receivable held-for-sale
            
            
            16,409
            
            
            
            2,910MSR
      activity, net
            
            
            872
            
            
            
            613Amortization
      and accretion of premiums and discounts on mortgage-related
      and investment securities
            
            
            283
            
            
            
            (551
            )Principal
      collected on trading securities
            
            
            --
            
            
            
            7,729Proceeds
      from sale of trading securities
            
            
            --
            
            
            
            389,209Increase
      in cash surrender value of BOLI
            
            
            (1,233
            )
            
            
            --Depreciation
      and amortization of premises and equipment
            
            
            2,537
            
            
            
            2,023Amortization
      of deferred debt issuance costs
            
            
            28
            
            
            
            28Deferred gain on termination of interest rate swap, net of
      amortization
            
            
            1,457
            
            
            
            --Common
      stock committed to be released for allocation - ESOP
            
            
            3,353
            
            
            
            3,833Stock
      based compensation - stock options and RRP
            
            
            427
            
            
            
            357Other,
      net
            
            
            (246
            )
            
            
            (337
            )Changes
      in:Accrued
      interest receivable
            
            
            4,331
            
            
            
            320Other
      assets
            
            
            (431
            )
            
            
            (707
            )Income
      taxes payable/receivable
            
            
            12,392
            
            
            
            8,900Accounts
      payable and accrued expenses
            
            
            (2,063
            )
            
            
            2,828Net
      cash provided by operating activities
            
            
            40,097
            
            
            
            428,727CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities or calls of investment securities AFS
            
            
            99,782
            
            
            
            60,000Purchases
      of investment securities AFS
            
            
            --
            
            
            
            (1,520
            )Proceeds
      from maturities or calls of investment securities HTM
            
            
            510,108
            
            
            
            226,500Purchases
      of investment securities HTM
            
            
            (173,843
            )
            
            
            (626,388
            )Principal
      collected on mortgage-related securities AFS
            
            
            102,075
            
            
            
            108,407Purchases
      of mortgage-related securities AFS
            
            
            (810,881
            )
            
            
            (19,912
            )Proceeds
      from sale of mortgage-related securities AFS
            
            
            --
            
            
            
            15,237Principal
      collected on mortgage-related securities HTM
            
            
            112,850
            
            
            
            116,655Purchases
      of mortgage-related securities HTM
            
            
            (3,389
            )
            
            
            (134,878
            )Proceeds
      from the redemption of capital stock of FHLB
            
            
            27,361
            
            
            
            13,029Purchases
      of capital stock of FHLB
            
            
            (12,926
            )
            
            
            --Loan
      originations, net of principal collected
            
            
            (29,903
            )
            
            
            (40,738
            )Loan
      purchases, net of principal collected
            
            
            25,459
            
            
            
            44,518Net
      deferred fee activity
            
            
            235
            
            
            
            (54
            )Purchases
      of premises and equipment, net
            
            
            (1,445
            )
            
            
            (3,871
            )Proceeds
      from sales of real estate owned, net
            
            
            2,168
            
            
            
            2,694Net
      cash used in investing activities
            
            
            (152,349
            )
            
            
            (240,321
            )





(Continued)


6








CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid
            
            
            (20,760
            )
            
            
            (22,316
            )Dividends
      in excess of debt service cost of ESOP, net
            
            
            --
            
            
            
            669Deposits,
      net of withdrawals
            
            
            98,184
            
            
            
            102,435Proceeds
      from advances/line of credit from FHLB
            
            
            300,000
            
            
            
            --Repayments
      on advances/line of credit from FHLB
            
            
            (500,000
            )
            
            
            (200,000
            )Proceeds
      from repurchase agreements
            
            
            350,000
            
            
            
            --Change
      in advance payments by borrowers for taxes
    and insurance
            
            
            (6,488
            )
            
            
            (14,476
            )Acquisitions
      of treasury stock
            
            
            (7,245
            )
            
            
            (1,516
            )Stock
      options exercised
            
            
            232
            
            
            
            3,264Excess
      tax benefits from stock options
            
            
            39
            
            
            
            2,478Net
      cash provided by (used in) financing activities
            
            
            213,962
            
            
            
            (129,462
            )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            101,710
            
            
            
            58,944CASH
      AND CASH EQUIVALENTS:Beginning
      of period
            
            
            162,791
            
            
            
            183,242End
      of period
            
            $
            264,501
            
            
            $
            242,186SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Income
      tax payments, net of refunds
            
            $
            410
            
            
            $
            711Interest
      payments, net of interest credited to deposits
            
            $
            70,979
            
            
            $
            78,920SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIES:Loans
      transferred to real estate owned
            
            $
            2,804
            
            
            $
            1,915Purchase
      of mortgage-related securities that will settle in a subsequent
      period
            
            $
            56,003
            
            
            $
            --Repurchase
      agreements that will settle in a subsequent period
            
            $
            (50,000
            )
            
            $
            --Market
      value change related to fair value hedge:Interest
      rate swaps hedging FHLB advances
            
            $
            (13,948
            )
            
            $
            (6,268
            )





(Concluded)


See
accompanying notes to consolidated interim financial statements.


<Index>


7


Notes to Consolidated Interim Financial Statements
(Unaudited)





1.   Basis
of Financial Statement Presentation


The
accompanying consolidated financial statements of Capitol Federal Financial
(“CFFN”) and subsidiary (the “Company”) have been prepared in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation  S-X.  Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements.  In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.  These statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company’s 2007 Annual Report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”).  Interim results are not
necessarily indicative of results for a full year.





In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet, and revenues and expenses for the
period.  Significant estimates include the allowance for loan losses,
impairment of securities, valuation of MSR, and the fair values of derivative
instruments. Actual results could differ from those estimates.  See
“Item 2- Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies.”





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


8





2.   Earnings
Per Share


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





For
      the Three Months Ended
            
            
            For
      the Six Months EndedMarch
      31,
            
            
            March
      31,2008(1)
      (2)
            
            
            2007(3) (4)
            
            
            2008(1)(2)
            
            
            2007(3)
      (4)(Dollars
      in thousands, except per share
      amounts)Net
      income
            
            $
            11,727
            
            
            $
            8,456
            
            
            $
            20,840
            
            
            $
            18,707Average
      common shares outstanding
            
            
            72,824,366
            
            
            
            72,760,899
            
            
            
            72,890,074
            
            
            
            72,692,770Average
      committed ESOP shares outstanding
            
            
            50,964
            
            
            
            50,970
            
            
            
            25,618
            
            
            
            25,482Total
      basic average common shares outstanding
            
            
            72,875,330
            
            
            
            72,811,869
            
            
            
            72,915,692
            
            
            
            72,718,252Effect
      of dilutive RRP shares
            
            
            2,663
            
            
            
            5,173
            
            
            
            4,457
            
            
            
            6,547Effect
      of dilutive stock options
            
            
            50,953
            
            
            
            138,109
            
            
            
            53,100
            
            
            
            169,829Total
      diluted average common shares outstanding
            
            
            72,928,946
            
            
            
            72,955,151
            
            
            
            72,973,249
            
            
            
            72,894,628Net
      earnings per share:Basic
            
            $
            0.16
            
            
            $
            0.12
            
            
            $
            0.29
            
            
            $
            0.26Diluted
            
            $
            0.16
            
            
            $
            0.12
            
            
            $
            0.29
            
            
            $
            0.26





(1)Options to purchase 217,800 shares of common stock at prices between
$32.13 per share and $38.77 were outstanding as of March 31, 2008, but were not
included in the computation of diluted earnings per share (“EPS”) because they
were anti-dilutive for the three and six months ended March 31,
2008.





(2)At March 31, 2008, there were 6,000 unvested RRP shares at $32.30 per
share that were excluded from the computation of diluted EPS because they were
anti-dilutive for the three months and the six months ended March 31,
2008.





(3)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.





(4)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.Recent
Accounting Pronouncements




In
November 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 109, “Written
Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 supersedes
SAB 105, “Miscellaneous Accounting – Loan Commitments Accounted for as
Derivative Instruments.”  SAB 109 requires a company to include the
value of the MSR asset in the estimated fair value of the commitments on loans
to be sold.  SAB 105 had stated that this treatment was
inappropriate.  The new guidance should be applied prospectively to
commitments accounted for at fair value that are issued or modified in fiscal
quarters beginning after December 15, 2007, which for the Company was January 1,
2008.  The adoption of SAB 109 did not have a material impact on the
Company’s financial statements.




In
December 2007, the SEC codified SAB 110 as part of SAB Topic 14.D.2,
“Share-Based Payment: Certain Assumptions Used in Valuation Methods – Expected
Term.”  SAB 110 permits companies, under certain circumstances, to
continue to use the simplified method when calculating the expected term of
“plain vanilla” share options. Originally, the simplified method was due to
expire on December 31, 2007.  A company may use the simplified method
if it concludes that it is not reasonable to base its estimate of expected term
on its experience with exercising historical share options.  SAB 110
was effective for the Company on January 1, 2008.  Management determined
there was sufficient history of stock option exercises to develop an expected
term based on historical experience so the simplified method will no longer be
used to calculate expected term when stock options are granted.  The
adoption of SAB 110 did not have a material impact on the Company’s financial
statements.


9




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (SFAS) No. 141(R) “Business
Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – an amendment of ARB No. 51.”  These statements
change the way companies account for business combinations and noncontrolling
interests (minority interests in current GAAP) and continue the FASB’s push
toward more fair value in financial statements.  These Statements
should both be applied prospectively for fiscal years beginning on or after
December 15, 2008, which for the Company is October 1, 2009.  However,
Statement No. 160 requires entities to apply the presentation and disclosure
requirements retrospectively to comparative financial statements, if
presented.  Both Statements prohibit early
adoption.  Management is assessing the impact of the adoption of FASB
Statements No. 141(R) and No. 160.




In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FAS 133 (FAS 161)”.  SFAS 161
requires an entity with derivatives to describe how and why it uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS 133 “Accounting for Derivative Instruments and Hedging
Activities” and related interpretations, and how derivative instruments and
related hedged items affect the entity's financial position, financial
performance, and cash flows.  SFAS No. 161 is effective for the
Company for the fiscal year beginning October 1, 2009.  The Company's
adoption of SFAS 161 is not expected to have a material impact on its financial
condition or results of operations.







4.
Interest Rate Swaps


During
the quarter ended December 31, 2007, management terminated interest rate swaps
with a notional amount of $575.0 million that were scheduled to mature during
fiscal year 2010.  As a result of the termination, the Bank received
cash proceeds and recorded a deferred gain of $1.7 million.  The gain
will be amortized to interest expense on FHLB advances over the remaining life
of the FHLB advances that were originally hedged by the terminated interest rate
swap agreements.  As of March 31, 2008, the Bank had one remaining
interest rate swap agreement with a notional amount of $225.0 million that is
scheduled to mature in May 2008.





5.
Income Taxes


The
Company adopted FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109” on October 1,
2007.  The interpretation clarifies the accounting for uncertainty in
income taxes recognized in financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.”  The interpretation prescribes a
process by which the likelihood of a tax position is gauged based upon the
technical merits of the position, and then a subsequent measurement relates the
maximum benefit and the degree of likelihood to determine the amount of benefit
to recognize in the financial statements.





As of
October 1, 2007 (the date of adoption), the Company had unrecognized tax
benefits of $3.8 million as a result of tax positions taken during prior
periods, $531 thousand of which would affect the Company’s effective income tax
rate if recognized.  Of the total $3.8 million increase in liability
for unrecognized tax positions, $339 thousand was accounted for as a decrease to
the October 1, 2007 balance of retained earnings, and the remaining $3.5 million
was accounted for as an increase to net deferred tax assets.





As of
March 31, 2008, the Company had a total of $3.2 million of unrecognized tax
benefits, which included accrued penalties and interest of $490
thousand.  Estimated penalties and interest of $7 thousand are
included in income tax expense in the consolidated statements of
income.  Included in Other income in the consolidated statements of
income is $194 thousand of interest income related to a tax refund on our
amended September 30, 2005 federal tax return.  We do not expect a
material change in unrecognized tax benefits within the next twelve
months.





We file
income tax returns in the U.S. federal jurisdiction and the states of Kansas and
Missouri.  In many cases, uncertain tax positions are related to tax
years that remain subject to examination by the relevant taxing
authorities.  With few exceptions, the Company is no longer subject to
U.S. federal and state examinations by tax authorities for years before fiscal
year 2005.


10


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





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





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





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


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


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


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


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


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


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


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


·
            inflation,
      interest rate, market and monetary
fluctuations;


·
            our
      ability to access cost-effective
funding;


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


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


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


·
            the
      impact of changes in laws and regulations affecting financial
      institutions


·
            technological
      changes;


·
            acquisitions
      and dispositions;


·
            changes
      in consumer spending and saving habits;
and


·
            our
      success at managing the risks involved in our
  business.





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





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





The
following discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company.  It
should be read in conjunction with the consolidated financial statements and
notes presented in this report.  The discussion includes comments
relating to the Bank, since the Bank is wholly owned by the Company and
comprises the majority of its assets and is the principal source of income for
the Company.  This discussion and analysis should be read in
conjunction with the management discussion and analysis included in the
Company’s 2007 Annual Report on Form 10-K filed with the SEC.


11





Executive
Summary





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





Our
principal business consists of attracting deposits from the general public and
investing those funds primarily in permanent loans secured by first mortgages on
owner-occupied, one- to four-family residences.  We also originate
consumer loans, loans secured by first mortgages on nonowner-occupied one- to
four-family residences, permanent and construction loans secured by one- to
four-family residences, commercial real estate loans, and multi-family real
estate loans.  While our primary business is the origination of one-
to four-family mortgage loans funded through retail deposits, we also purchase
whole loans and invest in certain investment and mortgage-related securities
using FHLB advances and repurchase agreements as additional funding
sources.





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





The
Company’s results of operations are primarily dependent on net interest income,
which is the difference between the interest earned on loans, mortgage-related
securities, investment securities, and cash, and the interest paid on deposits
and borrowings.  We generally price our loan and deposit products
based upon an analysis of our competition and changes in market
rates.  On a weekly basis, management reviews deposit flows, loan
demand, cash levels, and changes in several market rates to assess all pricing
strategies.  While we do not explicitly price our products at a margin
to a specific market rate or index, our products tend to be priced at a margin
to general market rates or indices.  Our one- to four-family mortgage
loans are generally priced based upon the 10-year Treasury rate while the rates
on our deposits are generally priced based upon short-term Treasury
rates.  The majority of our loans are fixed-rate products with
maturities up to 30 years, while the majority of our deposits have maturity or
reprice dates of less than two years.





During
the second quarter of fiscal year 2008, housing and financial markets remained
under stress, and credit quality continued to be of concern to
lenders.  The Federal Open Market Committee of the Federal Reserve
(“FOMC”) lowered the overnight lending rate 200 basis points, from 4.25% to
2.25%, citing a continued bleak outlook for economic activity as the primary
motivation for the move.  The decreases in the overnight lending rate,
along with new lending facilities offered to primary dealers, were intended to
increase liquidity throughout the economy.   The Bank’s liquidity
position remains relatively unchanged from previous periods; see “Management’s
Discussion and Analysis--Liquidity and Capital Resources.”





The
credit quality of the Bank’s loan portfolio remains excellent, despite a slight
increase in delinquent and non-performing loans since the previous fiscal year
end, and a small addition to our allowance for loan losses.  Our
credit underwriting standards have been structured to limit our exposure to the
types of loans that are currently experiencing high foreclosure and loss rates,
as further described under the section entitled “Asset Quality.”  Our
mortgage loan portfolio has minimal exposure to loans generally considered to be
sub-prime loans.  The sub-prime mortgage banking environment has been
experiencing considerable strain from rising delinquencies and liquidity
pressures.  The increased scrutiny of the sub-prime lending market is
one of the factors that has impacted general market conditions as well as
perceptions of our business.


12


Net
income for the quarter ended March 31, 2008 was $11.7 million compared to $9.1
million for the prior quarter. The $2.6 million increase in net income was
primarily a result of a decrease in interest expense and a modest increase in
interest income.  The decrease in interest expense also resulted in an
increase of 19 basis points in the net interest margin compared to the prior
quarter.  The decrease in interest expense was a result of a decrease
in the weighted average cost of deposits, specifically a decrease in the rate
paid on the money market portfolio, and a decrease in the weighted average rate
and balance of FHLB advances.





During
fiscal year 2008, management has entered into $400.0 million of repurchase
agreements as a means of expanding its funding sources, and has borrowed an
additional $300.0 million of FHLB advances.  During this period,
$500.0 million of FHLB advances have matured.  The amount of total
borrowings is a function of balancing investment opportunities, liquidity
requirements, and managing the interest rate sensitivity of the
Bank.  Management monitors the Bank’s investment opportunities and
balances those opportunities with the cost of FHLB advances or other funding
sources for various terms to maturity.  See additional discussion of
interest rate risk in "Item 7A. Quantitative and Qualitative Disclosure About
Market Risk."





Currently,
the Bank has plans to open four new branches in late fiscal year 2008 and early
fiscal year 2009.  Two of these branches will be located in our market
areas in Kansas City, and two are adjacent to currently served market areas
around Wichita, KS.





Available
Information





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








Critical
Accounting Policies





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





Allowance for Loan
Losses.  Management maintains an allowance for loan losses to
absorb losses known and inherent in the loan portfolio based upon ongoing
quarterly assessments of the loan portfolio.  Our methodology for
assessing the appropriateness of the allowance consists of several key elements,
which includes a formula allowance, specific allowances for identified problem
loans and portfolio segments, and knowledge of economic conditions that may lead
to credit risk concerns about the loan portfolio or segments of the loan
portfolio. In addition, the allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures.”  These accounting
standards prescribe the measurement methods, income recognition and disclosures
related to impaired loans.





One- to
four-family mortgage loans and consumer loans that are not impaired, as defined
in SFAS No. 114 and No. 118, are collectively evaluated for impairment using a
formula allowance as permitted by SFAS No. 5, “Accounting for
Contingencies.”  Loans on residential properties with greater than
four units, residential construction loans and commercial properties that are
delinquent or where the borrower’s total loan concentration balance is greater
than $1.5 million (excluding one- to four-family mortgage loans) are evaluated
for impairment on a loan by loan basis at least annually.  If no
impairment exists, these loans are included in the formula
allowance.  The formula allowance is calculated by applying loss
factors to outstanding loans based on the internal risk evaluation of pools of
loans.  Changes in risk evaluations of both performing and
non-performing loans affect the amount of the formula allowance. Loss factors
are based both on our historical loss experience and on significant factors
that, in management’s judgment, affect the collectibility of the portfolio as of
the evaluation date.  Loan loss factors for portfolio segments are
representative of the credit risks associated with loans in those
segments.  The greater the credit
risks associated with a particular segment, the greater the loss
factor.  Loss factors increase as individual loans become classified,
delinquent, the foreclosure process begins, or as economic conditions
warrant.





13





Management
reviews these conditions quarterly.  To the extent that any of these
conditions are evidenced by a specifically identifiable problem loan or
portfolio segment as of the evaluation date, management’s estimate of the effect
of the condition may be reflected as a specific allowance applicable to the loan
or loans. Where any of these conditions are not evidenced by a specifically
identifiable problem loan or portfolio segment as of the evaluation date,
management’s evaluation of the loss related to these conditions is reflected in
the allowance associated with our homogeneous population of mortgage
loans.  The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they are not
identified with specific problem loans or portfolio segments.





The
amounts actually observed with respect to these losses can vary significantly
from the estimated amounts. Our methodology permits adjustments to any loss
factor used in the computation of the formula allowance in the event that, in
management’s judgment, significant factors which affect the collectibility of
the portfolio or any portion 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 portfolio on a quarterly basis, we can adjust
specific and inherent loss estimates based upon more current
information.





Assessing
the adequacy of the allowance for loan losses is inherently subjective as it
requires making material estimates, including the amount and timing of future
cash flows expected to be received on impaired loans, and changes in the market
value of collateral securing loans, which may be susceptible to volatility. In
the opinion of management, the allowance, when taken as a whole, is adequate to
absorb reasonable estimated losses inherent in our loan portfolio.





Securities
Impairment.  Management regularly monitors the investment and
mortgage-related security portfolios for impairment on a security by security
basis.  Many factors are considered in determining whether the
impairment is deemed to be other-than-temporary, including, but not limited to,
the length of time the security has had a market value less than the cost basis,
the severity of the loss, the intent and ability of the Bank to hold the
security for a period of time sufficient for a substantial recovery of its
investment, recent events specific to the issuer or industry including the
issuer’s financial condition and current ability to make future payments in a
timely manner, external credit ratings and recent downgrades in these
ratings.  If management deems the decline to be other-than-temporary,
the carrying value of the security is adjusted and an impairment amount is
recorded in the consolidated statements of income.  Currently, all
securities are rated investment grade, and there is a market for the
securities.





Valuation of Mortgage Servicing
Rights.  The Bank records MSR as a result of retaining the
servicing of loans that are owned by another entity.  Impairment may
exist 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.


14


Derivative
Instruments.  The Bank has entered into interest rate swap
agreements to hedge certain FHLB advances (“swapped FHLB
advances”).  When the Bank entered into the interest rate swap
agreements, they were designated as fair value hedges.  All terms of
the interest rate swap agreements relating to the pay, fixed-rate components,
and timing of cash flows match the terms of the swapped FHLB
advances.  Therefore, the Bank has assumed no ineffectiveness in the
hedging relationship and accounts for the interest rate swaps using the shortcut
method, under which any gain or loss in the fair value of the interest rate
swaps is recorded as an other asset or liability and is offset by a gain or loss
on the hedged FHLB advances.





Before
entering into the interest rate swap agreements, management formally documented
its risk management objectives and strategy, and the relationship between the
interest rate swap agreements and the swapped FHLB advances.  To
qualify for hedge accounting, the interest rate swaps and the related FHLB
advances must be designated as a hedge.  Both at the inception of the
hedge and on an ongoing basis, management assesses whether the hedging
relationship is expected to be highly effective in offsetting changes in fair
values of the swapped FHLB advances.  If at some point it is
determined that the interest rate swaps are not highly effective as a hedge,
hedge accounting will be discontinued.  If hedge accounting is
discontinued, changes in the fair value of the interest rate swaps will be
recorded in earnings and the swapped FHLB advances will no longer be adjusted
for changes in fair value.





During
the first quarter of fiscal year 2008, management terminated interest rate swap
agreements with an aggregate notional amount of $575.0 million due to market
conditions.  As of March 31, 2008, the Bank had one remaining interest
rate swap agreement with a notional amount of $225.0 million.








Financial
Condition





Total
assets increased from $7.68 billion at September 30, 2007 to $8.03 billion at
March 31, 2008.  The $357.1 million increase in assets was primarily
attributed to a $662.5 million increase in the mortgage-related securities
portfolio and a $101.7 million increase in cash and cash equivalents, partially
offset by a $435.6 million decrease in the investment securities
portfolio.  The increase in the mortgage-related securities portfolio
was a result of cash flows from the investment securities portfolio being
reinvested into this portfolio at a higher average yield and funds from the
repurchase agreements also being used to purchase mortgage-related
securities.  Cash and cash equivalents increased as a result of
increased cash flows from mortgage-related securities and agencies exercising
call options on securities, which decreased the investment securities portfolio
as these investments were not replaced.





Total
liabilities increased from $6.81 billion at September 30, 2007 to $7.17 billion
at March 31, 2008.  The $355.7 million increase in liabilities was due
primarily to entering into $400.0 million of repurchase agreements and to an
increase in deposits of $98.2 million, partially offset by a decrease in FHLB
advances of $184.6 million.





Stockholders’
equity increased $1.5 million to $869.1 million at March 31, 2008, from $867.6
million at September 30, 2007.


15


The
following table presents selected balance sheet data for the Company at the
dates indicated.





Balance
      atMarch
      31,
            
            
            December
      31,
            
            
            September
      30,
            
            
            June
      30,
            
            
            March
      31,2008
            
            
            2007
            
            
            2007
            
            
            2007
            
            
            2007(Dollars
      in thousands, except per share amounts)Selected
      Balance Sheet Data:Total
      assets
            
            $
            8,034,662
            
            
            $
            7,945,586
            
            
            $
            7,677,530
            
            
            $
            7,826,549
            
            
            $
            8,098,676Cash
      and cash equivalents
            
            
            264,501
            
            
            
            253,725
            
            
            
            162,791
            
            
            
            188,664
            
            
            
            242,186Investment
      securities
            
            
            88,597
            
            
            
            500,045
            
            
            
            524,168
            
            
            
            673,160
            
            
            
            773,404Mortgage-related
      securities
            
            
            2,076,766
            
            
            
            1,608,897
            
            
            
            1,414,271
            
            
            
            1,466,822
            
            
            
            1,603,443Loans
      receivable, net
            
            
            5,292,866
            
            
            
            5,310,296
            
            
            
            5,291,426
            
            
            
            5,252,275
            
            
            
            5,216,763MSR
            
            
            4,734
            
            
            
            5,483
            
            
            
            5,606
            
            
            
            6,017
            
            
            
            6,304Capital
      stock of FHLB
            
            
            129,170
            
            
            
            139,380
            
            
            
            139,661
            
            
            
            147,557
            
            
            
            157,344Deposits
            
            
            4,020,966
            
            
            
            3,981,449
            
            
            
            3,922,782
            
            
            
            3,946,693
            
            
            
            4,002,866Advances
      from FHLB
            
            
            2,547,588
            
            
            
            2,746,532
            
            
            
            2,732,183
            
            
            
            2,870,337
            
            
            
            3,074,973Other
      borrowings
            
            
            453,552
            
            
            
            303,538
            
            
            
            53,524
            
            
            
            53,509
            
            
            
            53,495Stockholders'
      equity
            
            
            869,106
            
            
            
            862,579
            
            
            
            867,631
            
            
            
            870,095
            
            
            
            870,624Accumulated
      other comprehensive   gain
            
            
            6,215
            
            
            
            3,165
            
            
            
            1,287
            
            
            
            174
            
            
            
            370Equity
      to total assets at end of period
            
            
            10.82
            %
            
            
            10.86
            %
            
            
            11.30
            %
            
            
            11.12
            %
            
            
            10.75
            %Book
      value per share
            
            $
            11.92
            
            
            $
            11.84
            
            
            $
            11.88
            
            
            $
            11.92
            
            
            $
            11.94Shares
      outstanding
            
            
            72,930,747
            
            
            
            72,857,963
            
            
            
            73,024,845
            
            
            
            73,010,580
            
            
            
            72,932,544





The following table presents rate information at the dates
indicated.









March
      31,
            
            
            December
      31,
            
            
            
            September
      30,
            
            
            March
      31,2008
            
            
            2007
            
            
            
            2007
            
            
            2007Average
      Yield / Cost at End of Period: (annualized)Loans
      receivable
            
            
            5.70
            %
            
            
            5.74
            
            %
            
            
            5.73
            %
            
            
            5.69
            
            %Mortgage-related
      securities
            
            
            4.70
            
            
            
            4.66
            
            
            
            
            4.46
            
            
            
            4.30Investment
      securities
            
            
            4.48
            
            
            
            4.14
            
            
            
            
            4.52
            
            
            
            4.68Deposits
            
            
            3.31
            
            
            
            3.77
            
            
            
            
            3.86
            
            
            
            3.85FHLB
      advances
            
            
            4.82
            
            
            
            4.90
            
            
            
            
            5.39
            
            
            
            5.07Borrowings,
      other (1)
            
            
            4.25
            
            
            
            4.98
            
            
            
            
            8.12
            
            
            
            8.12







(1)The decrease in the rate of Borrowings, other between September 30, 2007
and March 31, 2008 was primarily a result of entering into a total of $400.0
million of repurchase agreements at an average rate of 3.88%.







Loans Receivable.The loan portfolio
remained virtually unchanged at $5.29 billion from September 30, 2007 to March
31, 2008.  Loans purchased from nationwide lenders represented 15.7%
of the loan portfolio at March 31, 2008 compared to 17.2% at September 30,
2007.  As of March 31, 2008, the average balance of a purchased
mortgage loan was approximately $350 thousand while the average balance of an
originated mortgage loan was approximately $120 thousand.




Included
in the loan portfolio at March 31, 2008 were $377.1 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.  Of the remaining interest-only
loans we purchased, the average credit score at the time of purchase was greater
than 700 and had an average loan-to-value (“LTV”) ratio not exceeding 80% at the
time of purchase.




16


Total
one- to four-family loan originations, excluding purchases, during the current
six month period were $322.6 million at an average rate of 5.76% compared to
one- to four-family loan originations of $268.7 million at an average rate of
5.90% 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, $287.0 million and $224.6 million, respectively, were fixed-rate.
Generally, during the six months ended March 31, 2008, the Bank’s 30-year
fixed-rate loans, with no points paid by the borrower, were priced at
approximately 200 basis points above the average 10-year Treasury rate, while
the Bank’s 15-year fixed-rate loans were priced approximately 160 basis points
above the average 10-year Treasury rate.  The Bank’s loan pricing is
benchmarked to the secondary mortgage market pricing.







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, 2008
            
            
            March
      31, 2007Amount
            
            
            Rate
            
            
            %
      of Total
            
            
            Amount
            
            
            Rate
            
            
            %
      of TotalFixed-Rate:One-
      to four-family:<=
      15 years
            
            $
            30,583
            
            
            
            5.30
            %
            
            
            13.16
            %
            
            $
            22,816
            
            
            
            5.64
            %
            
            
            12.32
            %>
      15 years
            
            
            141,922
            
            
            
            5.69
            
            
            
            61.08
            
            
            
            97,122
            
            
            
            5.97
            
            
            
            52.43Other
      real estate
            
            
            300
            
            
            
            6.75
            
            
            
            0.13
            
            
            
            3,100
            
            
            
            6.50
            
            
            
            1.67Non
      real estate
            
            
            4,389
            
            
            
            7.77
            
            
            
            1.90
            
            
            
            7,960
            
            
            
            8.14
            
            
            
            4.30Total
      fixed-rate
            
            
            177,194
            
            
            
            5.68
            
            
            
            76.27
            
            
            
            130,998
            
            
            
            6.06
            
            
            
            70.72Adjustable-Rate:One-
      to four-family:<=
      36 months
            
            
            8,306
            
            
            
            5.16
            
            
            
            3.57
            
            
            
            8,515
            
            
            
            5.31
            
            
            
            4.60>
      36 months
            
            
            25,070
            
            
            
            5.51
            
            
            
            10.79
            
            
            
            25,186
            
            
            
            5.59
            
            
            
            13.60Non
      real estate
            
            
            21,775
            
            
            
            6.82
            
            
            
            9.37
            
            
            
            20,524
            
            
            
            8.57
            
            
            
            11.08Total
      adjustable-rate
            
            
            55,151
            
            
            
            5.97
            
            
            
            23.73
            
            
            
            54,225
            
            
            
            6.67
            
            
            
            29.28Total
      originations, refinances and purchases
            
            $
            232,345
            
            
            
            5.75
            %
            
            
            100.00
            %
            
            $
            185,223
            
            
            
            6.24
            %
            
            
            100.00
            %Purchased
      loans included above:Fixed-rate
            
            $
            10,191
            
            
            
            5.71
            %
            
            
            
            
            
            $
            9,333
            
            
            
            6.01
            %Adjustable-rate
            
            $
            20,322
            
            
            
            5.51
            %
            
            
            
            
            
            $
            14,186
            
            
            
            5.57
            %





17





For
      the Six Months Ended
            
            
            For
      the Six Months EndedMarch
      31, 2008
            
            
            March
      31, 2007Amount
            
            
            Rate
            
            
            %
      of Total
            
            
            Amount
            
            
            Rate
            
            
            %
      of TotalFixed-Rate:One-
      to four-family:<=
      15 years
            
            $
            57,197
            
            
            
            5.52
            %
            
            
            13.03
            %
            
            $
            43,423
            
            
            
            5.69
            %
            
            
            11.40
            %>
      15 years
            
            
            252,043
            
            
            
            5.87
            
            
            
            57.44
            
            
            
            202,161
            
            
            
            6.04
            
            
            
            53.05Other
      real estate
            
            
            300
            
            
            
            6.75
            
            
            
            0.07
            
            
            
            3,873
            
            
            
            6.54
            
            
            
            1.02Non
      real estate
            
            
            11,085
            
            
            
            8.17
            
            
            
            2.53
            
            
            
            17,007
            
            
            
            8.02
            
            
            
            4.46Total
      fixed-rate
            
            
            320,625
            
            
            
            5.88
            
            
            
            73.07
            
            
            
            266,464
            
            
            
            6.12
            
            
            
            69.93Adjustable-Rate:One-
      to four-family:<=
      36 months
            
            
            18,046
            
            
            
            5.36
            
            
            
            4.11
            
            
            
            14,407
            
            
            
            5.35
            
            
            
            3.78>
      36 months
            
            
            57,709
            
            
            
            5.70
            
            
            
            13.15
            
            
            
            58,566
            
            
            
            5.66
            
            
            
            15.37Non
      real estate
            
            
            42,430
            
            
            
            7.55
            
            
            
            9.67
            
            
            
            41,631
            
            
            
            8.58
            
            
            
            10.92Total
      adjustable-rate
            
            
            118,185
            
            
            
            6.31
            
            
            
            26.93
            
            
            
            114,604
            
            
            
            6.68
            
            
            
            30.07Total
      originations, refinances and purchases
            
            $
            438,810
            
            
            
            6.00
            %
            
            
            100.00
            %
            
            $
            381,068
            
            
            
            6.29
            %
            
            
            100.00
            %Purchased
      loans included above:Fixed-rate
            
            $
            22,277
            
            
            
            5.97
            %
            
            
            
            
            
            $
            21,009
            
            
            
            6.10
            %Adjustable-rate
            
            $
            40,102
            
            
            
            5.68
            %
            
            
            
            
            
            $
            28,882
            
            
            
            5.70
            %











18





The
following table summarizes the activity in the loan portfolio for the periods
indicated, excluding changes in loans in process, deferred fees and allowance
for loan losses.





For
      the Three Months EndedMarch
      31, 2008
            
            December
      31, 2007
            
            September
      30, 2007
            
            
            June
      30, 2007Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
      in thousands)Beginning
      balance
            
            $
            5,366,186
            
            
            
            5.71
            %
            
            $
            5,346,626
            
            
            
            5.68
            %
            
            $
            5,303,830
            
            
            
            5.64
            %
            
            $
            5,249,793
            
            
            
            5.59
            %Originations
      and refinances
            
            
            201,832
            
            
            
            5.77
            
            
            
            174,599
            
            
            
            6.34
            
            
            
            225,333
            
            
            
            6.50
            
            
            
            246,940
            
            
            
            6.24Purchases
            
            
            30,513
            
            
            
            5.58
            
            
            
            31,866
            
            
            
            5.98
            
            
            
            39,820
            
            
            
            6.06
            
            
            
            54,624
            
            
            
            6.25Repayments
            
            
            (244,823
            )
            
            
            
            
            
            
            (186,091
            )
            
            
            
            
            
            
            (221,075
            )
            
            
            
            
            
            
            (246,829
            )Other
            
            
            (1,430
            )
            
            
            
            
            
            
            (814
            )
            
            
            
            
            
            
            (1,282
            )
            
            
            
            
            
            
            (698
            )Ending
      balance
            
            $
            5,352,278
            
            
            
            5.66
            %
            
            $
            5,366,186
            
            
            
            5.71
            %
            
            $
            5,346,626
            
            
            
            5.68
            %
            
            $
            5,303,830
            
            
            
            5.64
            %For
      the Six Months EndedMarch
      31, 2008
            
            March
      31, 2007Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
      in thousands)Beginning
      balance
            
            $
            5,346,626
            
            
            
            5.68
            %
            
            $
            5,257,473
            
            
            
            5.55
            %Originations
      and refinances
            
            
            376,431
            
            
            
            6.04
            
            
            
            331,178
            
            
            
            6.35Purchases
            
            
            62,379
            
            
            
            5.79
            
            
            
            49,890
            
            
            
            5.87Repayments
            
            
            (430,914
            )
            
            
            
            
            
            
            (388,076
            )Other
            
            
            (2,244
            )
            
            
            
            
            
            
            (672
            )Ending
      balance
            
            $
            5,352,278
            
            
            
            5.66
            %
            
            $
            5,249,793
            
            
            
            5.59
            %





19


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


March
      31, 2008
              
              
              December
      31, 2007
              
              
              September
      30, 2007Amount
              
              
              Average
      Rate
              
              
              %
      of Total
              
              
              Amount
              
              
              Average
      Rate
              
              
              %
      of Total
              
              
              Amount
              
              
              Average
      Rate
              
              
              %
      of Total(Dollars
      in thousands)Real Estate LoansOne-
      to four-family
              
              $
              5,001,195
              
              
              
              5.58
              %
              
              
              93.44
              %
              
              $
              5,012,447
              
              
              
              5.58
              %
              
              
              93.41
              %
              
              $
              4,992,398
              
              
              
              5.55
              %
              
              
              93.38
              %Multi-family
      and commercial
              
              
              57,273
              
              
              
              6.46
              
              
              
              1.07
              
              
              
              59,581
              
              
              
              6.47
              
              
              
              1.11
              
              
              
              60,625
              
              
              
              6.48
              
              
              
              1.13Construction
      and development
              
              
              82,737
              
              
              
              6.10
              
              
              
              1.55
              
              
              
              75,046
              
              
              
              6.24
              
              
              
              1.40
              
              
              
              74,521
              
              
              
              6.22
              
              
              
              1.39Total
      real estate loans
              
              
              5,141,205
              
              
              
              5.60
              
              
              
              96.06
              
              
              
              5,147,074
              
              
              
              5.60
              
              
              
              95.92
              
              
              
              5,127,544
              
              
              
              5.57
              
              
              
              95.90Consumer LoansSavings
      loans
              
              
              4,918
              
              
              
              6.37
              
              
              
              0.09
              
              
              
              4,944
              
              
              
              6.54
              
              
              
              0.09
              
              
              
              5,249
              
              
              
              6.55
              
              
              
              0.10Automobile
              
              
              3,836
              
              
              
              7.02
              
              
              
              0.07
              
              
              
              4,115
              
              
              
              6.99
              
              
              
              0.08
              
              
              
              4,234
              
              
              
              6.98
              
              
              
              0.08Home
      equity
              
              
              201,743
              
              
              
              7.26
              
              
              
              3.77
              
              
              
              209,408
              
              
              
              8.24
              
              
              
              3.90
              
              
              
              208,986
              
              
              
              8.41
              
              
              
              3.91Other
              
              
              576
              
              
              
              8.36
              
              
              
              0.01
              
              
              
              645
              
              
              
              7.77
              
              
              
              0.01
              
              
              
              613
              
              
              
              8.26
              
              
              
              0.01Total
      consumer loans
              
              
              211,073
              
              
              
              7.24
              
              
              
              3.94
              
              
              
              219,112
              
              
              
              8.18
              
              
              
              4.08
              
              
              
              219,082
              
              
              
              8.33
              
              
              
              4.10Total
      loans receivable
              
              
              5,352,278
              
              
              
              5.66
              %
              
              
              100.00
              %
              
              
              5,366,186
              
              
              
              5.71
              %
              
              
              100.00
              %
              
              
              5,346,626
              
              
              
              5.68
              %
              
              
              100.00
              %Less:Loans
      in process
              
              
              45,033
              
              
              
              
              
              
              
              
              
              
              
              41,936
              
              
              
              
              
              
              
              
              
              
              
              41,126Deferred
      fees and discounts
              
              
              10,129
              
              
              
              
              
              
              
              
              
              
              
              9,783
              
              
              
              
              
              
              
              
              
              
              
              9,893Allowance
      for losses
              
              
              4,250
              
              
              
              
              
              
              
              
              
              
              
              4,171
              
              
              
              
              
              
              
              
              
              
              
              4,181Total
      loans receivable, net
              
              $
              5,292,866
              
              
              
              
              
              
              
              
              
              
              $
              5,310,296
              
              
              
              
              
              
              
              
              
              
              $
              5,291,426


20







Lending
Practices and Underwriting Standards





The
Bank’s primary lending activity is the origination of loans and the purchase of
loans from a select group of correspondent lenders.  These loans are
generally secured by first mortgages on owner-occupied, one- to four-family
residences in the Bank’s market areas and select market areas in
Missouri.  Additional lending volume has been generated by purchasing
whole one- to four-family mortgage loans from nationwide
lenders.  These purchases allow the Bank to attain some geographic
diversification and manage credit concentration risks in its loan
portfolio.  The loans that are purchased help mitigate the Bank’s
interest rate risk exposure because they are predominately adjustable-rate or
short-term fixed-rate loans.





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





Current
adjustable-rate one- to four-family loans originated by the Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the
interest rate, as well as a specified maximum lifetime cap and minimum rate, or
floor.  Negative amortization of principal is not
allowed.  Borrowers are qualified based on the principal, interest,
taxes and insurance payment at the initial rate for three, five and seven year
adjustable-rate mortgage (“ARM”) loans.





As of
March 2008, the Bank no longer offers an interest-only ARM product, but holds in
its portfolio originated interest-only ARM loans that did not require principal
payments for a period of up to ten years at the time of
origination.  Borrowers were qualified based on a fully amortizing
payment at the initial loan rate.  The Bank was more restrictive on
debt-to-income ratios and credit scores on interest-only ARM loans than on other
ARM loans to offset the potential risk of payment shock at the time the loan
rate adjusts and/or the principal and interest payments begin.  The
Bank plans to consider the purchase of interest-only ARM products from
nationwide lenders using similarly restrictive criteria.





In an
effort to offset the impact of repayments and to retain our customers, the Bank
offers existing loan customers whose loans have not been sold to third parties
the opportunity to modify their original loan terms to new loan terms generally
consistent with those currently being offered.  This is a convenient
tool for customers who may have considered refinancing from an ARM loan to a
fixed-rate loan or would like to reduce their term and take advantage of lower
rates associated with current market rates.  The program helps ensure
the Bank maintains the relationship with the customer and significantly reduces
the amount of time it takes for customers to obtain current market pricing and
terms without having to refinance their loans, and is a more efficient way for
the Bank to process the change.  The Bank charges a fee for this
service generally comparable to fees charged on new loans.  The Bank
does not solicit customers for this program, but considers it a valuable
opportunity to retain customers who, due to our strict initial underwriting,
could likely obtain similar financing elsewhere.





One- to
four-family loans are generally underwritten using an automated underwriting
system developed by a third party.  The system’s components closely
resemble the Bank’s manual underwriting standards which are generally in
accordance with Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal
National Mortgage Association (“FNMA”) underwriting guidelines.  The
automated underwriting system analyzes the applicant’s data, with emphasis on
credit history, employment and income history, qualifying ratios reflecting the
applicant’s ability to repay, asset reserves, and loan-to-value
ratio.  Loans that do not meet the automated underwriting standards
are referred to a staff underwriter for manual underwriting.  Full
documentation to support the applicant’s credit, income, and sufficient funds to
cover all applicable fees and reserves at closing are required on all
loans.  Properties securing one- to four-family loans are appraised by
either staff appraisers or independent fee appraisers approved by the board of
directors who are independent of the loan origination function.





Presently,
the Bank lends up to 100% of the lesser of the appraised value or purchase price
for one- to four-family mortgage loans.  In May 2008, the Bank will
reduce this amount to 97% of the lesser of the appraised value or purchase price
for one- to four-family mortgage loans.  At March 31, 2008, less than
1% of the balance of the loan portfolio had a loan-to-value ratio greater than
100%.  For loans with a LTV ratio in excess of 80% at the time of
origination, private mortgage insurance is required in order to reduce the
Bank’s loss exposure to less than 80% of the appraised value or the purchase
price of the property.





The
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


21


Manager
reviews specific criteria such as loan amount, credit scores, loan-to-value
ratios, geographic location, and debt ratios of each loan in the
pool.  If the specific criteria do not meet the Bank’s underwriting
standards and compensating factors are not sufficient, then a loan will be
removed from the pool.  Once the review of the specific criteria is
complete and loans not meeting the Bank’s standards are removed from the pool,
changes are sent back to the lender for acceptance and
pricing.  Before the pool is funded, a Bank underwriter reviews at
least 25% of the loan files and the supporting documentation in the
pool.





The
underwriting of loans purchased under contractual agreement through
correspondent lenders is generally performed by a third party underwriter who is
under contract to use the Bank’s internal underwriting
standards.  Correspondent lenders are located within the metropolitan
Kansas City market area and select market areas in Missouri.  The loan
product is originated to the Bank’s specifications including interest rates,
product description, and underwriting standards.  The Bank purchases
approved loans and the related servicing rights, on a loan-by-loan
basis.





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





The Bank
offers a variety of secured consumer loans, including home equity loans and
lines of credit, home improvement loans, auto loans, and loans secured by
savings deposits.  The Bank discontinued offering a student loan
product in March 2008.   The Bank also originates a very limited
amount of unsecured loans.  The Bank does not originate any consumer
loans on an indirect basis, such as contracts purchased from retailers of goods
or services which have extended credit to their customers.  All
consumer loans are originated in the Bank’s market areas.  Home equity
loans may be originated in amounts, together with the amount of the existing
first mortgage, of up to 95% of the value of the property securing the
loan.  In order to minimize risk of loss, home equity loans that are
greater than 80% of the value of the property, when combined with the first
mortgage, require private mortgage insurance.  The term-to-maturity of
home equity and home improvement loans may be up to 20 years.  Other
home equity lines of credit have no stated term-to-maturity and require a
payment of 1.5% of the outstanding loan balance per
month.   Interest-only home equity lines of credit have a 10-year
term-to-maturity, monthly payments of accrued interest, and a balloon payment at
maturity.  Repaid principal may be re-advanced at any time, not to
exceed the original credit limit of the loan.  Other consumer loan
terms vary according to the type of collateral and the length of the
contract.  The majority of the consumer loan portfolio is comprised of
home equity lines of credit, which have interest rates that can adjust monthly
based upon changes in the prime rate, to a maximum of 18%.





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





The
Bank’s multi-family and commercial real estate loans are secured primarily by
multi-family dwellings and small office buildings generally located in the
Bank’s market areas.  These loans are granted based on the income
producing potential of the property and the financial strength of the
borrower.  Loan-to-value ratios on multi-family and commercial real
estate loans usually do not exceed 80% of the appraised value of the property
securing the loans.  The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt.  The
Bank generally requires personal guarantees of the borrowers covering a portion
of the debt in addition to the security property as collateral for these
loans.  The Bank also generally requires an assignment of rents or
leases in order to be assured that the cash flow from the project will be used
to repay the debt.  Appraisals on properties securing these loans are
performed by independent state certified fee appraisers approved by the board of
directors.  While maximum maturities may extend to 30 years, loans
frequently have shorter maturities and may not be fully amortizing, requiring
balloon payments of unamortized principal at maturity.





Loans
over $500 thousand must be underwritten by two senior level
underwriters.  Any loan greater than $750 thousand must be approved by
the Asset and Liability Management Committee (“ALCO”) and loans over $1.5
million must be approved by the board of directors.  For loans
requiring ALCO and/or board of directors’ approval, management is responsible
for presenting
to the ALCO and/or board of directors information about the creditworthiness of
the borrower and the estimated value of the subject
property.  Information pertaining to the creditworthiness of the
borrower generally consists of a summary of the borrower’s credit history,
employment stability, sources of income, net worth, and debt
ratios.  The estimated value of the property must be supported by an
independent appraisal report prepared in accordance with our appraisal
policy.


22


Asset
Quality




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





The
following matrix shows the balance of one-to-four family mortgage loans
cross-referenced by LTV ratio and FICO score.  The LTV ratios used in
the matrix were based on the most recent bank appraisal available, and the FICO
scores were updated through December 31, 2007.  Per the matrix, the
greatest concentration of loans are believed to be of the highest quality, which
fall into the “751 and above” FICO category and have a LTV ratio of less than
70%.  The loans believed to be of the lowest quality, which fall into
the “less than 660” FICO category and have LTV ratios of more than 80%, comprise
the lowest concentration.




FICO
      ScoreLess
      than 660
              
              661
      to 700
              
              701
      to 750
              
              751
      and above
              
              TotalAmount
              
              
              %
      of total
              
              Amount
              
              
              %
      of total
              
              Amount
              
              
              %
      of total
              
              Amount
              
              
              %
      of total
              
              Amount
              
              
              %
      of total(Dollars
      in thousands)Less
      than 70%
              
              $
              139,179
              
              
              
              2.8
              %
              
              $
              150,042
              
              
              
              3.0
              %
              
              $
              407,842
              
              
              
              8.1
              %
              
              $
              1,784,875
              
              
              
              35.7
              %
              
              $
              2,481,938
              
              
              
              49.6
              %70%
      to 80%
              
              
              113,947
              
              
              
              2.3
              
              
              
              140,405
              
              
              
              2.8
              
              
              
              416,074
              
              
              
              8.3
              
              
              
              1,160,453
              
              
              
              23.2
              
              
              
              1,830,879
              
              
              
              36.6More
      than 80%
              
              
              74,346
              
              
              
              1.5
              
              
              
              79,549
              
              
              
              1.6
              
              
              
              193,987
              
              
              
              3.9
              
              
              
              340,496
              
              
              
              6.8
              
              
              
              688,378
              
              
              
              13.8Total
              
              $
              327,472
              
              
              
              6.6
              %
              
              $
              369,996
              
              
              
              7.4
              %
              
              $
              1,017,903
              
              
              
              20.3
              %
              
              $
              3,285,824
              
              
              
              65.7
              %
              
              $
              5,001,195
              
              
              
              100.0
              %


The
following table presents the Company’s 30 to 89 day delinquent loans,
non-performing loans, and real estate owned at the dates
indicated.  The ratios of non-performing loans to total loans and
non-performing assets to total assets do not include loans that are 30 to 89
days delinquent.  Non-performing assets include non-performing loans
and real estate owned.





March
      31,
            
            
            December
      31,
            
            
            September
      30,
            
            
            March
      31,2008
            
            
            2007
            
            
            2007
            
            
            2007Asset
      quality information:
            
            (Dollars
      in thousands)Loans
      30-89 days delinquent
            
            $
            18,908
            
            
            $
            22,712
            
            
            $
            17,732
            
            
            $
            18,883Non-performing
      loans
            
            
            9,884
            
            
            
            10,232
            
            
            
            7,352
            
            
            
            6,833Real
      estate owned
            
            
            2,764
            
            
            
            2,023
            
            
            
            2,097
            
            
            
            1,905Asset
      quality ratios:Non-performing
      assets to total assets atend
      of period
            
            
            0.16
            %
            
            
            0.15
            %
            
            
            0.12
            %
            
            
            0.11
            %Non-performing
      loans to total loans
            
            
            0.19
            %
            
            
            0.19
            %
            
            
            0.14
            %
            
            
            0.13
            %





Non-performing
loans consist primarily of loans 90 or more days delinquent and loans in the
process of foreclosure.  Non-performing loans increased $2.5 million
from $7.4 million at September 30, 2007 to $9.9 million at March 31,
2008.  The increase in non-performing loans increased our ratio of
non-performing loans to total loans from 0.14% as of September 30, 2007 to 0.19%
at March 31, 2008.  Of the $9.9 million of non-performing loans, $5.4
million, or 55%, are secured by property located in our market areas and $3.4
million, or 34%, were purchased from one nationwide lender.  At March
31, 2008, the total balance of loans purchased from this lender was $123.0
million or 2% of the total loan portfolio.  There is not believed to
be a geographic trend associated with our non-performing purchased
loans.





At March
31, 2008, non-performing loans with LTV ratios greater than 80% comprised 29.7%
of total non-performing loans.  Of the non-performing loans with LTV
ratios greater than 80%, 92% had private mortgage insurance which
substantially


23


reduces
or eliminates the Bank’s exposure to loss.  The balance of
non-performing loans with LTV ratios greater than 80% with no private mortgage
insurance was $231 thousand at March 31, 2008.  At origination, these
loans had LTV ratios less than 80%, but as a result of updating the appraisals,
the LTV ratios are now in excess of 80%.





Loans 30
to 89 days delinquent, which are not included in non-performing loans, increased
approximately $1.2 million from $17.7 million at September 30, 2007 to $18.9
million at March 31, 2008.  Of the $18.9 million at March 31, 2008,
$10.6 million, or 56% represent loans secured by property located in our market
areas and $8.3 million, or 44%, were purchased loans.  There is not
believed to be a geographic trend associated with our purchased loans 30 to 89
days delinquent.





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 somewhat by purchasing loans
from outside our market areas.  In our local market areas, the economy
has continued to be generally stable.  There have been some
indications that there may be some decreases in the value of home prices
occurring in some of our market areas and some market areas in which we have
purchased loans.  However, we believe that given the underwriting
standards of the Bank, the value of the underlying collateral, along with any
required private mortgage insurance, the collateral of our loans is sufficient
to protect the Bank from losses in excess of our allowance for loan
losses.





The
balance of loans in foreclosure increased from $2.3 million at December 31, 2007
to $3.1 million at March 31, 2008.  At December 31, 2007, 100% of the
loans in foreclosure were located in our market areas.  At March 31,
2008, only 30% of the loans in foreclosure were in our market
areas.  The other 70% of loans in foreclosure at March 31, 2008 were
purchased from one nationwide lender and the underlying collateral was located
in various states.  As a result of the increase in purchased loans in
foreclosure, a provision for loan losses was recorded during the current
quarter.  Management believes that the current allowance for loan
losses is sufficient for the losses inherent in the loan portfolio.





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
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Allowance
      for loan losses:
            
            (Dollars
      in thousands)Beginning
      balance
            
            $
            4,171
            
            
            $
            4,143
            
            
            $
            4,181
            
            
            $
            4,433Losses
      charged against the allowance:One-
      to four-family loans
            
            
            33
            
            
            
            --
            
            
            
            30
            
            
            
            9Multi-family
      loans
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Commercial
      and other loans
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Consumer
      loans
            
            
            7
            
            
            
            5
            
            
            
            20
            
            
            
            6Total
      charge-offs
            
            
            40
            
            
            
            5
            
            
            
            50
            
            
            
            15Recoveries
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Provision
      (recovery) charged to expense
            
            
            119
            
            
            
            55
            
            
            
            119
            
            
            
            (225
            )Ending
      balance
            
            $
            4,250
            
            
            $
            4,193
            
            
            $
            4,250
            
            
            $
            4,193Allowance
      for loan losses to non-performing
      loans at period end
            
            
            
            
            
            
            
            
            
            
            43.00
            %
            
            
            61.36
            %Allowance
      for loan losses to loansreceivable,
      net at period end
            
            
            
            
            
            
            
            
            
            
            0.08
            %
            
            
            0.08
            %








24





Mortgage-Related
Securities.  The balance of mortgage-related securities
increased $662.5 million from $1.41 billion at September 30, 2007 to $ 2.08
billion at March 31, 2008.  The following tables provide a summary of
the activity in our portfolio of mortgage-related securities for the periods
presented.  The yields and weighted average life (“WAL”) for purchases
are presented as recorded at the time of purchase.  The yields for the
beginning and ending balances are as of the period presented and are generally
derived from recent prepayment activity on the securities in the portfolio as of
the dates presented.  The beginning and ending WAL is the estimated
remaining maturity after projected prepayment speeds have been
applied.  The increase in the yield at March 31, 2008 compared to
September 30, 2007 was primarily a result of the purchase of mortgage-related
securities with yields higher than that of the existing
portfolio.  The increase in the WAL at March 31, 2008 compared to
September 30, 2007 was due to purchases of mortgage-related securities with WALs
greater than that of the existing portfolio and general assumptions about a
slow-down in prepayment speeds based upon market assumptions at March 31,
2008.





For
      the Three Months EndedMarch
      31, 2008
            
            December
      31, 2007
            
            
            September
      30, 2007
            
            
            June
      30, 2007Amount
            
            
            Yield
            
            
            WAL
            
            Amount
            
            Yield
            
            
            WAL
            
            
            Amount
            
            
            Yield
            
            WAL
            
            
            Amount
            
            Yield
            
            WAL(Dollars
      in thousands)Beginning
      balance
            $
            1,608,897
            
            
            
            4.66
            %
            
            
            4.41
            
            $
            1,414,271
            
            
            4.46
            %
            
            
            4.04
            
            
            $
            1,466,822
            
            
            
            4.30
            %
            
            4.89
            
            
            $
            1,603,443
            
            
            4.27
            %
            
            3.40Maturities
      and repayments
            
            (119,682
            )
            
            
            
            
            
            
            
            
            
            (95,243
            )
            
            
            
            
            
            
            
            
            
            (126,050
            )
            
            
            
            
            
            
            
            
            
            (135,905
            )Net
      amortization of
              premiums/discounts
            
            (426
            )
            
            
            
            
            
            
            
            
            
            (335
            )
            
            
            
            
            
            
            
            
            
            (783
            )
            
            
            
            
            
            
            
            
            
            (1,228
            )Purchases:Fixed
            
            395,048
            
            
            
            4.90
            
            
            
            4.98
            
            
            200,382
            
            
            5.17
            
            
            
            3.98
            
            
            
            72,610
            
            
            
            5.79
            
            
            4.34
            
            
            
            692
            
            
            5.62
            
            
            7.61Adjustable
            
            188,024
            
            
            
            4.71
            
            
            
            5.06
            
            
            86,819
            
            
            4.88
            
            
            
            4.68
            
            
            
            --
            
            
            
            --
            
            
            --
            
            
            
            --
            
            
            --
            
            
            --Change
      in valuation on AFS securities
            
            4,905
            
            
            
            
            
            
            
            
            
            
            3,003
            
            
            
            
            
            
            
            
            
            
            1,672
            
            
            
            
            
            
            
            
            
            
            (180
            )Ending
      balance
            $
            2,076,766
            
            
            
            4.70
            %
            
            
            4.88
            
            $
            1,608,897
            
            
            4.66
            %
            
            
            4.41
            
            
            $
            1,414,271
            
            
            
            4.46
            %
            
            4.04
            
            
            $
            1,466,822
            
            
            4.30
            %
            
            4.89For
      the Six Months EndedMarch
      31, 2008
            
            March
      31, 2007Amount
            
            
            Yield
            
            
            WAL
            
            Amount
            
            Yield
            
            
            WAL(Dollars
      in thousands)Beginning
      balance
            $
            1,414,271
            
            
            
            4.46
            %
            
            
            4.04
            
            $
            2,084,786
            
            
            4.54
            %
            
            
            4.39Maturities
      and repayments
            
            (214,925
            )
            
            
            
            
            
            
            
            
            
            (232,791
            )Sale
      of securities, net of gains
            
            --
            
            
            
            
            
            
            
            
            
            
            (404,459
            )Net
      amortization of
              premiums/discounts
            
            (761
            )
            
            
            
            
            
            
            
            
            
            (2,063
            )Purchases:Fixed
            
            595,430
            
            
            
            4.99
            
            
            
            4.64
            
            
            1,983
            
            
            5.65
            
            
            
            18.18Adjustable
            
            274,843
            
            
            
            4.77
            
            
            
            4.94
            
            
            152,807
            
            
            5.00
            
            
            
            1.61Change
      in valuation on AFS securities
            
            7,908
            
            
            
            
            
            
            
            
            
            
            3,180Ending
      balance
            $
            2,076,766
            
            
            
            4.70
            %
            
            
            4.88
            
            $
            1,603,443
            
            
            4.27
            %
            
            
            3.40





25








Investment
Securities.  Investment securities, which consist of agency
bonds (primarily issued by FNMA, FHLMC, or FHLB) and municipal investments,
decreased $435.6 million from $524.2 million at September 30, 2007 to $88.6
million at March 31, 2008.  The following tables provide a summary of
the activity of investment securities for the periods presented.  The
yields for the beginning and ending balances are as of the periods
presented.  The decrease in the yield at March 31, 2008 compared to
September 30, 2007 was a result of calls and/or maturities of securities with
rates higher than that of the remaining portfolio.  The beginning and
ending WAL represent the estimated remaining maturity of the securities after
projected call dates have been considered, based upon market rates at each date
presented.  The increase in the WAL at March 31, 2008 compared to
September 30, 2007 was due to issuers of certain securities in the portfolio
exercising their option to call the security.





For
      the Three Months EndedMarch
      31, 2008
            
            
            December
      31, 2007
            
            
            September
      30, 2007
            
            
            June
      30, 2007Amount
            
            Yield
            
            
            WAL
            
            
            Amount
            
            Yield
            
            
            WAL
            
            
            Amount
            
            Yield
            
            WAL
            
            
            Amount
            
            Yield
            
            WAL(Dollars
      in thousands)Beginning
      balance
            
            $
            500,045
            
            
            4.14
            %
            
            
            0.67
            
            
            $
            524,168
            
            
            4.52
            %
            
            
            1.66
            
            
            $
            673,160
            
            
            4.68
            %
            
            1.71
            
            
            $
            773,404
            
            
            4.76
            %
            
            1.72Maturities
      and calls
            
            
            (420,000
            )
            
            
            
            
            
            
            
            
            
            (189,890
            )
            
            
            
            
            
            
            
            
            
            (155,250
            )
            
            
            
            
            
            
            
            
            (158,740
            )Net
      amortization of
              premiums/discounts
            
            
            307
            
            
            
            
            
            
            
            
            
            
            171
            
            
            
            
            
            
            
            
            
            
            334
            
            
            
            
            
            
            
            
            
            1,303Purchases
      - Fixed
            
            
            8,253
            
            
            3.20
            
            
            
            5.67
            
            
            
            165,590
            
            
            4.28
            
            
            
            0.70
            
            
            
            5,802
            
            
            3.76
            
            
            4.85
            
            
            
            57,329
            
            
            5.01
            
            
            0.74Change
      in valuation of AFS securities
            
            
            (8
            )
            
            
            
            
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            122
            
            
            
            
            
            
            
            
            
            (136
            )Ending
      balance
            
            $
            88,597
            
            
            4.48
            %
            
            
            2.78
            
            
            $
            500,045
            
            
            4.14
            %
            
            
            0.67
            
            
            $
            524,168
            
            
            4.52
            %
            
            1.66
            
            
            $
            673,160
            
            
            4.68
            %
            
            1.71For
      the Six Months EndedMarch
      31, 2008
            
            
            March
      31, 2007Amount
            
            Yield
            
            
            WAL
            
            
            Amount
            
            Yield
            
            
            WAL(Dollars
      in thousands)Beginning
      balance
            
            $
            524,168
            
            
            4.52
            %
            
            
            1.66
            
            
            $
            429,480
            
            
            4.46
            %
            
            
            2.63Maturities
      and calls
            
            
            (609,890
            )
            
            
            
            
            
            
            
            
            
            (286,500
            )Net
      amortization of
              premiums/discounts
            
            
            478
            
            
            
            
            
            
            
            
            
            
            2,614Purchases
      - Fixed
            
            
            173,843
            
            
            4.23
            
            
            
            0.94
            
            
            
            627,908
            
            
            5.22
            
            
            
            0.87Change
      in valuation of AFS securities
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            (98
            )Ending
      balance
            
            $
            88,597
            
            
            4.48
            %
            
            
            2.78
            
            
            $
            773,404
            
            
            4.76
            %
            
            
            1.72








26


Liabilities.   Total
liabilities increased from $6.81 billion at September 30, 2007 to $7.17 billion
at March 31, 2008.  The $355.7 million increase in liabilities was due
primarily to entering into $400.0 million of repurchase agreements, an increase
in deposits of $98.2 million, and an increase in accounts payable and accrued
expenses of $40.0 million partially offset by a decrease in FHLB advances of
$184.6 million.  The increase in accounts payable and accrued expenses
was due primarily to commitments to purchase securities that will settle in the
third quarter of fiscal year 2008.  The decrease in FHLB advances was
due to $500.0 million of maturing advances, of which only $300.0 million was
renewed.





The Bank
entered into additional repurchase agreements during the quarter because rates
and terms were more favorable than other funding options on those
dates.  The use of repurchase agreements also allows for the
diversification of funding sources and the use of securities that were not being
leveraged as collateral.  Management will continue to monitor market
conditions for funding opportunities that can be leveraged to improve earnings
without creating undue interest rate or credit risk exposure.





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





At
            
            At
            At
            AtMarch 31, 2008
            
            December 31, 2007
            September 30, 2007
            June 30, 2007Average
            
            %
      of
            
            
            
            
            Average
            
            %
      of
            
            
            
            
            Average
            
            %
      of
            
            
            
            
            Average
            
            %
      ofAmount
            
            
            Cost
            
            Total
            
            Amount
            
            
            Cost
            
            Total
            
            Amount
            
            
            Cost
            
            Total
            
            Amount
            
            
            Cost
            
            Total(Dollars
      in thousands)Checking
            
            $
            423,675
            
            
            
            0.21
            %
            
            
            10.54
            %
            
            $
            413,349
            
            
            
            0.21
            %
            
            
            10.38
            %
            
            $
            394,109
            
            
            
            0.21
            %
            
            
            10.05
            %
            
            $
            420,952
            
            
            
            0.21
            %
            
            
            10.66
            %Savings
            
            
            231,050
            
            
            
            1.35
            
            
            
            5.75
            
            
            
            229,862
            
            
            
            2.05
            
            
            
            5.77
            
            
            
            237,148
            
            
            
            2.58
            
            
            
            6.04
            
            
            
            243,040
            
            
            
            3.07
            
            
            
            6.16Money
      market
            
            
            827,623
            
            
            
            1.65
            
            
            
            20.58
            
            
            
            811,002
            
            
            
            2.95
            
            
            
            20.37
            
            
            
            790,277
            
            
            
            3.18
            
            
            
            20.15
            
            
            
            801,511
            
            
            
            3.28
            
            
            
            20.31Certificates
            
            
            2,538,618
            
            
            
            4.54
            
            
            
            63.13
            
            
            
            2,527,236
            
            
            
            4.77
            
            
            
            63.48
            
            
            
            2,501,248
            
            
            
            4.77
            
            
            
            63.76
            
            
            
            2,481,190
            
            
            
            4.72
            
            
            
            62.87Total
      deposits
            
            $
            4,020,966
            
            
            
            3.31
            %
            
            
            100.00
            %
            
            $
            3,981,449
            
            
            
            3.77
            %
            
            
            100.00
            %
            
            $
            3,922,782
            
            
            
            3.86
            %
            
            
            100.00
            %
            
            $
            3,946,693
            
            
            
            3.85
            %
            
            
            100.00
            %





At March
31, 2008, $180.6 million of the $2.54 billion in certificates were brokered
deposits, compared to $193.0 million in brokered and public unit deposits at
September 30, 2007.  There were no public unit deposits at March 31,
2008.  The $12.4 million decrease between September 30, 2007 and March
31, 2008 was attributed to maturities of public unit deposits that were not
retained because the Bank did not price competitively in the market for public
units.  Management will continue to monitor the wholesale deposit
market for attractive opportunities.





27





Stockholders’
Equity.Stockholders’ equity increased $1.5 million from
$867.6 million at September 30, 2007 to $869.1 million at March 31,
2008.  The increase was primarily a result of net income of $20.8
million, an increase in unrealized gains on AFS securities of $4.9 million, and
ESOP activity of $3.4 million, partially offset by dividends paid of $20.7
million and treasury stock purchases of $7.2 million.





Dividends
from the Company are the only source of funds for MHC.  It is expected
that MHC will waive future dividends except to the extent they are needed to
fund its continuing operations.  The following table shows the number
of shares eligible to receive dividends (“public shares”) because of the waiver
of dividends by MHC at March 31, 2008.  The unvested shares in the
ESOP receive cash equal to the dividends paid on the public
shares.  The cash received is used to repay the annual debt obligation
on the loan taken out by the ESOP from the Company at the time of the
mutual-to-stock conversion of the Bank to purchase shares for the
ESOP.  These shares are held in trust for a future employee benefit,
and are therefore excluded from the calculation of public shares.





Total
      voting shares outstanding at September 30, 2007
            
            
            74,258,977Treasury
      stock acquisitions
            
            
            (223,542
            )RRP
      grants, net
            
            
            10,000Options
      exercised, net
            
            
            18,124Total
      voting shares outstanding at March 31, 2008
            
            
            74,063,559Unvested
      shares in ESOP
            
            
            (1,209,832
            )Shares
      held by MHC
            
            
            (52,192,817
            )Total
      shares eligible to receive dividends at March 31, 2008 (public
      shares)
            
            
            20,660,910







28


The
following table presents quarterly dividends paid in calendar years 2008, 2007
and 2006.  The dollar amounts represent dividends paid during the
quarter.  The actual amount of  dividends to be paid during
the quarter ending June 30, 2008, as declared on April 23, 2008, will be based
upon the number of shares outstanding on the record date of May 2,
2008.  All shares outstanding presented in the table below, except for
the quarter ending June 30, 2008, are as of the date of record per the dividend
declaration.  For the purposes of the table below, the number of
dividend shares for the quarter ending June 30, 2008 is based upon shares
outstanding on April 28, 2008.  This does not represent the actual
dividend payout, but rather management’s estimate of the number of shares
eligible to receive the dividend and the total dividend payout as of April 28,
2008.







Calendar
      Year2008
            
            
            2007
            
            
            2006(Dollars
      in thousands, except per share amounts)Quarter
      ended March 31Number
      of dividend shares
            
            
            20,660,510
            
            
            
            20,520,793
            
            
            
            20,457,283Dividend
      per share
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            $
            10,330
            
            
            $
            10,261
            
            
            $
            10,229Quarter
      ended June 30Number
      of dividend shares
            
            
            20,661,410
            
            
            
            20,673,933
            
            
            
            20,257,420Dividend
      per share
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            $
            10,331
            
            
            $
            10,337
            
            
            $
            10,129Quarter
      ended September 30Number
      of dividend shares
            
            
            
            
            
            
            20,694,533
            
            
            
            20,250,134Dividend
      per share
            
            
            
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            
            
            
            
            $
            10,347
            
            
            $
            10,125Quarter
      ended December 31Number
      of dividend shares
            
            
            
            
            
            
            20,860,278
            
            
            
            20,432,393Dividend
      per share
            
            
            
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            
            
            
            
            $
            10,430
            
            
            $
            10,216Special
      year end dividendNumber
      of dividend shares
            
            
            
            
            
            
            --
            
            
            
            20,432,793Dividend
      per share
            
            
            
            
            
            $
            --
            
            
            $
            0.09Total
      dividends paid
            
            
            
            
            
            $
            --
            
            
            $
            1,839Calendar
      year-to-date dividends per share
            
            $
            1.00
            
            
            $
            2.00
            
            
            $
            2.09





29


Analysis
of Net Interest Income





Net
interest income represents the difference between interest income earned on
interest-earning assets, such as mortgage loans, investment securities, and
mortgage-related securities, and interest paid on interest-bearing liabilities,
such as deposits, FHLB advances, and other borrowings.  Net interest
income depends on the balance of interest-earning assets and interest-bearing
liabilities, and the interest rates earned or paid on them.





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





For
      the Three Months EndedMarch
      31, 2008
            
            
            December
      31, 2007
            
            
            September
      30, 2007
            
            
            March
      31, 2007Average
            
            
            
            
            
            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)
            
            $
            5,306,797
            
            
            
            5.67
            %
            
            $
            5,309,758
            
            
            
            5.74
            %
            
            $
            5,279,454
            
            
            
            5.63
            %
            
            $
            5,223,416
            
            
            
            5.67
            %Mortgage-related
      securities
            
            
            1,756,593
            
            
            
            4.61
            
            
            
            1,497,081
            
            
            
            4.58
            
            
            
            1,444,060
            
            
            
            4.35
            
            
            
            1,633,477
            
            
            
            4.24Investment
      securities
            
            
            304,470
            
            
            
            4.02
            
            
            
            391,173
            
            
            
            4.22
            
            
            
            562,665
            
            
            
            4.58
            
            
            
            776,143
            
            
            
            4.77Capital
      stock of FHLB
            
            
            130,752
            
            
            
            5.73
            
            
            
            133,378
            
            
            
            6.21
            
            
            
            140,374
            
            
            
            6.67
            
            
            
            159,171
            
            
            
            6.48Cash
      and cash equivalents
            
            
            171,356
            
            
            
            3.16
            
            
            
            129,227
            
            
            
            4.32
            
            
            
            113,146
            
            
            
            5.01
            
            
            
            114,528
            
            
            
            5.17Total
      interest-earning assets (1)
            
            
            7,669,968
            
            
            
            5.31
            
            
            
            7,460,617
            
            
            
            5.41
            
            
            
            7,539,699
            
            
            
            5.32
            
            
            
            7,906,735
            
            
            
            5.30Other
      noninterest-earning assets
            
            
            202,741
            
            
            
            
            
            
            
            203,260
            
            
            
            
            
            
            
            157,599
            
            
            
            
            
            
            
            170,200Total
      assets
            
            $
            7,872,709
            
            
            
            
            
            
            $
            7,663,877
            
            
            
            
            
            
            $
            7,697,298
            
            
            
            
            
            
            $
            8,076,935Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Deposits
            
            $
            3,965,701
            
            
            
            3.56
            %
            
            $
            3,914,532
            
            
            
            3.86
            %
            
            $
            3,902,775
            
            
            
            3.88
            %
            
            $
            3,917,104
            
            
            
            3.75
            %FHLB
      advances (2)
            
            
            2,602,210
            
            
            
            4.88
            
            
            
            2,593,271
            
            
            
            5.19
            
            
            
            2,741,914
            
            
            
            5.27
            
            
            
            3,110,915
            
            
            
            4.95Other
      borrowings
            
            
            323,323
            
            
            
            4.74
            
            
            
            149,724
            
            
            
            5.77
            
            
            
            53,514
            
            
            
            8.23
            
            
            
            53,486
            
            
            
            8.24Total
      interest-bearing liabilities
            
            
            6,891,234
            
            
            
            4.11
            
            
            
            6,657,527
            
            
            
            4.42
            
            
            
            6,698,203
            
            
            
            4.48
            
            
            
            7,081,505
            
            
            
            4.31Other
      noninterest-bearing liabilities
            
            
            111,881
            
            
            
            
            
            
            
            137,469
            
            
            
            
            
            
            
            130,172
            
            
            
            
            
            
            
            126,904Stockholders'
      equity
            
            
            869,594
            
            
            
            
            
            
            
            868,881
            
            
            
            
            
            
            
            868,923
            
            
            
            
            
            
            
            868,526Total
      liabilities andStockholders'
      equity
            
            $
            7,872,709
            
            
            
            
            
            
            $
            7,663,877
            
            
            
            
            
            
            $
            7,697,298
            
            
            
            
            
            
            $
            8,076,935





(Continued)





30





Net
      interest rate spread
            
            
            
            
            
            1.20
            %
            
            
            
            
            
            0.99
            %
            
            
            
            
            
            0.84
            %
            
            
            
            
            
            0.99
            %Net
      interest-earning assets
            
            $
            778,734
            
            
            
            
            
            
            $
            803,089
            
            
            
            
            
            
            $
            841,496
            
            
            
            
            
            
            $
            825,230Net
      interest margin
            
            
            
            
            
            
            1.62
            %
            
            
            
            
            
            
            1.43
            %
            
            
            
            
            
            
            1.28
            %
            
            
            
            
            
            
            1.45
            %Ratio
      of interest-earning assetsto
      interest-bearing liabilities
            
            
            
            
            
            
            1.11
            
            
            
            
            
            
            
            1.12
            
            
            
            
            
            
            
            1.13
            
            
            
            
            
            
            
            1.12Selected
      performance ratios:Return
      on average assets (annualized)
            
            
            
            
            
            
            0.60
            %
            
            
            
            
            
            
            0.48
            %
            
            
            
            
            
            
            0.33
            %
            
            
            
            
            
            
            0.42
            %Return
      on average equity (annualized)
            
            
            
            
            
            
            5.39
            %
            
            
            
            
            
            
            4.20
            %
            
            
            
            
            
            
            2.90
            %
            
            
            
            
            
            
            3.89
            %Average
      equity to average assets
            
            
            
            
            
            
            11.05
            %
            
            
            
            
            
            
            11.34
            %
            
            
            
            
            
            
            11.29
            %
            
            
            
            
            
            
            10.75
            %








(1)Calculated net of deferred loan fees, loan discounts, and loans in
process.  Non-accruing loans are included in the loans receivable
average balance with a yield of zero percent.




(2)The rate calculation includes net interest expense of $238 thousand, $2.2
million, $3.6 million and $3.3 million related to the interest rate swaps for
the three months ended March 31, 2008, December 31, 2007, September 30, 2007,
and March 31, 2007, respectively.









(Concluded)




31





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
      31,2008
            
            
            2007
            
            
            2007
            
            
            2007
            
            
            2007Selected
      income statement data:
            
            (Dollars
      in thousands, except per share amounts)Interest
      and dividend income:Loans
      receivable
            
            $
            75,276
            
            
            $
            76,263
            
            
            $
            74,343
            
            
            $
            73,219
            
            
            $
            73,990Mortgage-related
      securities
            
            
            20,246
            
            
            
            17,127
            
            
            
            15,690
            
            
            
            16,224
            
            
            
            17,317Investment
      securities
            
            
            3,061
            
            
            
            4,130
            
            
            
            6,444
            
            
            
            8,459
            
            
            
            9,262Other
      interest and dividend income
            
            
            3,233
            
            
            
            3,508
            
            
            
            3,808
            
            
            
            3,624
            
            
            
            4,004Total
      interest and dividend income
            
            
            101,816
            
            
            
            101,028
            
            
            
            100,285
            
            
            
            101,526
            
            
            
            104,573Interest
      expense:Deposits
            
            
            35,145
            
            
            
            38,033
            
            
            
            38,166
            
            
            
            37,377
            
            
            
            36,267FHLB
      advances
            
            
            31,796
            
            
            
            34,161
            
            
            
            36,894
            
            
            
            37,220
            
            
            
            38,508Other
      borrowings
            
            
            3,873
            
            
            
            2,207
            
            
            
            1,125
            
            
            
            1,113
            
            
            
            1,101Total
      interest expense
            
            
            70,814
            
            
            
            74,401
            
            
            
            76,185
            
            
            
            75,710
            
            
            
            75,876Provision
      for loan losses
            
            
            119
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            55Net
      interest and dividend income(after
      provision for loan losses)
            
            
            30,883
            
            
            
            26,627
            
            
            
            24,100
            
            
            
            25,816
            
            
            
            28,642Other
      income
            
            
            7,982
            
            
            
            7,111
            
            
            
            6,412
            
            
            
            5,908
            
            
            
            5,475Other
      expenses
            
            
            20,907
            
            
            
            19,451
            
            
            
            19,938
            
            
            
            20,136
            
            
            
            20,064Income
      tax expense
            
            
            6,231
            
            
            
            5,174
            
            
            
            4,274
            
            
            
            4,299
            
            
            
            5,597Net
      income
            
            $
            11,727
            
            
            $
            9,113
            
            
            $
            6,300
            
            
            $
            7,289
            
            
            $
            8,456Efficiency
      ratio
            
            
            53.63
            
            
            
            57.65
            
            
            
            65.34
            
            
            
            63.47
            
            
            
            58.71Basic
      earnings per share
            
            $
            0.16
            
            
            $
            0.12
            
            
            $
            0.08
            
            
            $
            0.10
            
            
            $
            0.12Diluted
      earnings per share
            
            $
            0.16
            
            
            $
            0.12
            
            
            $
            0.08
            
            
            $
            0.10
            
            
            $
            0.12Dividends
      declared per share
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            0.50










32


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




Net
income for the quarter ended March 31, 2008 was $11.7 million compared to $8.5
million for the same period in the prior fiscal year. The $3.2 million increase
in net income was primarily a result of a $5.1 million decrease in interest
expense and a $2.5 million increase in other income, partially offset by a $2.8
million decrease in interest and dividend income and an $843 thousand increase
in other expenses.





Total
interest and dividend income for the quarter was $101.8 million compared to
$104.6 million for the prior year quarter.  The $2.8 million decrease
was primarily a result of a decrease in interest income on investment securities
of $6.2 million and a decrease in dividends on FHLB stock of $680 thousand,
partially offset by an increase in interest income on mortgage-related
securities of $2.9 million and interest income on loans receivable of $1.3
million.





Interest
income on loans receivable for the quarter was $75.3 million compared to $74.0
million for the prior year quarter.  The $1.3 million increase was a
result of an increase of $83.4 million in the average balance of the loan
portfolio between the two periods, as the weighted average yield of the
portfolio remained unchanged.





Interest
income on mortgage-related securities for the quarter was $20.2 million compared
to $17.3 million for the prior year quarter.  The $2.9 million
increase in interest income was due to both an increase of $123.1 million in the
average balance and an increase in the average yield of 37 basis points to 4.61%
for the current quarter.  The increase in the average portfolio
balance was a result of purchases of $583.1 million, partially offset by
principal repayments of $119.7 million.  The funds for the purchases
were primarily from the maturities and calls of investment securities and from
the repurchase agreements.  The weighted average yield of the
mortgage-related securities portfolio increased between the two periods due to
the purchase of mortgage-related securities with yields higher than that of the
existing portfolio in the current quarter.





Interest
income on investment securities for the quarter was $3.1 million compared to
$9.3 million for the prior year quarter.  The $6.2 million decrease in
interest income was primarily a result of a decrease of $471.7 million in the
average balance of the portfolio and, to a lesser extent, a 75 basis point
decrease in the weighted average portfolio yield to 4.02% for the current
quarter.  The decrease in the average balance was primarily a result
of issuers calling agency bonds and the majority of the funds were not
reinvested into the investment securities portfolio but rather the higher
yielding mortgage-related securities portfolio.  The decrease in the
weighted average yield of the portfolio was attributed to maturities and calls
of securities with weighted average yields greater than that of the portfolio,
and also due to reinvestments made at lower yields.





Dividends
on FHLB stock for the quarter were $1.9 million compared to $2.5 million for the
prior year quarter.  The $680 thousand decrease was due to a decrease
in the average balance and a 75 basis point decrease in the average
yield.  The decrease in the average balance is a result of the
redemption of shares, as the required number of shares held is based upon
outstanding FHLB advances, which decreased during the period.  The
dividend rate on FHLB stock correlates to the federal funds rate, which
decreased during the quarter.





Interest
expense on deposits for the current quarter was $35.1 million compared to $36.3
million for the prior year quarter.  The $1.2 million decrease in
interest expense was primarily a result of a decrease in the average rate paid
on the money market portfolio in the current quarter compared to the prior year
quarter due to the portfolio repricing to market rates.  This decrease
was partially offset by a higher weighted average rate on the certificate of
deposit portfolio in the current quarter compared to the prior year
quarter.  During fiscal year 2007, the Bank increased the rates
offered on its certificate of deposit portfolio, with an emphasis on the
mid-term maturity category, in order to remain competitive.  This
resulted in a higher weighted average certificate of deposit portfolio rate in
the current quarter than the prior year quarter as some of those higher rate
certificates were still outstanding during the current quarter.





Interest
expense on FHLB advances for the current quarter was $31.8 million compared to
$38.5 million for the prior year quarter.  The $6.7 million decrease
in interest expense was a result of a decrease in the average balance due to
maturing advances that were not renewed, and to a small extent, the termination
of $575.0 million of the interest rate swaps in December 2007.  During
the current quarter, interest expense of $238 thousand was related to the
interest rate swaps, compared to $3.3 million of interest expense in the prior
year quarter.


33


Interest
expense on other borrowings was $3.9 million compared to $1.1 million in the
prior year quarter.  The $2.8 million increase was due to an increase
in the average balance of other borrowings due to the Bank entering into $400.0
million of repurchase agreements during fiscal year 2008.  Additional
information about the repurchase agreements is included under “Liquidity and
Capital Resources.”





The Bank
recorded a provision for loan losses of $119 thousand during the current
quarter, compared to a provision of $55 thousand in the same period in the prior
year.  See additional discussion regarding the provision for loan
losses in the section entitled “Asset Quality”.





Total
other income for the current quarter was $8.0 million compared to $5.5 million
in the prior year quarter.  The $2.5 million increase in other income
was primarily a result of an increase of $1.1 million in other income, net, an
increase of $612 thousand in income from BOLI and an increase of $508 thousand
in retail fees.  The increase in other income, net was primarily due
to the redemption of shares received in the Visa, Inc. initial public offering
of $992 thousand.  BOLI income was $612 thousand for the current
quarter, compared to no income from BOLI in the prior year quarter, as the
Bank’s BOLI purchase was made in the fourth quarter of fiscal year
2007.  Retail fees increased during the current quarter as a result of
an increase in ATM and Visa check card usage and a net increase in checking
account fees.





Total
other expenses for the current quarter increased $843 thousand to $20.9 million
compared to $20.1 million in the prior year quarter.  The increase was
due primarily to an increase in other, net expenses of $597 thousand, and
deposit and loan expense of $266 thousand, partially offset by a decrease in
office supplies and related expense of $274 thousand.  The increase in
other expense, net was due primarily to a valuation allowance for MSR of $523
thousand taken in the current quarter due to an increase in prepayment speeds
and also to an increase of $284 thousand in a liability accrual related to
ongoing litigation involving Visa, Inc.  The increase in deposit and
loan expense was due to an increase in volume-based Visa check card expenses and
to an increase in loan expenses due to a higher volume of loans originated
during the current quarter compared to the prior year quarter.  The
decrease in office supplies and related expense was due to a decrease in postage
and stationery expense associated with data processing conversion-related
mailings in the first quarter of fiscal year 2007.





Income
tax expense for the current quarter was $6.2 million compared to $5.6 million in
the prior year quarter.  The increase in income tax expense was due to
an increase in earnings compared to the prior year quarter, partially offset by
a decrease in the effective tax rate.  The effective tax rate for the
current quarter was 34.7%, compared to 39.8% for the prior year
quarter.  The decrease in the effective tax rate in the current
quarter compared to the prior year quarter was a result of an increase in
nontaxable income from municipal securities and BOLI.


34


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, 2008 to the quarter ended
March 31, 2007.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate





Quarter
      Ended March 31,2008
      vs. 2007Increase
      (Decrease) Due toVolume
            
            
            Rate
            
            
            Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            1,188
            
            
            $
            98
            
            
            $
            1,286Mortgage-related
      securities
            
            
            1,358
            
            
            
            1,571
            
            
            
            2,929Investment
      securities
            
            
            (4,925
            )
            
            
            (1,276
            )
            
            
            (6,201
            )Capital
      stock of FHLB
            
            
            (412
            )
            
            
            (268
            )
            
            
            (680
            )Cash
      equivalents
            
            
            594
            
            
            
            (685
            )
            
            
            (91
            )Total
      interest-earning assets
            
            $
            (2,197
            )
            
            $
            (560
            )
            
            $
            (2,757
            )Interest-bearing
      liabilities:Savings
            
            $
            212
            
            
            $
            (476
            )
            
            $
            (264
            )Checking
            
            
            (2
            )
            
            
            --
            
            
            
            (2
            )Money
      market
            
            
            (39
            )
            
            
            (1,678
            )
            
            
            (1,717
            )Certificates
            
            
            244
            
            
            
            617
            
            
            
            861FHLB
      advances
            
            
            (6,746
            )
            
            
            34
            
            
            
            (6,712
            )Other
      borrowings
            
            
            3,419
            
            
            
            (647
            )
            
            
            2,772Total
      interest-bearing liabilities
            
            $
            (2,912
            )
            
            $
            (2,150
            )
            
            $
            (5,062
            )Net
      change in net interest and dividend income
            
            $
            715
            
            
            $
            1,590
            
            
            $
            2,305











Comparison
of Operating Results for the Six Months Ended March 31, 2008 and
2007




Net
income for the six months ended March 31, 2008 was $20.8 million compared to
$18.7 million for the same period in the prior fiscal year. The $2.1 million
increase in net income was primarily a result of an increase in other income of
$3.2 million, an increase in net interest and dividend income of $1.1 million,
and a decrease in income tax expense of $632 thousand, partially offset by an
increase in other expense of $2.5 million.





Total
interest and dividend income for the current six month period was $202.8 million
compared to $209.7 million for the prior year period.  The $6.9
million decrease was a result of a decrease in interest income on investments of
$8.8 million, cash and cash equivalent interest income of $1.7 million, and
dividends on FHLB stock of $1.3 million, partially offset by an increase in
interest on loans receivable of $4.4 million, and interest income on
mortgage-related securities of $535 thousand.





Interest
income on loans receivable for the current six month period was $151.5 million
compared to $147.2 million for the prior year period.  The $4.3
million increase was a result of both an increase in the average balance of the
loan portfolio between the two periods and an increase of eight basis points in
the weighted average yield of the loan


35


portfolio
to 5.71% for the current six month period.  The increase in the
weighted average yield can be attributed to loans originated at rates higher
than the overall portfolio rate and to ARM loans repricing.





Interest
income on mortgage-related securities for the current six month period was $37.4
million compared to $36.8 million for the same period in the prior
year.  The $535 thousand increase in interest income was due to an
increase of 31 basis points in the average yield to 4.60% for the current six
month period, which was almost entirely offset by a decrease in the average
balance.  The weighted average yield of the mortgage-related
securities portfolio increased between the two periods due to the purchase of
mortgage-related securities with yields higher than that of the existing
portfolio.  The decrease in the average portfolio balance was due
primarily to principal repayments that were not reinvested in mortgage-related
securities during fiscal year 2007 as these proceeds were used, in part, to pay
down maturing FHLB advances.





Interest
income on investment securities for the current six month period was $7.2
million compared to $15.9 million for the same period in the prior
year.  The $8.8 million decrease in interest income was primarily a
result of a decrease in the average balance of the portfolio and, to a lesser
extent, a 60 basis point decrease in the weighted average portfolio yield to
4.13% for the current six month period.  The decrease in the average
balance was a result of maturities and calls which were not reinvested into
investment securities and were used, in part, to pay down maturing FHLB advances
and purchase higher yielding mortgage-related securities during fiscal year
2008. The decrease in the weighted average yield of the portfolio was attributed
to calls and maturities of securities with weighted average yields greater than
that of the portfolio.





Dividends
on FHLB stock for the current six month period was $3.9 million compared to $5.2
million for the same period in the prior year.  The $1.3 million
decrease was due to a decrease in the average balance and a 51 basis point
decrease in the average yield.  The decrease in the average balance
was due to the redemption of shares, as the required number of shares held is
based upon outstanding FHLB advances, which decreased during the
period.  The dividend rate on FHLB stock correlates to the federal
funds rate, which also decreased during the period.





Interest
income on cash and cash equivalents for the six months was $2.8 million compared
to $4.5 million for the same period in the prior year.  The $1.7
million decrease in interest income was a result of a 149 basis point decrease
in the average yield to 3.66% for the current six months and a decrease in the
average balance.  The decrease in the average yield was due to a
decrease in short-term interest rates.  The decrease in the average
balance of cash and cash equivalents related primarily to the timing of the
repayment of maturing FHLB advances.





Interest
expense on deposits for the current six month period was $73.2 million compared
to $71.7 million for the same period in the prior year.  The $1.5
million increase in interest expense was primarily a result of a higher weighted
average rate on the certificate of deposit portfolio in the current six month
period compared to the same period in the prior year.  During fiscal
year 2007, the Bank increased the rates offered on its certificate of deposit
portfolio, with an emphasis on the mid-term maturity category, in order to
remain competitive.  This resulted in a higher weighted average
certificate of deposit portfolio rate in the current six month period than the
previous year period as some of those certificates were outstanding during the
current six month period.  The increase in interest expense was
partially offset by a decrease in the average rate paid on the money market
portfolio as this portfolio reprices to market rates quicker than the
certificate of deposit portfolio.





Interest
expense on FHLB advances for the current six month period was $66.0 million
compared to $79.2 million for the same period in the prior year.  The
$13.2 million decrease in interest expense was a result of a decrease of $594.1
million in the average balance due to maturing advances that were not
renewed.





Interest
expense on other borrowings was $6.1 million compared to $2.2 million in the
prior year six months.  The $3.9 million increase was due to an
increase in the average balance of other borrowings due to the Bank entering
into $400.0 million of repurchase agreements during fiscal year
2008.  The increase was partially offset by a decrease in the rate
paid on $53.6 million of other borrowings tied to the three month LIBOR, which
decreased between the periods.  Additional information about the
repurchase agreements is included under “Liquidity and Capital
Resources.”


36


The Bank
recorded a provision for loan losses of $119 thousand during the current six
month period compared to a recovery of $225 thousand in the same period in the
prior year.  See additional discussion regarding the provision for
loan losses in the section entitled “Asset Quality”.





Total
other income for the current six month period was $15.1 million compared to
$11.9 million in the same prior year period.  The $3.2 million
increase in other income was due primarily to increases in BOLI income, other
income, net, and retail fees.  BOLI income was $1.2 million for the
current six month period, compared to no income from BOLI in the prior year
period.  Other income, net increased $1.1 million due primarily to the
redemption of shares received in the Visa, Inc. initial public
offering.  Retail fees increased $507 thousand due primarily to an
increase in fees received on ATM and Visa check cards from increased volume and
an increase in the interchange rate received on point-of-sale
transactions.





Total
other expenses for the current six month period increased $2.5 million to $40.4
million compared to $37.9 million in the prior year period.  The
increase was due primarily to an increase in other expense, net of $1.4 million,
and an increase in deposit and loan expense of $571 thousand.  These
increases were partially offset by a decrease in office supplies and related
expense of $629 thousand.  The increase in other expense, net was due
primarily to a liability accrual of $594 thousand related to ongoing litigation
involving Visa, Inc., relative to a decrease in miscellaneous operating expenses
in the prior year six month period which were individually insignificant, but in
the aggregate resulted in an increase of $1.0 million.  The increase
in other expense, net was also due to a valuation allowance taken on the MSR
asset in the current six month period due to an increase in prepayment
speeds.  The increase in deposit and loan expense was due primarily to
an increase in Visa check card fees and ATM network expense from increased
transaction volume.  The increase in occupancy expense related
primarily to an increase in depreciation of the core information technology
assets, partially offset by a decrease in software maintenance
expense.  The increase in salaries and employee benefits was due
primarily to no capitalization of payroll expense in the current six month
period while amounts related to the core conversion were capitalized in the
prior year six month period, and also to increased payroll expense resulting
from the hiring of new employees for existing vacant and new positions, filling
positions held open during the previous year six month period prior to the core
computer system conversion. These increases in salaries and employee benefits
were partially offset by a decrease in ESOP expense due to a decrease in the
average price of the Company’s common stock during the six month period. The
decrease in office supplies and related expense was due to a decrease in postage
and stationery expense associated with conversion-related mailings in the prior
six month period.





Income
tax expense for the current six month period was $11.4 million compared to $12.0
million in the prior year.  The decrease in income tax expense was due
to a decrease in the effective tax rate for the current six month period to
35.4%, compared to 39.2% for the same period in the prior year.  The
decrease in the effective tax rate in the current period was a result of an
increase in nontaxable income from BOLI and municipal
securities.


37


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





For
      the Six Months EndedMarch
      31, 2008
            
            
            March
      31, 2007Average
            
            
            
            
            
            AverageOutstanding
            
            
            Yield/
            
            
            Outstanding
            
            
            Yield/Balance
            
            
            Rate
            
            
            Balance
            
            
            RateAssets:
            
            (Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable (1)
            
            $
            5,308,286
            
            
            
            5.71
            %
            
            $
            5,229,290
            
            
            
            5.63
            %Mortgage-related
      securities
            
            
            1,626,128
            
            
            
            4.60
            
            
            
            1,719,138
            
            
            
            4.29Investment
      securities
            
            
            348,058
            
            
            
            4.13
            
            
            
            674,394
            
            
            
            4.73Capital
      stock of FHLB
            
            
            132,072
            
            
            
            5.97
            
            
            
            162,198
            
            
            
            6.48Cash
      and cash equivalents
            
            
            150,176
            
            
            
            3.66
            
            
            
            176,195
            
            
            
            5.16Total
      interest-earning assets (1)
            
            
            7,564,720
            
            
            
            5.36
            
            
            
            7,961,215
            
            
            
            5.27Other
      noninterest-earning assets
            
            
            203,036
            
            
            
            
            
            
            
            171,534Total
      assets
            
            $
            7,767,756
            
            
            
            
            
            
            $
            8,132,749Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Deposits
            
            $
            3,939,977
            
            
            
            3.70
            
            
            $
            3,885,534
            
            
            
            3.71FHLB
      advances (2)
            
            
            2,597,716
            
            
            
            5.04
            
            
            
            3,191,838
            
            
            
            4.92Other
      borrowings
            
            
            236,049
            
            
            
            5.07
            
            
            
            53,479
            
            
            
            8.25Total
      interest-bearing liabilities
            
            
            6,773,742
            
            
            
            4.26
            
            
            
            7,130,851
            
            
            
            4.29Other
      noninterest-bearing liabilities
            
            
            124,776
            
            
            
            
            
            
            
            135,137Stockholders'
      equity
            
            
            869,238
            
            
            
            
            
            
            
            866,761Total
      liabilities and stockholders' equity
            
            $
            7,767,756
            
            
            
            
            
            
            $
            8,132,749Net
      interest rate spread
            
            
            
            
            
            
            1.10
            %
            
            
            
            
            
            
            0.99
            %Net
      interest-earning assets
            
            $
            790,978
            
            
            
            
            
            
            $
            830,364Net
      interest margin
            
            
            
            
            
            
            1.52
            %
            
            
            
            
            
            
            1.42
            %Ratio
      of interest-earning assetsto
      interest-bearing liabilities
            
            
            
            
            
            
            1.12
            
            
            
            
            
            
            
            1.12Selected
      Performance Ratios:Return
      on average assets (annualized)
            
            
            
            
            
            
            0.54
            %
            
            
            
            
            
            
            0.46
            %Return
      on average equity (annualized)
            
            
            
            
            
            
            4.80
            %
            
            
            
            
            
            
            4.32
            %Average
      equity to average assets
            
            
            
            
            
            
            11.19
            %
            
            
            
            
            
            
            10.66
            %


(1)Calculated
net of deferred loan fees, loan discounts, and loans in
process.  Non-accruing loans are included in the loans receivable
average balance with a yield of zero percent.




(2)The
rate calculation includes net interest expense of $2.4 million and $6.7 million
related to the interest rate swaps for the six months ended March 31, 2008 and
March 31, 2007, respectively.




38


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, 2008 to the six months
ended March 31, 2007.  For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume, which are changes in the average balance
multiplied by the previous year’s average rate and (2) changes in rate, which
are changes in the average rate multiplied by the average balance from the
previous year.  The net changes attributable to the combined impact of
both rate and volume have been allocated proportionately to the changes due to
volume and the changes due to rate.





For
      the Six Months EndedMarch
      31, 2008 vs. March 31, 2007Increase
      (Decrease) Due toVolume
            
            
            Rate
            
            
            Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            2,159
            
            
            $
            2,198
            
            
            $
            4,357Mortgage-related
      securities
            
            
            (2,053
            )
            
            
            2,588
            
            
            
            535Investment
      securities
            
            
            (6,944
            )
            
            
            (1,811
            )
            
            
            (8,755
            )Capital
      stock of FHLB
            
            
            (912
            )
            
            
            (387
            )
            
            
            (1,299
            )Cash
      and cash equivalents
            
            
            (586
            )
            
            
            (1,147
            )
            
            
            (1,733
            )Total
      interest-earning assets
            
            $
            (8,336
            )
            
            $
            1,441
            
            
            $
            (6,895
            )Interest-bearing
      liabilities:Savings
      (1)
            
            $
            1,208
            
            
            $
            81
            
            
            $
            1,289Checking
            
            
            (9
            )
            
            
            (29
            )
            
            
            (38
            )Money
      market
            
            
            (277
            )
            
            
            (3,885
            )
            
            
            (4,162
            )Certificates
      (1)
            
            
            (129
            )
            
            
            4,482
            
            
            
            4,353FHLB
      advances
            
            
            (16,770
            )
            
            
            3,478
            
            
            
            (13,292
            )Other
      borrowings
            
            
            4,988
            
            
            
            (1,138
            )
            
            
            3,850Total
      interest-bearing liabilities
            
            $
            (10,989
            )
            
            $
            2,989
            
            
            $
            (8,000
            )Net
      change in net interest and dividend income
            
            $
            2,653
            
            
            $
            (1,548
            )
            
            $
            1,105





(1)The increase in the volume and the rate
in the savings accounts is related to the variable-rate retirement certificate
of deposits that were reclassified to savings from certificates as the
reclassified accounts did not have a stated maturity date as a result of changes
required by the new core information technology processing
system.  The change in volume and rate on the savings accounts would
have been a decrease of $363 thousand and a decrease of $753 thousand,
respectively, excluding the variable-rate retirement certificates reclassified
to savings.  The change in the volume and rate on the certificates
would have been an increase of $3.0 million and an increase of $2.4 million,
respectively, including the variable-rate retirement certificates reclassified
to savings.








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





For the
quarter ended March 31, 2008, the Company recognized net income of $11.7
million, compared to net income of $9.1 million for the quarter ended December
31, 2007.  The $2.6 million increase in net income was primarily the
result of a $4.4 million increase in net interest and dividend income and an
increase of $872 thousand in other income, partially offset by an increase in
other expense of $1.5 million and income tax expense of $1.1
million.





Total
interest and dividend income for the current quarter was $101.8 million compared
to $101.0 million for the quarter ended December 31, 2007.  The $787
thousand increase was a result of an increase in interest income
on


39


mortgage-related
securities of $3.1 million, partially offset by decreases in interest income on
investment securities of $1.1 million and loans receivable of $987 thousand, and
dividends on FHLB stock of $217 thousand.





Interest
income on loans receivable for the current quarter was $75.3 million compared to
$76.3 million for the quarter ended December 31, 2007.  The $987
thousand decrease in interest income was primarily a result of a seven basis
point decrease in the average yield of the portfolio to 5.67% for the current
quarter.  The decrease in the average yield was due to a decrease in
the average yield of the home equity portfolio as a result of a decrease in the
prime rate, and to modifications on mortgage loans.





Interest
income on mortgage-related securities for the current quarter was $20.2 million
compared to $17.1 million for the quarter ended December 31,
2007.  The $3.1 million increase was primarily a result of a $259.7
million increase in the average balance of the portfolio due to
purchases.





Interest
income on investment securities for the current quarter was $3.1 million
compared to $4.1 million for the quarter ended December 31, 2007.  The
$1.0 million decrease was primarily a result of a decrease in the average
balance of $86.7 million for the current quarter due to calls and maturities
that were not reinvested in the investment securities portfolio.





Interest
expense decreased $3.6 million to $70.8 million for the current quarter from
$74.4 million for the quarter ended December 31, 2007.  The decrease
was due to a decrease in interest expense on deposits of $2.9 million
and  FHLB advances of $2.4 million, partially offset by an increase in
interest expense on other borrowings of $1.7 million.  The decrease in
deposit interest expense was primarily a result of a decrease in the rate paid
on money market, certificates, and retirement savings accounts due to a decrease
in market rates.  The weighed average rate of the certificate of
deposit portfolio also decreased as certificates with higher rates matured
during the current quarter.  The decrease in interest expense on FHLB
advances was primarily a result of a decrease in interest expense on the swapped
FHLB advances due to the termination of certain interest rate swaps in December
2007 and partially due to a decrease in the average balance as not all maturing
FHLB advances were renewed during the quarter.  The increase in
interest expense on other borrowings of $1.7 million was due to an increase in
the average balance of other borrowings due to the Bank entering into additional
repurchase agreements during the second quarter of fiscal year
2008.





The Bank
recorded a provision for loan losses of $119 thousand during the current
quarter.  No provision was recorded in the prior
quarter.  See additional discussion regarding the provision for loan
losses in the section entitled “Asset Quality”.





Total
other income increased $871 thousand to $8.0 million for the current quarter
compared to $7.1 million for the quarter ended December 31,
2007.  Other income, net increased primarily as a result of the
redemption of shares received in the Visa, Inc. initial public
offering.  Retail fees and charges decreased as a result of a decrease
in overdraft fees, ATM fees, and fee income from Visa check cards.





Total
other expenses for the current quarter were $20.9 million for the current
quarter, compared to $19.5 million in the prior quarter.  The increase
in other expenses, net was due primarily to an increase in the MSR valuation
allowance,an increase in losses related to low-income housing partnerships,
which were purchased for their related tax credits, and an increase in office
supplies and related expenses of $170 thousand due to an increase in postage and
several large supply purchases.  The increase in advertising expense
was due to the timing of media campaigns.  The increase in occupancy
expense was due primarily to an increase in software maintenance.  The
decrease in salaries and employee benefits was due primarily to a decrease in
payroll expense, partially offset by adjustments to performance-related accruals
and benefits whose expense is affected by the price of the Company’s
stock.





Income
tax expense for the current quarter was $6.2 million compared to $5.2 million
for the quarter ended December 31, 2007.  The increase in income tax
expense was primarily due to an increase in earnings for the current quarter,
partially offset by a decrease in the effective tax rate for the current
quarter.  The effective tax rate for the current quarter was 34.7%
compared to 36.2% for the quarter ended December 31, 2007.  The
decrease in the effective tax rate between quarters was a result of a decrease
in FIN 48 items due to lapses in applicable statutes of limitations and
adjustments to the deferred state tax rate in the current
quarter.


40





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, 2008 to the quarter ended
December 31, 2007.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate.








Quarter
      EndedMarch
      31, 2008 vs. December 31, 2007Increase
      (Decrease) Due toVolume
            
            
            Rate
            
            
            Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            (65
            )
            
            $
            (922
            )
            
            $
            (987
            )Mortgage-related
      securities
            
            
            2,990
            
            
            
            129
            
            
            
            3,119Investment
      securities
            
            
            (880
            )
            
            
            (189
            )
            
            
            (1,069
            )Capital
      stock of FHLB
            
            
            (45
            )
            
            
            (172
            )
            
            
            (217
            )Cash
      and cash equivalents
            
            
            380
            
            
            
            (438
            )
            
            
            (58
            )Total
      interest-earning assets
            
            $
            2,380
            
            
            $
            (1,592
            )
            
            $
            788Interest-bearing
      liabilities:Savings
            
            $
            (28
            )
            
            $
            (454
            )
            
            $
            (482
            )Checking
            
            
            8
            
            
            
            --
            
            
            
            8Money
      market
            
            
            105
            
            
            
            (2,082
            )
            
            
            (1,977
            )Certificates
            
            
            299
            
            
            
            (736
            )
            
            
            (437
            )FHLB
      advances
            
            
            (1,123
            )
            
            
            (1,242
            )
            
            
            (2,365
            )Other
      borrowings
            
            
            2,111
            
            
            
            (445
            )
            
            
            1,666Total
      interest-bearing liabilities
            
            $
            1,372
            
            
            $
            (4,959
            )
            
            $
            (3,587
            )Net
      change in net interest and dividend income
            
            $
            1,008
            
            
            $
            3,367
            
            
            $
            4,375





41


Liquidity
and Capital Resources





Liquidity
management is both a daily and long-term function of our business
management.  The Bank’s most available liquid assets, represented by
cash and cash equivalents, available-for-sale mortgage-related and investment
securities, and short-term investment securities, are a product of its
operating, investing and financing activities.  The Bank’s primary
sources of funds are deposits, FHLB advances, other borrowings, repayments on
and maturities of outstanding loans and mortgage-related securities, other
short-term investments, and funds provided from operations.  While
scheduled payments from the amortization of loans and mortgage-related
securities and payments on short-term investments are relatively predictable
sources of funds, deposit flows and prepayments on loans and mortgage-related
securities are greatly influenced by general interest rates, economic conditions
and competition and are less predictable sources of funds.  To the
extent possible, the Bank manages the cash flows of its portfolios by the rates
it offers customers.  Sources of funds are used primarily to meet
ongoing operations, to pay maturing certificates of deposit and savings
withdrawals, and to fund loan commitments.  At March 31, 2008,
approximately $1.66 billion of the $2.54 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, 2008, cash and cash equivalents totaled $264.5 million, an increase of
$101.7 million from September 30, 2007.  The increase in cash was due
to higher cash receipts from called and maturing securities, principal
repayments, deposits, and proceeds from borrowings in March.




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




During
fiscal year 2008, the Bank entered into repurchase agreements totaling $400.0
million.  The agreements are treated as secured borrowings and are
reported as a liability of the Company on a consolidated basis.  The
Bank has pledged securities with a market value of $413.8 million as
collateral.  At the maturity date of these borrowings, the pledged
securities will be delivered to the Bank.  The Bank may enter into
additional repurchase agreements as management deems appropriate




In 2004,
the Company issued $53.6 million in Junior Subordinated Deferrable Interest
Debentures (“Debentures”) in connection with a trust preferred securities
offering.  The Company received, net, $52.0 million from the issuance
of the Debentures and an investment of $1.6 million in Capitol Federal Financial
Trust I (the “Trust”).  The Company did not down-stream the proceeds
to be used by the Bank for Tier 1 capital because the Bank exceeded all
regulatory requirements to be a well-capitalized
institution.  Instead, the Company deposited the proceeds into
certificate accounts at the Bank to be used to further the Company’s general
corporate and capital management strategies, which could include the payment of
dividends.




Despite
the current challenging rate environment, it is management’s and the board of
directors’ intention to continue to pay regular quarterly dividends of $0.50 per
share for the foreseeable future.  MHC, which owns a majority of the
outstanding shares of CFFN common stock, generally waives its right to receive
dividends paid on the common stock.  See additional discussion and
calculation of public shares in “Item 2, Management’s Discussion and Analysis –
Stockholders’ Equity.” At March 31, 2008, CFFN, at the holding company level,
had $106.6 million in cash and certificates of deposit at the Bank to be used to
further the Company's general corporate and capital management strategies, which
could include the payment of dividends.




42


Off
Balance Sheet Arrangements, Commitments and Contractual Obligations




The
Company, in the normal course of business, makes commitments to buy or sell
assets or to incur or fund liabilities.  Commitments may include, but
are not limited to:




·
            the
      origination, purchase, or sale of
loans


·
            the
      purchase or sale of investment and mortgage-related
      securities,


·
            extensions
      of credit on home equity loans and construction
  loans,


·
            terms
      and conditions of operating leases,
and


·
            funding
      withdrawals of savings accounts at
maturity.





The
Company’s contractual obligations related to operating leases and debentures
have not changed significantly from September 30, 2007.  The following
table summarizes our other contractual obligations as of March 31,
2008.





Maturity
      RangeLess
      than
            
            
            
            1
      - 3
            
            
            
            3
      - 5
            
            
            More
      thanTotal
            
            
            1
      year
            
            
            years
            
            
            years
            
            
            5
      years(Dollars
      in thousands)FHLB
      Advances
            
            $
            2,546,000
            
            
            $
            925,000
            
            
            $
            1,445,000
            
            
            $
            176,000
            
            
            $
            --4.87
            %
            
            
            4.44
            %
            
            
            5.19
            %
            
            
            4.53
            %
            
            
            --
            %Repurchase
      Agreements
            
            
            400,000
            
            
            
            --
            
            
            
            150,000
            
            
            
            225,000
            
            
            
            25,0003.88
            %
            
            
            --
            
            
            
            3.76
            %
            
            
            4.02
            %
            
            
            3.33
            %Certificates
      of Deposit
            
            
            2,538,618
            
            
            
            1,658,714
            
            
            
            797,203
            
            
            
            81,377
            
            
            
            1,3244.54
            %
            
            
            4.63
            %
            
            
            4.41
            %
            
            
            4.17
            %
            
            
            4.39
            %Commitments
      to originate andpurchase
      mortgage loans
            
            
            175,823
            
            
            
            175,823
            
            
            
            --
            
            
            
            --
            
            
            
            --5.63
            %
            
            
            5.63
            %
            
            
            --
            %
            
            
            --
            %
            
            
            --
            %Commitments
      to fund unused homeequity
      lines of credit
            
            
            271,188
            
            
            
            271,188
            
            
            
            --
            
            
            
            --
            
            
            
            --6.71
            %
            
            
            6.71
            %
            
            
            --
            %
            
            
            --
            %
            
            
            --
            %Unadvanced
      portion ofconstruction
      loans
            
            
            45,033
            
            
            
            45,033
            
            
            
            --
            
            
            
            --
            
            
            
            --





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





The
maturity schedule for our certificate of deposit portfolio at March 31, 2008 is
located under “Item 3. Quantitative and Qualitative Disclosure About Market
Risk.”  We anticipate that we will continue to have sufficient funds,
through repayments and maturities of loans and securities, deposits and
borrowings, to meet our current commitments.


43




The
following table presents the maturity of FHLB advances at par and repurchase
agreements as of March 31, 2008.  The balance of advances excludes the
unrealized loss adjustment on the remaining swapped FHLB advance and the
deferred gain on the terminated interest rate swaps.  Management will
continue to monitor the Bank’s investment opportunities and balance those
opportunities with the cost of FHLB advances or other funding sources throughout
fiscal year 2008.





Actual
      rates
            
            
            EffectiveFHLB
            
            
            Repurchase
            
            
            without
            
            
            rates
      withMaturity
      by
            
            Advances
            
            
            Agreements
            
            
            interest
      rate
            
            
            interest
      rateFiscal
      year
            
            Amount
            
            
            Amount
            
            
            swaps
            
            
            swaps(Dollars
      in thousands)2008
            
            $
            625,000
            
            
            $
            --
            
            
            
            4.58
            %
            
            
            4.37
            %2009
            
            
            620,000
            
            
            
            --
            
            
            
            4.27
            
            
            
            4.272010(1)
            
            
            925,000
            
            
            
            25,000
            
            
            
            5.50
            
            
            
            5.502011
            
            
            276,000
            
            
            
            150,000
            
            
            
            4.49
            
            
            
            4.492012
            
            
            100,000
            
            
            
            150,000
            
            
            
            4.22
            
            
            
            4.222013
            
            
            --
            
            
            
            75,000
            
            
            
            3.43
            
            
            
            3.43Total
            
            $
            2,546,000
            
            
            $
            400,000
            
            
            
            4.74
            %
            
            
            4.69
            %





(1)The interest rate swaps hedged against
a portion of these advances were terminated during the first quarter of fiscal
year 2008. The effective rate with interest rate swaps includes the rate
adjustment associated with the deferred gain related to the interest rate swap
termination, which will be amortized as a rate adjustment over the remaining
life of the related advances.





The
following table presents the maturity of FHLB advances for the next four
quarters as of March 31, 2008.  As of March 31, 2008, the Bank had an
interest rate swap agreement with a notional amount of $225.0 million that is
scheduled to mature in May 2008.





WeightedAverageMaturity
      by Quarter End
            
            Amount
            
            
            Rate(Dollars
      in thousands)June
      30, 2008
            
            $
            425,000
            
            
            
            4.85
            %September
      30, 2008
            
            
            200,000
            
            
            
            3.99December
      31, 2008
            
            
            --
            
            
            
            --March
      31, 2009
            
            
            300,000
            
            
            
            4.16$
            925,000
            
            
            
            4.
      44
            %





In
December 2003, management entered into interest rate swap agreements with an
aggregate notional amount of $800.0 million to modify the Bank’s interest rate
risk profile by hedging certain FHLB advances.   In December
2007, management terminated interest rate swap agreements with an aggregate
notional amount of $575.0 million due to favorable economic market
conditions.  The interest rate swaps were scheduled to mature in
fiscal year 2010.  The net position at the time of termination was a
gain of $1.7 million which is being deferred and recorded as a yield adjustment
to the related advances over the remaining term to maturity of the
advances.  The termination of the interest rate swap agreements
improved the interest rate risk profile of the Bank by extending the effective
repricing frequency of the related advances from monthly to their stated
maturity.  See “Notes to Consolidated Financial Statements—Note
4.”




Contingencies




In the
normal course of business, the Company and its subsidiary are named defendants
in various lawsuits and counter claims.  In the opinion of management,
after consultation with legal counsel, none of the currently pending suits are
expected to have a materially adverse effect on the Company’s consolidated
financial statements for the current interim or future periods.




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 $800.0 million at
March 31, 2008, or 10.0% of total Bank assets on that date.  As of
March 31, 2008, the Bank exceeded all capital requirements of the
OTS.  The following table presents the Bank’s regulatory capital
ratios at March 31, 2008 based upon regulatory guidelines.


RegulatoryRequirementBank
            
            
            For
      “WellRatios
            
            
            Capitalized”
      StatusCore
      capital
            
            
            9.8
            %
            
            
            5.0
            %Tier
      I risk-based capital
            
            
            23.0
            %
            
            
            6.0
            %Total
      risk-based capital
            
            
            22.8
            %
            
            
            10.0
            %







The
long-term ability of the Company to pay dividends to its stockholders is based
primarily upon the ability of the Bank to make capital distributions to the
Company.  Under OTS safe harbor regulations, the Bank may distribute
to the Company capital not exceeding net income for the current calendar year
and the prior two calendar years.  Due to the impact refinancing FHLB
advances had on earnings in 2004, the Bank cannot distribute capital to the
Company unless it receives waivers of the safe harbor regulation from the OTS
during the current waiver period.  It is likely a waiver will be
necessary through December 31, 2008.  Currently, the Bank has
authorization from the OTS to distribute capital from the Bank to the Company
through the quarter ending June 30, 2008.  So long as the Bank
continues to maintain excess capital, operate in a safe and sound manner, and
comply with the interest rate risk management guidelines of the OTS, it is
management’s belief that the Bank will continue to receive waivers allowing it
to distribute the net income of the Bank to the Company, although no assurance
can be given in this regard.




44





Item 3.   Quantitative and Qualitative
Disclosure About Market Risk





For a
complete discussion of the Company’s asset and liability management policies, as
well as the potential impact of interest rate changes upon the market value of
the Company’s portfolios, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management and Market
Risk” in the Company’s Annual Report to Stockholders for the year ended
September 30, 2007, attached as Exhibit 13 to the Company’s Annual Report on
Form 10-K for the year ended September 30, 2007.





ALCO
regularly reviews the interest rate risk exposure of the Bank by forecasting the
impact of hypothetical, alternative interest rate environments on net interest
income and measuring the market value of portfolio equity (“MVPE”) at various
dates.  The MVPE is defined as the net of the present value of the
cash flows of an institution’s existing assets, liabilities and off-balance
sheet instruments.  The present values are determined in alternative
interest rate environments providing potential changes in MVPE under those
alternative interest rate environments. The Bank’s analysis of its MVPE at March
31, 2008 indicates an increase in its risk exposure as compared to December 31,
2007.  The Bank’s analysis of the sensitivity of its net interest
income to parallel changes in interest rates at March 31, 2008 indicates an
increase in sensitivity since December 31, 2007.





For each
period end presented in the following table, the estimated percentage change in
the Bank’s net interest income based on the indicated instantaneous, parallel
and permanent change in interest rates is presented.  The percentage
change in each interest rate environment represents the difference between
estimated net interest income in the 0 basis point interest rate environment
(“base case”, assumes the forward market and product interest rates implied by
the yield curve are realized) and estimated net interest income in each
alternative interest rate environment (assumes market and product interest rates
have a parallel shift in rates across all maturities by the indicated change in
rates).  At March 31, 2008, the three-month Treasury bill was 1.38%,
so the -200 basis point scenario is not presented.  Estimations of net
interest income used in preparing the table below are based upon the assumptions
that the total composition of interest-earning assets and interest-bearing
liabilities does not change materially
and that any repricing of assets or liabilities occurs at anticipated product
and market rates for the alternative rate environments as of the dates
presented.  The estimation of net interest income does not include any
change in the amount of unamortized premium on mortgage-related securities, any
projected gain-on-sale related to the sale of loans or securities or the effect
of the use of new interest rate swaps or income derived from non-interest income
sources, but does include the use of different prepayment assumptions in the
alternative interest rate environments.  It is important to consider
that the estimated changes in net interest income are for a cumulative
four-quarter period.  These do not reflect the earnings expectations
of management.





Percentage
      Change in Net Interest IncomeAtChange
      (in Basis Points)
            
            
            March
      31,
            December
      31,
            September
      30,in
      Interest Rates (1)
            
            
            2008
            2007
            2007-100
      bp
            
            
            -2.23
            1.63
            14.530
      bp
            
            
            --
            --
            --+100
      bp
            
            
            -3.27
            -2.77
            -8.30+200
      bp
            
            
            -7.84
            -9.31
            -23.25+300
      bp
            
            
            -13.38
            -16.56
            -38.61





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





The
primary reason for the decrease in estimated net interest income in the
increasing rate environments is the anticipated increase in the cost of deposits
in excess of the increases in yields in the loan and investment and
mortgage-related securities portfolios.  The increase in the cost of
deposits is primarily a result of the relatively short average maturity of the
Bank’s certificate of deposit portfolio.  The increase in the cost of
deposits is also due to anticipated increases in the cost of money market
accounts.  Changes in the rates on the mortgage loan and
mortgage-related securities portfolios happen at a slower pace, compared to the
interest-bearing liabilities, because only the amount of cash flow received on
the repayment of these portfolios is reinvested at the higher rates. In
addition, caps on adjustable-rate products limit the increase in rates in these
assets when rates rise.  The lower sensitivity of earnings to
increases in market rates from December 31, 2007 to March 31, 2008 is in part
due to the lengthening of the maturities of advances and other borrowed
money.





The
decrease in estimated net interest income if interest rates were to decrease 100
basis points is primarily the result of the significant increase in prepayment
on mortgage related assets that will need to be reinvested at lower
yields.  This did not occur in the down 100 basis point scenario as of
December 31, 2007 because interest rates were higher at that time resulting in
longer average lives for mortgage related assets.  Interest rates were
lower at March 31, 2008 resulting in shorter average lives in the base
case.  A further reduction in interest rates, such as in the down 100
basis point scenario, results in assets repricing at a faster pace than
liabilities.  The increased sensitivity to earnings in the decreasing
rate environments is also attributable to longer maturity FHLB advances and
other borrowed money relative to faster repricing assets.





As a
result of the flat or inverted yield curve during fiscal year 2007 and the
relatively short term to reprice of our liabilities compared to our assets, the
Bank experienced net interest margin compression during fiscal year
2007.  The steeper yield curve during the first half of fiscal year
2008 has benefitted the net interest margin as short-term liabilities have
repriced at lower interest rates while cashflows from the mortgage loan and
mortgage-related securities portfolios have been reinvested at relatively higher
rates, which has caused an increase in earnings.


45


The
following table sets forth the estimated percentage change in MVPE at each
period end presented based on the indicated instantaneous, parallel and
permanent change in interest rates.  The MVPE is defined as the net of
the present value of the cash flows of an institution’s existing assets,
liabilities and off-balance sheet instruments.  The percentage change
in each interest rate environment represents the difference between MVPE in the
base case and MVPE in each alternative interest rate environment.  At
March 31, 2008, the three-month Treasury bill was 1.38%, so the -200 basis point
scenario is not presented.  The estimations of MVPE used in preparing
the table below are based upon the assumptions that the total composition of
interest-earning assets and interest-bearing liabilities does not change, that
any repricing of assets or liabilities occurs at current product or market rates
for the alternative rate environments as of the dates presented, and that
different prepayment rates are used in each alternative interest rate
environment.  The estimated MVPE results from the valuation of cash
flows from financial assets and liabilities over the anticipated lives of each
for each interest rate environment.  The table presents the effects of
the change in interest rates on our assets and liabilities as they mature, repay
or reprice, as shown by the change in the MVPE in changing interest rate
environments.





Percentage
      Change in MVPEAtChange
      (in Basis Points)
            
            
            March
      31,
            
            December
      31,
            September
      30,in
      Interest Rates (1)
            
            
            2008
            
            2007
            2007-100
      bp
            
            
            0.30
            
            2.27
            5.370
      bp
            
            
            --
            
            --
            --+100
      bp
            
            
            -14.11
            
            -11.35
            -13.99+200
      bp
            
            
            -33.84
            
            -27.06
            -32.14+300
      bp
            
            
            -54.65
            
            -44.47
            -52.52





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





Changes
in the estimated market values of our financial assets and liabilities drive
changes in estimates of MVPE.  The market value of shorter
term-to-maturity financial instruments is less sensitive to changes in interest
rates than the market value of longer term-to-maturity financial
instruments.  Because of this, our certificates of deposit (which have
relatively short average lives) tend to display less sensitivity to changes in
interest rates than do our mortgage-related assets (which have relatively long
average lives).  However, the average life expected on our
mortgage-related assets varies under different interest rate environments
because customers have the ability to prepay their mortgage
loans.  Prepayment assumptions change on mortgage-related assets under
various interest rate environments because many customers with mortgage debt
look to obtain financing at the lowest cost available.  Generally,
there is no penalty to prepay a mortgage loan we have originated or
purchased.  If rates decrease, the customer has an economic incentive
to lower the cost of their mortgage (through a lower interest rate) with only
the fees associated with the new mortgage or loan modification to obtain the
lower cost mortgage.  In a decreasing rate environment, prepayments
increase and the average life of a mortgage shortens compared to higher rate
environments.  When interest rates increase, the economic incentive
for customers to modify their mortgage debt is reduced, resulting in lower
prepayment assumptions and longer average lives.  Holders of
certificates of deposit have the ability to modify the terms of their deposits
by withdrawing before maturity the balance in their
account.  Generally a penalty is assessed for early
withdrawal.  In a decreasing rate environment the economic incentive
to the depositor probably does not exist because the rate on the new account
would likely be lower than they are currently receiving.  Given the
short term nature of our certificates of deposit, in an increasing rate
environment customers will likely wait until maturity to change the terms of
their deposit, which would result in no change to the expected lives of our
certificates of deposit in a rising rate environment.  These
characteristics of financial assets and liabilities result in a decrease in the
estimated value of the Bank’s MVPE in rising rate environments.





The
Bank’s measure of its MVPE sensitivity to decreasing interest rates indicates a
small decrease in the MVPE at March 31, 2008 for the down 100 basis point
scenario.  The negative impact in the down interest rate environment
is caused primarily by the significant increase in the projected cash flows from
mortgage prepayments, refinances or modifications of loans to market rates lower
than in the base case analysis such that the lives of the assets would be
shorter than the liabilities than in the base case relative to changes in the
average lives of the liabilities.  The higher prepayment assumptions
shorten the expected average lives on our fixed-rate assets, thereby decreasing
the


46


sensitivity
of the present value of their cash flows to changes in interest rates, while the
expected average lives of our liabilities remains largely
unchanged.





The
Bank’s MVPE declines in rising interest rate environments as well.  As
rates increase, the estimated fair values of the liabilities with short average
lives do not respond to rates in the same manner as the longer maturity assets,
such as our fixed-rate loans, which have longer average lives.  The
prepayment assumptions on the fixed-rate loans in particular, and all loans in
general, anticipate prepayment rates in the increasing rate environments that
would likely only be realized through normal changes in customers lives, such as
divorce, death, job-related relocations, and other life changing
events.  The lower prepayment assumptions extend the expected average
lives on these assets, relative to assumptions in the base case, thereby
increasing their sensitivity to changes in interest rates.  The net
effect of these characteristics of short-lived liabilities and long-lived assets
is to increase the sensitivity of the Bank to changes in interest rates the more
rates increase.  The sensitivity of the Bank’s MVPE increased from
December 31, 2007 primarily due to lower interest rates that result in greater
changes to the average lives of mortgage related assets due to changing rates
and to an increase in the percentage of mortgage related assets to total
assets.





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, 2008,
based on the information and assumptions set forth in the notes
below.  Cash flow projections for mortgage loans and mortgage-related
securities are calculated based on current interest rates.  Although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react differently to changes in market interest
rates.  The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types of assets and liabilities may lag behind changes in market
interest rates.  Certain assets, such as ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset.  In the event of a change in interest rates, prepayment and
early withdrawal levels likely would deviate significantly from those assumed in
calculating the gap table. For additional information regarding the impact
of changes in interest rates, see the Percentage Change in Net Interest Income
and Percentage Change in MVPE tables above.


47


March
      31, 2008Within
      Three Months
            
            
            Three
      Months To One Year
            
            
            More
      Than One Year to Three Years
            
            
            More
      Than Three Years to Five Years
            
            
            Over
              Five
      Years
            
            
            TotalInterest-earning
      assets:
            
            (Dollars
      in thousands)Loans
      receivable (1)
      (2):Mortgage
      loans:Fixed
            
            $
            192,263
            
            
            $
            848,397
            
            
            $
            1,249,812
            
            
            $
            421,378
            
            
            $
            813,286
            
            
            $
            3,525,136Adjustable
            
            
            181,831
            
            
            
            606,673
            
            
            
            715,982
            
            
            
            87,722
            
            
            
            4,104
            
            
            
            1,596,312Other
      loans
            
            
            128,673
            
            
            
            5,121
            
            
            
            10,132
            
            
            
            7,630
            
            
            
            59,261
            
            
            
            210,817Securities:Non-mortgage
      securities (3)
            
            
            29,422
            
            
            
            14,236
            
            
            
            6,457
            
            
            
            4,636
            
            
            
            33,755
            
            
            
            88,506Mortgage-related
      securities (4)
            
            
            321,859
            
            
            
            642,075
            
            
            
            558,477
            
            
            
            191,598
            
            
            
            352,868
            
            
            
            2,066,877Other
      interest-earning assets
            
            
            222,021
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            222,021Total
      interest-earning assets
            
            
            1,076,069
            
            
            
            2,116,502
            
            
            
            2,540,860
            
            
            
            712,964
            
            
            
            1,263,274
            
            
            
            7,709,669Interest-bearing
      liabilities:Deposits:Savings(5)
            
            
            125,886
            
            
            
            6,859
            
            
            
            16,149
            
            
            
            12,781
            
            
            
            69,375
            
            
            
            231,050Checking
      (5)
            
            
            10,204
            
            
            
            34,459
            
            
            
            75,845
            
            
            
            76,141
            
            
            
            227,026
            
            
            
            423,675Money
      market (5)
            
            
            37,425
            
            
            
            103,165
            
            
            
            190,270
            
            
            
            139,671
            
            
            
            357,092
            
            
            
            827,623Certificates
            
            
            574,896
            
            
            
            1,083,818
            
            
            
            797,203
            
            
            
            81,377
            
            
            
            1,324
            
            
            
            2,538,618Borrowings
      (6)
            
            
            478,609
            
            
            
            500,000
            
            
            
            1,595,000
            
            
            
            401,000
            
            
            
            25,000
            
            
            
            2,999,609Total
      interest-bearing liabilities
            
            
            1,227,020
            
            
            
            1,728,301
            
            
            
            2,674,467
            
            
            
            710,970
            
            
            
            679,817
            
            
            
            7,020,575Excess
      (deficiency) of interest-earning assets overinterest-bearing
      liabilities
            
            $
            (150,951
            )
            
            $
            388,201
            
            
            $
            (133,607
            )
            
            $
            1,994
            
            
            $
            583,457
            
            
            $
            689,094Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities
            
            $
            (150,951
            )
            
            $
            237,250
            
            
            $
            103,643
            
            
            $
            105,637
            
            
            $
            689,094Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities as apercent
      of total assets at March 31, 2008
            
            
            (1.88
            )%
            
            
            2.95
            %
            
            
            1.29
            %
            
            
            1.32
            %
            
            
            8.58
            %Cumulative
      excess (deficiency) at September 30, 2007
            
            
            (9.45
            )%
            
            
            (11.57
            )%
            
            
            (5.52
            )%
            
            
            1.68
            %
            
            
            8.72
            %Cumulative
      excess (deficiency) at September 30, 2006
            
            
            (7.91
            )%
            
            
            (13.62
            )%
            
            
            (13.92
            )%
            
            
            (4.37
            )%
            
            
            7.94
            %


48


(1)  Adjustable-rate
loans are included in the period in which the rate is next scheduled to adjust
or in the period in which repayments are expected to occur prior to their next
rate adjustment, rather than in the period in which the loans are
due.  Fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization and prepayment
assumptions.


(2)  Balances
have been reduced for non-performing loans, which totaled $9.9 million at March
31, 2008.


(3)  Based
on contractual maturities, or terms to call date or pre-refunding dates as of
March 31, 2008, and excludes the unrealized gain adjustment of $91 thousand on
AFS investment securities.


(4)  Reflects
estimated prepayments of mortgage-related securities in our portfolio, and
excludes the unrealized gain adjustment of $9.9 million on AFS mortgage-related
securities.


(5)  Although
our checking, savings and money market accounts are subject to immediate
withdrawal, management considers a substantial amount of such accounts to be
core deposits having significantly longer effective maturities.  The
decay rates (the assumed rate at which the balance of existing accounts would
decline) used on these accounts are based on assumptions developed based upon
our actual experience with these accounts.  If all of our checking,
savings and money market accounts had been assumed to be subject to repricing
within one year, interest-bearing liabilities which were estimated to mature or
reprice within one year would have exceeded interest-earning assets with
comparable characteristics by $927.1 million, for a cumulative one-year gap of
(11.54)% of total assets.


(6)  Borrowings
exclude the $131 thousand unrealized gain adjustment on the swapped FHLB
advances, $1.5 million deferred gain on the terminated interest rate swaps, and
$57 thousand of capitalized debt issuance costs on other
borrowings.





The
change in the one-year gap to positive 2.95% from a negative 11.57% from
September 30, 2007 to March 31, 2008, respectively, occurred for two
reasons.  The first was a reduction of liabilities repricing in the
upcoming year that was caused by the termination of $575 million of interest
rate swaps hedging FHLB advances.  These interest rate swaps
effectively converted long-term fixed-rate advances to adjustable-rate advances
that repriced monthly.  Once the swaps were terminated the advances
became long-term fixed-rate liabilities that will not reprice in the upcoming
year.  The second reason for the change in the one-year gap was the
decrease in interest rates.  This decrease is expected to cause a
significant increase in the projected cash flows in the upcoming year from
mortgage prepayments, refinances or modifications of loans to lower market
rates.  This results in shorter average lives and quicker repricing of
assets than the September 30, 2007 projections.











49





Changes in
portfolio composition.  The following table presents the
distribution of our investment and mortgage-related securities portfolios, at
cost, at the dates indicated.  Overall, fixed-rate securities
comprised 58% of these portfolios at March 31, 2008 compared to 60% at September
30, 2007.  The WAL is the estimated remaining maturity after projected
prepayment speeds and call option assumptions have been applied.  The
increase in the WAL between September 30, 2007 and March 31, 2008 was due
largely to purchasing new securities and reinvesting principal cash flows into
securities with longer WAL, and general assumptions about a slow-down in
prepayment speeds based upon market assumptions at March 31,
2008.  The increase in the yield between September 30, 2007 and March
31, 2008 is a result of the purchase of securities with yields greater than that
of the overall portfolio yield.


March
      31, 2008
            
            
            December
      31, 2007
            
            
            September
      30, 2007Balance
            
            
            WAL
            
            
            Yield
            
            
            Balance
            
            
            WAL
            
            
            Yield
            
            
            Balance
            
            
            WAL
            
            
            Yield(Dollars
      in thousands)Fixed-rate
      investments:Agency
      bonds
            
            $
            41,382
            
            
            
            0.19
            
            
            
            5.47
            %
            
            $
            460,997
            
            
            
            0.28
            
            
            
            4.18
            %
            
            $
            501,057
            
            
            
            1.51
            
            
            
            4.56
            %Mortgage-related
      securities, at cost
            
            
            1,156,848
            
            
            
            4.03
            
            
            
            4.83
            
            
            
            806,285
            
            
            
            4.12
            
            
            
            4.79
            
            
            
            632,142
            
            
            
            4.15
            
            
            
            4.68Municipal
      bonds
            
            
            47,124
            
            
            
            5.15
            
            
            
            3.57
            
            
            
            38,949
            
            
            
            7.06
            
            
            
            3.66
            
            
            
            23,018
            
            
            
            5.06
            
            
            
            3.69Total
      fixed-rate investments
            
            
            1,245,354
            
            
            
            3.94
            
            
            
            4.80
            
            
            
            1,306,231
            
            
            
            2.85
            
            
            
            4.54
            
            
            
            1,156,217
            
            
            
            3.02
            
            
            
            4.61Adjustable-rate
      investments:Mortgage-related
      securities, at cost
            
            
            910,030
            
            
            
            5.97
            
            
            
            4.55
            
            
            
            797,628
            
            
            
            4.71
            
            
            
            4.53
            
            
            
            780,147
            
            
            
            3.95
            
            
            
            4.29Total
      adjustable-rate investments
            
            
            910,030
            
            
            
            5.97
            
            
            
            4.55
            
            
            
            797,628
            
            
            
            4.71
            
            
            
            4.53
            
            
            
            780,147
            
            
            
            3.95
            
            
            
            4.29Total
      investment portfolio, at cost
            
            $
            2,155,384
            
            
            
            4.80
            
            
            
            4.70
            %
            
            $
            2,103,859
            
            
            
            3.56
            
            
            
            4.54
            %
            
            $
            1,936,364
            
            
            
            3.40
            
            
            
            4.48
            %







The
certificate of deposit portfolio increased $37.4 million from September 30, 2007
to March 31, 2008 and the average cost of the portfolio decreased 23 basis
points between the two reporting dates.  Certificates maturing in one
year or less at March 31, 2008 were $1.66 billion with an average cost of
4.63%.  The following table presents the maturity of certificates of
deposit at the dates indicated.





March
      31, 2008
            
            
            December
      31, 2007
            
            
            September
      30, 2007
            
            
            June
      30, 2007Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
      in thousands)Certificates
      maturing within:0
      to 3 months
            
            $
            574,897
            
            
            
            4.84
            %
            
            $
            506,282
            
            
            
            4.74
            %
            
            $
            358,141
            
            
            
            4.55
            %
            
            $
            360,011
            
            
            
            4.42
            %3
      to 6 months
            
            
            448,972
            
            
            
            4.74
            
            
            
            573,343
            
            
            
            4.87
            
            
            
            507,072
            
            
            
            4.77
            
            
            
            358,352
            
            
            
            4.636
      months to one year
            
            
            634,845
            
            
            
            4.36
            
            
            
            749,696
            
            
            
            4.86
            
            
            
            881,810
            
            
            
            4.88
            
            
            
            921,104
            
            
            
            4.81One
      year to two years
            
            
            508,283
            
            
            
            4.20
            
            
            
            357,331
            
            
            
            4.45
            
            
            
            400,859
            
            
            
            4.66
            
            
            
            580,902
            
            
            
            4.85After
      two years
            
            
            371,621
            
            
            
            4.64
            
            
            
            340,584
            
            
            
            4.81
            
            
            
            353,366
            
            
            
            4.85
            
            
            
            260,821
            
            
            
            4.69Total
      certificates
            
            $
            2,538,618
            
            
            
            4.54
            %
            
            $
            2,527,236
            
            
            
            4.77
            %
            
            $
            2,501,248
            
            
            
            4.77
            %
            
            $
            2,481,190
            
            
            
            4.72
            %Average
      maturity (in years)
            
            
            0.95
            
            
            
            
            
            
            
            0.90
            
            
            
            
            
            
            
            0.95
            
            
            
            
            
            
            
            0.95





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 and Chief Financial Officer,
have evaluated the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, the “Act”)
as of March 31, 2008.  Based upon their evaluation, they have
concluded that as of March 31, 2008, such disclosure controls and procedures
were effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Act is accumulated and
communicated to the Company’s management (including the Chief Executive Officer
and Chief Financial Officer) to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.





Changes
in Internal Control Over Financial Reporting


During
the quarter ended March 31, 2008, there were no changes in the Company’s
internal control over financial reporting as defined by Rule 13a-15(d) of the
Act that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.





Part II -   OTHER
INFORMATION





Item 1.  Legal Proceedings


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





Item 1A.  Risk Factors


A decline in local and national real
estate markets may impact our operations and/or financial condition.
There has been a slowdown in the housing market, both nationally and locally, as
evidenced by reports of reduced levels of new and existing home sales,
increasing inventories of houses on the market, stagnant to declining property
values, and an increase in the length of time houses remain on the market. No
assurance can be given that these conditions will not continue or worsen. If
these conditions do continue or worsen, they may result in a decrease in our
interest income or an adverse impact on our loan losses.





There
have been no other material changes to our risk factors since September 30,
2007.  For a summary of other risk factors relevant to our operations,
see Part I, Item 1A in our 2007 Annual Report on Form
10-K.





51





<Index>


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


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





The
following table summarizes our share repurchase activity during the three months
ended March 31, 2008 and additional information regarding our share repurchase
program.   Our current repurchase plan of 500,000 shares was
announced on May 26, 2006.  The plan has no expiration date and had
187,931 shares remaining as of March 31, 2008.  The Company intends to
repurchase shares from time to time, depending on market conditions, at
prevailing market prices in open-market and other transactions.  The
shares would be held as treasury stock for general corporate use.









Total
            
            Total
      Number of
            Maximum
      NumberNumber
      of
            Average
            Shares
      Purchased as
            of
      Shares that MayShares
            Price  Paid
            Part
      of Publicly
            Yet
      Be PurchasedPeriod
            Purchased
            per
      Share
            Announced
      Plans
            Under
      the PlanJanuary
      1, 2008 throughJanuary
      31, 2008
            --
            --
            --
            187,931February
      1, 2008 throughFebruary
      29, 2008
            --
            --
            --
            187,931March
      1, 2008 throughMarch
      31, 2008
            --
            --
            --
            187,931Total
            --
            --
            --
            187,931





<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, 2007, was held on January 9, 2008.  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,
2007.





<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
5,
2008                                                By: /s/ John B.
Dicus


John B. Dicus, President and


Chief Executive Officer








Date:   May
5,
2008                                               By: /s/ Kent G.
Townsend


Kent G. Townsend, Executive Vice President and


Chief Financial Officer








<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 November 29, 2007 as Exhibit 3(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference4(i)
            
            Form
      of Stock Certificate of Capitol Federal Financial*4(ii)
            
            The
      Registrant agrees to furnish to the Securities and Exchange Commission,
      upon request, theinstruments
      defining the rights of the holders of the Registrant’s long-term
      debt10.1(i)
            
            Registrant’s
      Thrift Plan filed on November 29, 2007 as Exhibit 10.1(i)
    tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.1(ii)
            
            Registrant’s
      Stock Ownership Plan filed on November 29, 2007 as Exhibit 10.1(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.2
            
            Registrant’s
      2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
      April 13,2000
      as Appendix A to Registrant’s Revised Proxy Statement (File No. 000-25391)
      and incorporated herein by reference10.3
            
            Registrant’s
      2000 Recognition and Retention Plan (the “RRP”) filed on April 13, 2000
      asAppendix
      B to Registrant’s Revised Proxy Statement (File No. 000-25391) and
      incorporated herein by reference10.4
            
            Capitol
      Federal Financial Deferred Incentive Bonus Plan filed on December 14,
      2006as
      Exhibit 10.4 to the Annual Report on Form 10-K and incorporated herein by
      reference10.5
            
            Form
      of Incentive Stock Option Agreement under the Stock Option Plan filed on
      February 4, 2005as
      Exhibit 10.5 to the December 31, 2004 Form 10-Q and incorporated herein by
      reference10.6
            
            Form
      of Non-Qualified Stock Option Agreement under the Stock Option Plan filed
      on February 4,2005
      as Exhibit 10.6 to the December 31, 2004 Form 10-Q and incorporated herein
      by reference10.7
            
            Form
      of Restricted Stock Agreement under the RRP filed on February 4, 2005 as
      Exhibit 10.7 to theDecember
      31, 2004 Form 10-Q and incorporated herein by reference10.8
            
            Description
      of Named Executive Officer Salary and Bonus Arrangements filed on November
      29,2007
      as Exhibit 10.8 to the Annual Report on Form 10-K and incorporated herein
      by reference10.9
            
            Description
      of Director Fee Arrangements filed on February 5, 2007 as Exhibit 10.9 to
      the March 31, 2007 Form 10-Q and incorporated herein by
      reference10.10
            
            Short-term
      Performance Plan filed on December 14, 2005 as Exhibit 10.10 to the
      AnnualReport
      on Form 10-K for the fiscal year ended September 30, 2005 and incorporated
      herein by reference11
            
            Statement
      re: computation of earnings per share**31.1
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by John B.
      Dicus, President and Chief Executive Officer31.2
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G.
      Townsend, Executive Vice President and Chief Financial
Officer32
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 made by John B. Dicus, President and Chief
      Executive Officer, and Kent G. Townsend, Executive Vice President and
      Chief Financial Officer





54


*Incorporated
by reference from Capitol Federal Financial’s Registration Statement on Form S-1
(File No. 333-68363) filed on February 11, 2000, as amended and declared
effective on the same date.


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


55