UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549


_________________





Form
10-Q


(Mark
One)


þQUARTERLY REPORT PURSUANT
      TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended December 31, 2009





or





 ̈TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15 (d)


OF
      THE SECURITIES EXCHANGE ACT OF 1934





Commission
file number:  000-25391


_________________





Capitol
Federal Financial


(Exact name of registrant as
specified in its charter)





United
States                                                                   48-1212142


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


or
organization)                                                                        Identification
No.)





700 Kansas Avenue, Topeka,
Kansas                                             66603


(Address of principal executive
offices)             
                          (Zip
Code)





Registrant’s
telephone number, including area code:


(785)
235-1341








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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.) Yes  ̈  No  ̈





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





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


(do
not check if a smaller


reporting
company)





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





As of
January 25, 2010, there were 73,971,687 shares of Capitol Federal Financial
Common Stock outstanding.





1











PART I -- FINANCIAL
      INFORMATION
            Page
              NumberItem
      1.  Financial Statements (Unaudited):Consolidated Balance Sheets at December
      31, 2009 and September 30, 2009
            3Consolidated Statements of Income for
      the three months endedDecember
      31, 2009 and December 31, 2008
            4Consolidated Statement of Stockholders’
      Equity for the three months endedDecember
      31, 2009
            5Consolidated Statements of Cash Flows
      for the three months endedDecember
      31, 2009 and December 31, 2008
            6Notes to
      Consolidated Interim Financial Statements
            8Item
      2.  Management’s Discussion and Analysis of
      Financial Condition andResults
      of Operations
            16Item
      3.  Quantitative and Qualitative Disclosure about
      Market Risk
            57Item
      4.  Controls and
      Procedures
            61PART
      II -- OTHER INFORMATIONItem
      1.    Legal Proceedings
            61Item
      1A. Risk Factors
            61Item
      2.    Unregistered Sales of Equity Securities
      and Use of Proceeds
            62Item
      3.    Defaults Upon Senior
      Securities
            62Item
      4.    Submission of Matters to a Vote of Security
      Holders
            63Item
      5.    Other Information
            63Item
      6.    Exhibits
            63Signature Page
            64INDEX
      TO EXHIBITS
            65





2


PART
I -- FINANCIAL INFORMATION


Item
1. Financial Statements


CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY


CONSOLIDATED BALANCE
SHEETS


(Dollars
in thousands except per share data and amounts)








December
      31,
            
            
            September
      30,2009
            
            
            2009ASSETS:
            
            (Unaudited)Cash
      and cash equivalents (includes interest-earning deposits of $80,895 and
      $32,319)
            
            $
            105,128
            
            
            $
            41,154Investment
      securities:Available-for-sale
      (“AFS”) at estimated fair value (amortized cost of $234,500 and
      $235,185)
            
            
            234,001
            
            
            
            234,784Held-to-maturity
      (“HTM”) at amortized cost (estimated fair value of $419,352 and
      $248,929)
            
            
            417,942
            
            
            
            245,920Mortgage-backed
      securities (“MBS”):AFS,
      at estimated fair value (amortized cost of $1,254,958 and
      $1,334,357)
            
            
            1,305,096
            
            
            
            1,389,211HTM,
      at amortized cost (estimated fair value of $594,365 and
      $627,829)
            
            
            572,873
            
            
            
            603,256Loans
      receivable, net of allowance for loan losses (“ALLL”) of $12,207 and
      $10,150
            
            
            5,423,923
            
            
            
            5,603,965Bank-owned
      life insurance (“BOLI”)
            
            
            53,777
            
            
            
            53,509Capital
      stock of Federal Home Loan Bank (“FHLB”), at cost
            
            
            134,064
            
            
            
            133,064Accrued
      interest receivable
            
            
            31,048
            
            
            
            32,640Premises
      and equipment, net
            
            
            39,901
            
            
            
            37,709Real
      estate owned (“REO”), net
            
            
            6,637
            
            
            
            7,404Prepaid
      federal insurance premium
            
            
            25,735
            
            
            
            --Other
      assets
            
            
            24,637
            
            
            
            21,064TOTAL
      ASSETS
            
            $
            8,374,762
            
            
            $
            8,403,680LIABILITIES:Deposits
            
            $
            4,227,252
            
            
            $
            4,228,609Advances
      from FHLB
            
            
            2,394,214
            
            
            
            2,392,570Other
      borrowings, net
            
            
            713,609
            
            
            
            713,609Advance
      payments by borrowers for taxes and insurance
            
            
            21,339
            
            
            
            55,367Income
      taxes payable
            
            
            13,881
            
            
            
            6,016Deferred
      income tax liabilities, net
            
            
            31,740
            
            
            
            30,970Accounts
      payable and accrued expenses
            
            
            30,728
            
            
            
            35,241Total
      liabilities
            
            
            7,432,763
            
            
            
            7,462,382STOCKHOLDERS'
      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;  74,023,577 and 74,099,355 shares
      outstanding
            
            
            915
            
            
            
            915as
      of December 31, 2009 and September 30, 2009, respectivelyAdditional
      paid-in capital
            
            
            453,975
            
            
            
            452,872Unearned
      compensation, Employee Stock Ownership Plan (“ESOP”)
            
            
            (7,561
            )
            
            
            (8,066
            )Unearned
      compensation, Recognition and Retention Plan (“RRP”)
            
            
            (260
            )
            
            
            (330
            )Retained
      earnings
            
            
            785,914
            
            
            
            781,604Accumulated
      other comprehensive income, net of tax
            
            
            30,875
            
            
            
            33,870Less
      shares held in treasury (17,488,710 and 17,412,932 shares as
      ofDecember
      31, 2009 and September 30, 2009, respectively, at cost)
            
            
            (321,859
            )
            
            
            (319,567
            )Total
      stockholders' equity
            
            
            941,999
            
            
            
            941,298TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            8,374,762
            
            
            $
            8,403,680





See
accompanying notes to consolidated financial statements.


<Index>


3





CAPITOL FEDERAL FINANCIAL AND
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)


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


For
      the Three Months EndedDecember
      31,2009
            
            
            2008INTEREST
      AND DIVIDEND INCOME:Loans
      receivable
            
            $
            74,526
            
            
            $
            76,716MBS
            
            
            20,754
            
            
            
            26,402Investment
      securities
            
            
            2,559
            
            
            
            1,326Capital
      stock of FHLB
            
            
            1,001
            
            
            
            780Cash
      and cash equivalents
            
            
            47
            
            
            
            49Total
      interest and dividend income
            
            
            98,887
            
            
            
            105,273INTEREST
      EXPENSE:FHLB
      advances
            
            
            24,819
            
            
            
            29,545Deposits
            
            
            22,105
            
            
            
            26,785Other
      borrowings
            
            
            7,109
            
            
            
            7,725Total
      interest expense
            
            
            54,033
            
            
            
            64,055NET
      INTEREST AND DIVIDEND INCOME
            
            
            44,854
            
            
            
            41,218PROVISION
      FOR LOAN LOSSES
            
            
            3,115
            
            
            
            549NET
      INTEREST AND DIVIDEND INCOMEAFTER
      PROVISION FOR LOAN LOSSES
            
            
            41,739
            
            
            
            40,669OTHER
      INCOME:Retail
      fees and charges
            
            
            4,723
            
            
            
            4,530Insurance
      commissions
            
            
            582
            
            
            
            491Loan
      fees
            
            
            581
            
            
            
            569Income
      from BOLI
            
            
            268
            
            
            
            384Gains
      on securities and loans receivable, net
            
            
            6,472
            
            
            
            24Other,
      net
            
            
            505
            
            
            
            644Total
      other income
            
            
            13,131
            
            
            
            6,642OTHER
      EXPENSES:Salaries
      and employee benefits
            
            
            10,532
            
            
            
            11,164Occupancy
      of premises
            
            
            3,942
            
            
            
            3,722Federal
      insurance premium
            
            
            1,814
            
            
            
            166Advertising
            
            
            1,644
            
            
            
            1,742Deposit
      and loan transaction costs
            
            
            1,380
            
            
            
            1,303Regulatory
      and outside services
            
            
            1,448
            
            
            
            1,149Office
      supplies and related expenses
            
            
            625
            
            
            
            713Other,
      net
            
            
            1,364
            
            
            
            2,228Total
      other expenses
            
            
            22,749
            
            
            
            22,187INCOME
      BEFORE INCOME TAX EXPENSE
            
            
            32,121
            
            
            
            25,124INCOME
      TAX EXPENSE
            
            
            11,141
            
            
            
            9,272NET
      INCOME
            
            $
            20,980
            
            
            $
            15,852Basic
      earnings per common share
            
            $
            0.29
            
            
            $
            0.22Diluted
      earnings per common share
            
            $
            0.29
            
            
            $
            0.22Dividends
      declared per public share
            
            $
            0.79
            
            
            $
            0.61Basic
      weighted average common shares
            
            
            73,281
            
            
            
            73,085Diluted
      weighted average common shares
            
            
            73,287
            
            
            
            73,176




See
accompanying notes to consolidated financial statements.


4


CAPITOL FEDERAL FINANCIAL AND
SUBSIDIARY


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


(Unaudited)


(Dollars
in thousands)





AccumulatedAdditional
            
            
            Unearned
            
            
            Unearned
            
            
            
            
            
            Other
            
            
            
            
            
            TotalCommon
            
            
            Paid-In
            
            
            Compensation
            
            
            Compensation
            
            
            Retained
            
            
            Comprehensive
            
            
            Treasury
            
            
            Stockholders'Stock
            
            
            Capital
            
            
            ESOP
            
            
            RRP
            
            
            Earnings
            
            
            Income
            
            
            Stock
            
            
            EquityBalance
      at October 1, 2009
            
            $
            915
            
            
            $
            452,872
            
            
            $
            (8,066
            )
            
            $
            (330
            )
            
            $
            781,604
            
            
            $
            33,870
            
            
            $
            (319,567
            )
            
            $
            941,298Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20,980
            
            
            
            
            
            
            
            
            
            
            
            20,980Changes
      in unrealized gain/losses onsecurities
      AFS, net of deferredincome taxes of $1,819
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,995
            )
            
            
            
            
            
            
            (2,995
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,985ESOP
      activity, net
            
            
            
            
            
            
            1,039
            
            
            
            505
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,544RRP
      activity, net
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3Stock
      based compensation - stock options
              and RRP
            
            
            
            
            
            
            61
            
            
            
            
            
            
            
            70
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            131Acquisition
      of treasury stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,292
            )
            
            
            (2,292
            )Dividends
      on common stock tostockholders
      ($0.79 per public share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (16,670
            )
            
            
            
            
            
            
            
            
            
            
            (16,670
            )Balance
      at December 31, 2009
            
            $
            915
            
            
            $
            453,975
            
            
            $
            (7,561
            )
            
            $
            (260
            )
            
            $
            785,914
            
            
            $
            30,875
            
            
            $
            (321,859
            )
            
            $
            941,999








See
accompanying notes to consolidated financial statements.








<Index>





5


CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)


For
      the Three Months EndedDecember
      31,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            20,980
            
            
            $
            15,852Adjustments
      to reconcile net income to net cash provided byoperating
      activities:FHLB
      stock dividends
            
            
            (1,000
            )
            
            
            (780
            )Provision for
      loan losses
            
            
            3,115
            
            
            
            549Originations
      of loans receivable held-for-sale (“LHFS”)
            
            
            (1,701
            )
            
            
            (738
            )Proceeds
      from sales of LHFS
            
            
            575
            
            
            
            1,508Amortization
      and accretion of premiums and discounts on MBSand investment securities
            
            
            1,453
            
            
            
            220Depreciation
      and amortization of premises and equipment
            
            
            1,272
            
            
            
            1,156Amortization
      of deferred amounts related to FHLB advances, net
            
            
            1,644
            
            
            
            (165
            )Common
      stock committed to be released for allocation - ESOP
            
            
            1,544
            
            
            
            2,170Stock
      based compensation - stock options and RRP
            
            
            131
            
            
            
            177Gain
      on the sale of trading securities received in the loan swap
      transaction
            
            
            (6,454
            )
            
            
            --Prepaid
      federal insurance premium
            
            
            (25,735
            )
            
            
            --Other,
      net
            
            
            (537
            )
            
            
            66Changes
      in:Accrued
      interest receivable
            
            
            1,592
            
            
            
            1,280Other
      assets
            
            
            (387
            )
            
            
            1,303Income
      taxes payable/receivable
            
            
            10,457
            
            
            
            5,855Accounts
      payable and accrued expenses
            
            
            (5,257
            )
            
            
            (1,327
            )Net
      cash provided by operating activities
            
            
            1,692
            
            
            
            27,126CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of trading securities received in the loan swap
      transaction
            
            
            199,144
            
            
            
            --Proceeds
      from maturities or calls of investment securities AFS
            
            
            23
            
            
            
            28Proceeds
      from maturities or calls of investment securities HTM
            
            
            1,010
            
            
            
            37,400Purchases
      of investment securities HTM
            
            
            (173,431
            )
            
            
            (886
            )Principal
      collected on MBS AFS
            
            
            78,991
            
            
            
            49,459Principal
      collected on MBS HTM
            
            
            33,389
            
            
            
            40,735Purchases
      of MBS HTM
            
            
            (2,990
            )
            
            
            --Proceeds
      from the redemption of capital stock of FHLB
            
            
            --
            
            
            
            2,958Purchases
      of capital stock of FHLB
            
            
            --
            
            
            
            (9,002
            )Loan
      originations and purchases, net of principal collected
            
            
            (18,233
            )
            
            
            (138,149
            )Net
      deferred fee activity
            
            
            (925
            )
            
            
            (35
            )Purchases
      of premises and equipment
            
            
            (3,473
            )
            
            
            (3,088
            )Proceeds
      from sales of REO
            
            
            3,124
            
            
            
            2,131Net
      cash used in investing activities
            
            
            116,629
            
            
            
            (18,449
            )





(Continued)


6





For
      the Three Months EndedDecember
      31,2009
            
            
            2008CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid
            
            
            (16,670
            )
            
            
            (12,737
            )Deposits,
      net of withdrawals
            
            
            (1,357
            )
            
            
            (56,579
            )Proceeds
      from advances/line of credit from FHLB
            
            
            --
            
            
            
            312,682Repayments
      on advances/line of credit from FHLB
            
            
            --
            
            
            
            (162,682
            )Change
      in advance payments by borrowers for taxes
    and insurance
            
            
            (34,028
            )
            
            
            (33,883
            )Acquisitions
      of treasury stock
            
            
            (2,292
            )
            
            
            (859
            )Stock
      options exercised and excess tax benefits from stock
    options
            
            
            --
            
            
            
            1,377Net
      cash (used in)/provided by financing activities
            
            
            (54,347
            )
            
            
            47,319NET
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            63,974
            
            
            
            55,996CASH
      AND CASH EQUIVALENTS:Beginning
      of period
            
            
            41,154
            
            
            
            87,138End
      of period
            
            $
            105,128
            
            
            $
            143,134SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Income
      tax payments
            
            $
            682
            
            
            $
            3,417Interest
      payments, net of interest credited to deposits
            
            $
            30,004
            
            
            $
            36,542SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIES:Loans
      transferred to REO
            
            $
            2,196
            
            
            $
            1,846Swap
      of loans for trading securities
            
            $
            193,889
            
            
            $
            --





(Concluded)


See
accompanying notes to consolidated financial statements.


<Index>


7


Notes to Consolidated 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
accounting principles generally accepted 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 Annual Report on Form 10-K for the fiscal year ended
September 30, 2009, filed with the Securities and Exchange Commission
(“SEC”).  Interim results are not necessarily indicative of results
for a full year.  In preparing these financial statements, we have
evaluated events occurring subsequent to December 31, 2009 through February 4,
2010, the date our financial statements were filed with the SEC, for potential
recognition and disclosure.  There have been no material events or
transactions which would require adjustments and/or disclosures to the
consolidated financial statements at December 31, 2009.





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





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





2.   Recent Accounting Pronouncements





Effective
October 1, 2009, the Company adopted new authoritative accounting guidance
under Accounting Standards Codification (“ASC”) 260, Earnings Per Share, which
provides that unvested share-based payment awards containing nonforfeitable
rights to dividends or dividend equivalents are participating securities and
should be included in the computation of earnings per share pursuant to the
two-class method. The Company determined that its unvested RRP awards are
participating securities. Accordingly, effective October 1, 2009, earnings
per common share is computed using the two-class method prescribed under ASC
260, and prior periods were adjusted retrospectively to conform with the
provisions of this guidance.  Earnings per share for the years ended
September 30, 2009, 2008 or 2007, or any of the related interim periods,
did not change due to the retrospective application of ASC 260.


8








3.   Earnings
Per Share (“EPS”)





The
Company accounts for the 3,024,574 shares acquired by its ESOP and the shares
awarded pursuant to its RRP in accordance with ASC 260, which requires that our
unvested RRP awards that contain nonforfeitable rights to dividends be treated
as participating securities in the computation of EPS pursuant to the two-class
method. The two-class method is an earnings allocation that determines EPS for
each class of common stock and participating security. Shares acquired by the
ESOP 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 table is a computation of our basic and
diluted EPS under the two-class method for the periods indicated.





For
      the Three Months EndedDecember
      31,2009
            
            
            2008(in
      thousands, except share and per share data)Net
      income
            
            $
            20,980
            
            
            $
            15,852Less:
      income allocable to unvested RRP awards
            
            
            (4
            )
            
            
            (5
            )Net
      income available to common stockholders
            
            $
            20,976
            
            
            $
            15,847Average
      common shares outstanding
            
            
            73,266,128
            
            
            
            73,062,337Average
      unvested RRP shares outstanding
            
            
            14,328
            
            
            
            22,428Average
      committed ESOP shares outstanding
            
            
            548
            
            
            
            548Total
      basic average common shares outstanding
            
            
            73,281,004
            
            
            
            73,085,313Effect
      of dilutive stock options
            
            
            5,833
            
            
            
            90,443Total
      diluted average common shares outstanding
            
            
            73,286,837
            
            
            
            73,175,756Net
      EPS:Basic
            
            $
            0.29
            
            
            $
            0.22Diluted
            
            $
            0.29
            
            
            $
            0.22Antidilutive
      stock options, excludedfrom
      the diluted average common sharesoutstanding
      calculation
            
            
            241,350
            
            
            
            25,500








4.   Fair Value of
Financial Instruments





Fair Value Measurements -ASC 820, Fair Value Measurements and
Disclosures, defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements.  The
Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. The Company did not have any
liabilities that were measured at fair value at December 31,
2009.  The Company’s AFS securities are recorded at fair value on a
recurring basis.  Additionally, from time to time, the Company may be
required to record at fair value other assets or liabilities on a non-recurring
basis, such as REO and impaired loans. These non-recurring fair value
adjustments involve the application of lower-of-cost-or-fair value accounting or
write-downs of individual assets.


9








In
accordance with ASC 820, the Company groups its assets at fair value in three
levels, based on the markets in which the assets are traded and the reliability
of the assumptions used to determine fair value. These levels are:





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


The
Company bases its fair values on the price that would be received to sell an
asset in an orderly transaction between market participants at the measurement
date.  As required by ASC 820, the Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when measuring
fair value.





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





AFS
Securities


The
Company’s AFS securities portfolio is carried at estimated fair value, with any
unrealized gains and losses, net of taxes, reported as accumulated other
comprehensive income/loss in stockholders' equity.  The Company’s
major security types based on the nature and risks of the securities are
included in the table below.  The majority of the securities within
the AFS portfolio are issued by U.S. government sponsored
enterprises.  The fair values for all AFS securities are based on
quoted prices for similar securities.  Various modeling techniques are
used to determine pricing for the Company’s securities, including option pricing
and discounted cash flow models. The inputs to these models may include
benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
benchmark securities, bids, offers and reference data.  There are some
AFS securities in the AFS portfolio that have significant unobservable inputs
requiring the independent pricing services to use some judgment in pricing the
related securities.  These AFS securities are classified as Level
3.  All other AFS securities are classified as Level 2.





The
following table provides the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a recurring
basis, which consists of AFS securities, at December 31, 2009.








Quoted
      Prices
            
            
            Significant
            
            
            Significantin
      Active Markets
            
            
            Other
      Observable
            
            
            UnobservableCarrying
            
            
            for
      Identical Assets
            
            
            Inputs
            
            
            InputsValue
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3) (1)(Dollars
      in thousands)U.S.
      government-sponsoredenterprises
            
            $
            228,840
            
            
            $
            --
            
            
            $
            228,840
            
            
            $
            --Municipal
      bonds
            
            
            2,753
            
            
            
            --
            
            
            
            2,753
            
            
            
            --Trust
      preferred securities
            
            
            2,408
            
            
            
            --
            
            
            
            --
            
            
            
            2,408MBS
            
            
            1,305,096
            
            
            
            --
            
            
            
            1,305,096
            
            
            
            --$
            1,539,097
            
            
            $
            --
            
            
            $
            1,536,689
            
            
            $
            2,408





(1)
            The
      Company’s Level 3 AFS securities were not significant at December 31, 2009
      and had no material activity during the period ended December 31,
      2009.




10





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


Loans
Receivable


Loans
which meet certain criteria are evaluated individually for impairment. A loan is
considered impaired when, based upon current information and events, it is
probable the Bank will be unable to collect all amounts due, including principal
and interest, according to the contractual terms of the loan
agreement.  Impaired loans at December 31, 2009 were $47.4 million.
Substantially all of the Bank’s impaired loans at December 31, 2009 are secured
by residential real estate.  These impaired loans are individually
assessed to ensure that the carrying value of the loan is not in excess of the
fair value of the collateral, less estimated selling costs. Fair value is
estimated through current appraisals, real estate brokers or listing
prices.  Fair values may be adjusted by management to reflect current
economic and market conditions and, as such, are classified as Level 3. Based on
this evaluation, the Company maintained an ALLL of $4.0 million at December 31,
2009 for such impaired loans.





REO


REO
represents real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure and is carried at the lower of cost or fair value less estimated
selling costs.  Fair value is estimated through current appraisals,
real estate brokers or listing prices.  As these properties are
actively marketed, estimated fair values may be adjusted by management to
reflect current economic and market conditions and, as such, are classified as
Level 3.  REO at December 31, 2009 was $6.6 million. During the three
months ended December 31, 2009, charge-offs to the ALLL related to loans that
were transferred to REO were $437 thousand. Write downs related to REO that were
charged to other expense were $173 thousandfor
the three months ended December 31, 2009.





The
following table provides the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a non-recurring
basis at December 31, 2009.





Quoted
      Prices
            
            
            Significant
            
            
            Significantin
      Active Markets
            
            
            Other
      Observable
            
            
            UnobservableCarrying
            
            
            for
      Identical Assets
            
            
            Inputs
            
            
            InputsValue
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)(Dollars
      in thousands)Impaired
      loans
            
            $
            47,427
            
            
            $
            --
            
            
            $
            --
            
            
            $
            47,427REO
            
            
            6,637
            
            
            
            --
            
            
            
            --
            
            
            
            6,637$
            54,064
            
            
            $
            --
            
            
            $
            --
            
            
            $
            54,064








Fair
Value Disclosures


The
Company determined estimated fair value amounts using available market
information and a selection from a variety of valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and estimation
methodologies may have a material effect on the estimated fair value
amounts.  The fair value estimates presented herein are based on
pertinent information available to management as of December 31, 2009 and
September 30, 2009. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
those dates.





11


The
estimated fair values of the Company’s financial instruments as of December 31,
2009 and September 30, 2009 are as follows.





At
            
            
            AtDecember
      31, 2009
            
            
            September
      30, 2009Estimated
            
            
            
            
            
            EstimatedCarrying
            
            
            Fair
            
            
            Carrying
            
            
            FairAmount
            
            
            Value
            
            
            Amount
            
            
            Value(Dollars
      in thousands)Financial
      assets:Cash
      and cash equivalents
            
            $
            105,128
            
            
            $
            105,128
            
            
            $
            41,154
            
            
            $
            41,154Investment
      securities:AFS
            
            
            234,001
            
            
            
            234,001
            
            
            
            234,784
            
            
            
            234,784HTM
            
            
            417,942
            
            
            
            419,352
            
            
            
            245,920
            
            
            
            248,929MBS:AFS
            
            
            1,305,096
            
            
            
            1,305,096
            
            
            
            1,389,211
            
            
            
            1,389,211HTM
            
            
            572,873
            
            
            
            594,365
            
            
            
            603,256
            
            
            
            627,829Loans
      receivable
            
            
            5,423,923
            
            
            
            5,589,283
            
            
            
            5,603,965
            
            
            
            5,801,724BOLI
            
            
            53,777
            
            
            
            53,777
            
            
            
            53,509
            
            
            
            53,509Capital
      stock of FHLB
            
            
            134,064
            
            
            
            134,064
            
            
            
            133,064
            
            
            
            133,064Financial
      liabilities:Deposits
            
            
            4,227,252
            
            
            
            4,282,549
            
            
            
            4,228,609
            
            
            
            4,294,454Advances
      from FHLB
            
            
            2,394,214
            
            
            
            2,528,034
            
            
            
            2,392,570
            
            
            
            2,554,206Other
      borrowings
            
            
            713,609
            
            
            
            738,653
            
            
            
            713,609
            
            
            
            742,301





The
following methods and assumptions were used to estimate the fair value of the
financial instruments:





Cash and Cash Equivalents-
The carrying amounts of cash and cash equivalents are considered to approximate
their fair value due to the nature of the financial asset.





Investment Securities and MBS -Estimated fair values of securities are based on one of three
methods:  1) quoted market prices where available, 2) quoted market
prices for similar instruments if quoted market prices are not available, 3)
unobservable data that represents the Bank’s assumptions about items that market
participants would consider in determining fair value where no market data is
available.  AFS securities are carried at estimated fair
value.  HTM securities are carried at amortized cost.





Loans Receivable - Fair
values are estimated for portfolios with similar financial
characteristics.  Loans are segregated by type, such as one- to
four-family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans.  Each loan category is further
segmented into fixed and adjustable interest rate categories.  Market
pricing sources are used to approximate the estimated fair value of fixed and
adjustable-rate one- to four-family residential mortgages.  For all
other loan categories, future cash flows are discounted using the LIBOR curve
plus a margin at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturity.





BOLI-The carrying value of BOLI
is considered to approximate its fair value due to the nature of the financial
asset.





Capital Stock of FHLB- The
carrying value of FHLB stock equals cost.  The fair value is based on
redemption at par value.





Deposits - The estimated fair
value of demand deposits, savings and money market accounts is the amount
payable on demand at the reporting date. The estimated fair value of
fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using a margin to the LIBOR curve.


12








Advances from FHLB - The
estimated fair value of advances from FHLB is determined by discounting the
future cash flows of each advance using a margin to the LIBOR
curve.





Other Borrowings- Other
borrowings consists of repurchase agreements and Junior Subordinated Deferrable
Interest Debentures (“the debentures”).The estimated fair value
of the repurchase agreements is determined by discounting the future cash flows
of each agreement using a margin to the LIBOR curve.  The debentures
have a variable rate structure, with the ability to redeem at par; therefore,
the carrying value of the debentures approximates their estimated fair
value.





5.   Securities





The
following tables reflect the amortized cost, estimated fair value, and gross
unrealized gains and losses of AFS and HTM securities at December 31, 2009 and
September 30, 2009.  The majority of the security portfolio is
composed of securities issued by U.S. government-sponsored
enterprises.




December
      31, 2009Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            Value(Dollars
      in thousands)AFS:U.S.
      government-sponsored enterprises
            
            $
            228,075
            
            
            $
            766
            
            
            $
            1
            
            
            $
            228,840Municipal
      bonds
            
            
            2,663
            
            
            
            103
            
            
            
            13
            
            
            
            2,753Trust
      preferred securities
            
            
            3,762
            
            
            
            --
            
            
            
            1,354
            
            
            
            2,408MBS
            
            
            1,254,958
            
            
            
            50,339
            
            
            
            201
            
            
            
            1,305,0961,489,458
            
            
            
            51,208
            
            
            
            1,569
            
            
            
            1,539,097HTM:U.S.
      government-sponsored enterprises
            
            
            348,623
            
            
            
            245
            
            
            
            628
            
            
            
            348,240Municipal
      bonds
            
            
            69,319
            
            
            
            1,893
            
            
            
            100
            
            
            
            71,112MBS
            
            
            572,873
            
            
            
            21,628
            
            
            
            136
            
            
            
            594,365990,815
            
            
            
            23,766
            
            
            
            864
            
            
            
            1,013,717$
            2,480,273
            
            
            $
            74,974
            
            
            $
            2,433
            
            
            $
            2,552,814September
      30, 2009Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            Value(Dollars
      in thousands)AFS:U.S.
      government-sponsored enterprises
            
            $
            228,743
            
            
            $
            1,132
            
            
            $
            --
            
            
            $
            229,875Municipal
      bonds
            
            
            2,668
            
            
            
            131
            
            
            
            --
            
            
            
            2,799Trust
      preferred securities
            
            
            3,774
            
            
            
            --
            
            
            
            1,664
            
            
            
            2,110MBS
            
            
            1,334,357
            
            
            
            55,552
            
            
            
            698
            
            
            
            1,389,2111,569,542
            
            
            
            56,815
            
            
            
            2,362
            
            
            
            1,623,995HTM:U.S.
      government-sponsored enterprises
            
            
            175,394
            
            
            
            535
            
            
            
            --
            
            
            
            175,929Municipal
      bonds
            
            
            70,526
            
            
            
            2,514
            
            
            
            40
            
            
            
            73,000MBS
            
            
            603,256
            
            
            
            24,645
            
            
            
            72
            
            
            
            627,829849,176
            
            
            
            27,694
            
            
            
            112
            
            
            
            876,758$
            2,418,718
            
            
            $
            84,509
            
            
            $
            2,474
            
            
            $
            2,500,753





13


The
following table presents the taxable and non-taxable components of interest
income on investment securities for the three months ended December 31, 2009 and
2008:




For
      the Three Months EndedDecember
      31,2009
            
            
            2008(Dollars
      in thousands)Taxable
            
            $
            2,024
            
            
            $
            841Non-taxable
            
            
            535
            
            
            
            485$
            2,559
            
            
            $
            1,326





The
following tables summarize the estimated fair value and gross unrealized losses
of those securities on which an unrealized loss at December 31, 2009 and
September 30, 2009 was reported and the continuous unrealized loss position for
the twelve months prior to December 31, 2009 and September 30, 2009 or for a
shorter period of time, as applicable.





December
      31, 2009Less
      Than
            
            
            Equal
      to or Greater12
      Months
            
            
            Than
      12 MonthsEstimated
            
            
            Unrealized
            
            
            
            
            
            Estimated
            
            
            UnrealizedCount
            
            
            Fair
      Value
            
            
            Losses
            
            
            Count
            
            
            Fair
      Value
            
            
            LossesAFS:
            
            (Dollars
      in thousands)U.S.
      government-sponsored enterprises
            
            
            1
            
            
            $
            25,025
            
            
            $
            1
            
            
            
            --
            
            
            $
            --
            
            
            $
            --Municipal
      bonds
            
            
            1
            
            
            
            412
            
            
            
            13
            
            
            
            --
            
            
            
            --
            
            
            
            --Trust
      preferred securities
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1
            
            
            
            2,408
            
            
            
            1,354MBS
            
            
            44
            
            
            
            87,014
            
            
            
            181
            
            
            
            11
            
            
            
            2,063
            
            
            
            2046
            
            
            $
            112,451
            
            
            $
            195
            
            
            
            12
            
            
            $
            4,471
            
            
            $
            1,374HTM:U.S.
      government-sponsored enterprises
            
            
            4
            
            
            $
            97,495
            
            
            $
            627
            
            
            
            --
            
            
            $
            --
            
            
            $
            --Municipal
      bonds
            
            
            8
            
            
            
            3,336
            
            
            
            36
            
            
            
            2
            
            
            
            1,316
            
            
            
            65MBS
            
            
            5
            
            
            
            28,943
            
            
            
            135
            
            
            
            1
            
            
            
            54
            
            
            
            117
            
            
            $
            129,774
            
            
            $
            798
            
            
            
            3
            
            
            $
            1,370
            
            
            $
            66September
      30, 2009Less
      Than
            
            
            Equal
      to or Greater12
      Months
            
            
            Than
      12 MonthsEstimated
            
            
            Unrealized
            
            
            
            
            
            
            Estimated
            
            
            UnrealizedCount
            
            
            Fair
      Value
            
            
            Losses
            
            
            Count
            
            
            Fair
      Value
            
            
            LossesAFS:
            
            (Dollars
      in thousands)Trust
      preferred securities
            
            
            --
            
            
            $
            --
            
            
            $
            --
            
            
            
            1
            
            
            $
            2,110
            
            
            $
            1,664MBS
            
            
            16
            
            
            
            57,157
            
            
            
            600
            
            
            
            37
            
            
            
            15,804
            
            
            
            9816
            
            
            $
            57,157
            
            
            $
            600
            
            
            
            38
            
            
            $
            17,914
            
            
            $
            1,762HTM:Municipal
      bonds
            
            
            4
            
            
            $
            1,930
            
            
            $
            36
            
            
            
            1
            
            
            $
            495
            
            
            $
            4MBS
            
            
            3
            
            
            
            5,563
            
            
            
            26
            
            
            
            4
            
            
            
            11,043
            
            
            
            467
            
            
            $
            7,493
            
            
            $
            62
            
            
            
            5
            
            
            $
            11,538
            
            
            $
            50





14


On a
quarterly basis, management conducts a formal review of securities for the
presence of an other-than-temporary impairment (“OTTI”).  Management
assesses whether an OTTI is present when the fair value of a security is less
than its amortized cost basis at the balance sheet date.  For such
securities, OTTI is considered to have occurred if the Company intends to sell
the security, if it is more likely than not the Company will be required to sell
the security before recovery of its amortized cost basis, or if the present
values of expected cash flows is not sufficient to recover the entire amortized
cost.





The
unrealized losses are primarily a result of increases in market yields from the
time of purchase.  In general, as market yields rise, the fair value
of securities will decrease; as market yields fall, the fair value of securities
will increase. Management generally views changes in fair value caused by
changes in interest rates as temporary; therefore, these securities have not
been classified as other-than-temporarily impaired.  Additionally, the
impairment is also considered temporary because scheduled coupon payments have
been made, it is anticipated that the entire principal balance will be collected
as scheduled, and management neither intends to sell the securities and it is
not more likely than not that the Company will be required to sell the
securities before the recovery of the remaining amortized cost
amount.





The
amortized cost and estimated fair value of securities by remaining contractual
maturity without consideration for call features or pre-refunding dates as of
December 31, 2009 are shown below.  Actual maturities of MBS may
differ from contractual maturities because borrowers have the right to prepay
obligations, generally without penalty.  Maturities of MBS depend on
the repayment characteristics and experience of the underlying financial
instruments. Issuers of certain investment securities have the right to
call and prepay obligations with or without prepayment penalties.  As
of December 31, 2009, the amortized cost of the securities in our portfolio
which are callable or have pre-refunding dates within one year totaled $534.2
million.





AFS
            
            
            HTMEstimated
            
            
            
            
            
            EstimatedAmortized
            
            
            Fair
            
            
            Amortized
            
            
            FairCost
            
            
            Value
            
            
            Cost
            
            
            Value(Dollars
      in thousands)One
      year or less
            
            $
            25,740
            
            
            $
            25,999
            
            
            $
            1,506
            
            
            $
            1,536One
      year through five years
            
            
            202,918
            
            
            
            203,434
            
            
            
            367,861
            
            
            
            368,044Five
      years through ten years
            
            
            105,593
            
            
            
            111,744
            
            
            
            353,048
            
            
            
            367,809Ten
      years and thereafter
            
            
            1,155,207
            
            
            
            1,197,920
            
            
            
            268,400
            
            
            
            276,328$
            1,489,458
            
            
            $
            1,539,097
            
            
            $
            990,815
            
            
            $
            1,013,717




As of
December 31, 2009 and September 30, 2009, the Bank has pledged AFS and HTM MBS
with an amortized cost of $734.3 million and $764.4 million, respectively, and
an estimated fair value of $765.3 million and $797.0 million, respectively, as
collateral for repurchase agreements.  The securities pledged as
collateral for the repurchase agreements can be repledged by the
counterparties.  As of December 31, 2009 and September 30, 2009, the
Bank also had pledged AFS and HTM MBS with an amortized cost of $198.6 million
and $193.6 million, respectively, and an estimated fair value of $207.3 million
and $202.8 million, respectively, as collateral for public unit depositors, and
discount window borrowings and treasury, tax, and loan requirements at the
Federal Reserve Bank.






During
the quarter, the Bank swapped $194.8 million of originated fixed-rate mortgage
loans with the Federal Home Loan Mortgage Corporation (“FHLMC”) for MBS (“loan
swap transaction”).  The MBS received in the loan swap transaction
were classified as trading securities prior to the sale.  Proceeds
from the sale of these securities were $199.1 million, resulting in a gross
realized gain of $6.5 million.  The gain is included in gains on
securities and loans receivable, net in the consolidated statements of income
for the quarter.




15





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
documents filed or furnished by the Company 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 and the continued waiver
      by
      its primary regulator, the Office of Thrift Supervision (the
      “OTS”),to distribute capital from the Bank to the Company,
      which could affect the ability of the Company to pay dividends in
      accordance with its dividend
policies;


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


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


·
            results
      of examinations of the Bank by the OTS, including the possibility that the
      OTS may, among other things, require the Bank to increase its
      ALLL;


·
            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 and
      branching locations, when required;


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


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


·
            technological
      changes;


·
            acquisitions
      and dispositions;


·
            changes
      in consumer spending and saving habits;
and


·
            our
      success at managing the risks involved in our
  business





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





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





16


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 2009 Annual Report on Form 10-K filed with the SEC.








Executive
Summary





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





Our
principal business consists of attracting deposits from the general public and
investing those funds primarily in permanent loans secured by first mortgages on
owner-occupied, one- to four-family residences.  We also originate
consumer loans, loans secured by first mortgages on non-owner-occupied one- to
four-family residences, 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 loans funded through retail deposits, we also purchase whole loans
and invest in certain investment securities and MBS, and use FHLB advances,
repurchase agreements and other borrowings as additional funding
sources.





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





The
Company’s results of operations are primarily dependent on net interest income,
which is the difference between the interest earned on loans, MBS, investment
securities and cash, and the interest paid on deposits and
borrowings.  On a weekly basis, management reviews deposit flows, loan
demand, cash levels, and changes in several market rates to assess all pricing
strategies.  We generally price our loan and deposit products based
upon an analysis of our competition and changes in market rates.  The
Bank generally prices its first mortgage loan products based on secondary market
and competitor pricing.  Generally, deposit pricing is based upon a
survey of competitors in the Bank’s market areas, and the need to attract
funding and retain maturing deposits.  The majority of our loans are
fixed-rate products with maturities up to 30 years, while the majority of our
deposits have maturity or reprice dates of less than two years.





During the first quarter of fiscal year
2010, the economy began to show signs of recovery, as evidenced by an increase
in consumer spending and stabilization of the labor market, the housing sector,
and financial markets.  However, unemployment levels remained
elevated, housing prices remained depressed and demand for housing was weak, due
to distressed sales and tightened lending standards.  In an effort to
support mortgage lending and housing market recovery, and to help improve credit
conditions overall, the Federal Open Market Committee of the Federal Reserve
maintained the overnight lending rate between zero and 25 basis points during
the first quarter of fiscal year 2010.  The Federal Reserve has
announced its intention to purchase up to $1.25 trillion of agency MBS by March
2010.





The
Company recognized net income of $21.0 million for the quarter ended December
31, 2009, compared to net income of $15.9 million for the quarter ended December
31, 2008.  The $5.1 million increase in net income between the periods
was primarily due to a decrease of $10.1 million in interest expense and an
increase of $6.5 million in other income, partially offset by a $6.4 million
decrease in interest and dividend income, a $2.6 million increase in the
provision for loan losses, and a $1.8 million increase in income taxes due to
higher earnings.  The decrease in interest expense was due to a
decrease in the rate on our FHLB advances due to the refinance of $875.0 million
of advances during the second and third quarters of fiscal year 2009 and a
decrease in interest expense on deposits due to the continued decline in the
cost of our certificate of deposit and money market portfolios as a result of
lower short-term market rates.  The $6.5 million increase in other
income was primarily due to the gain on the sale of trading securities received
in conjunction with a loan swap transaction during the current
quarter.  The decrease in interest and dividend income was primarily a
result of a decrease in the average yield of the MBS and loans receivable
portfolios due to prepayments of MBS and mortgage loans with higher yields than
the average portfolio yield, to adjustable-rate MBS and mortgage loans adjusting
to lower market rates on their reprice dates, refinances and modifications of
mortgage loans, and the origination of new mortgage loans at rates lower than
the overall portfolio rate.  The $2.6 million increase in the
provision for loan losses primarily reflects increases in the level of certain
qualitative factors in our general valuation allowance model to account for
lingering negative economic conditions.





17


During
the quarter, the Bank swapped $194.8 million of originated fixed-rate mortgage
loans with FHLMC for trading MBS.  The trading MBS were sold at a gain
of $6.5 million and the proceeds were reinvested into assets with an average
life shorter than that of the Bank’s remaining assets in an effort to reduce
future interest rate risk sensitivity that could occur as a result of the high
volume of refinances and modifications and likely increases in interest
rates.  Since December 2008, mortgage interest rates have been
historically low, prompting increased demand for refinances, and loan
modifications.





The Bank
has opened two new branches in our Kansas City market area since the beginning
of fiscal year 2010, and will open a new branch in the Wichita market area in
the second quarter of 2010.  The Bank continues to consider expansion
opportunities in all its market areas.








Available
Information





Financial
and other Company 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 ALLL,
other-than-temporary declines in the value of securities and fair value
measurements.  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 ALLL to absorb known and
inherent losses in the loan portfolio based upon ongoing quarterly assessments
of the loan portfolio.  Our methodology for assessing the
appropriateness of the ALLL consists of a formula analysis for general valuation
allowances and specific valuation allowances for identified problem and impaired
loans.  The ALLL is maintained through provisions for loan losses
which are charged to income.  The methodology for determining the ALLL
is considered a critical accounting policy by management because of the high
degree of judgment involved, the subjectivity of the assumptions used, and the
potential for changes in the economic environment that could result in changes
to the amount of the recorded ALLL.





Our
primary lending emphasis is the origination and purchase of one- to four-family
mortgage loans on residential properties, and, to a lesser extent, home equity
and second mortgages on one- to four-family residential properties resulting in
a loan concentration in residential first mortgage loans.  As a result
of our lending practices, we also have a concentration of loans secured by real
property located primarily in Kansas and Missouri.  At December 31,
2009, approximately 70% and approximately 15% of the Bank’s loans were secured
by real property located in Kansas and Missouri, respectively. Based on the
composition of our loan portfolio, we believe the primary risks inherent in our
portfolio are the continued weakened economic conditions due to the recent U.S.
recession, continued high levels of unemployment or underemployment, the
potential for rising mortgage interest rates in the markets we lend and a
continuing decline in real estate values.  Any one or a combination of
these events may adversely affect borrowers’ ability to repay their loans,
resulting in increased delinquencies, non-performing assets, loan losses and
future levels of loan loss provisions. Although management believes that the
Bank has established and maintained the ALLL at appropriate levels, additions
may be necessary if future economic and other conditions differ substantially
from the current operating environment.





18


Management
considers quantitative and qualitative factors when determining the
appropriateness of the ALLL.  Such factors include changes in
underwriting standards, the trend and composition of delinquent and
non-performing loans, results of foreclosed property and short sale
transactions, historical charge-offs, the current status and trends of local and
national economies; specifically levels of unemployment, changes in mortgage
interest rates, and loan portfolio growth and concentrations. Since our loan
portfolio is primarily concentrated in one- to four-family real estate, we
monitor one- to four-family real estate market value trends in our local market
areas and geographic sections of the U.S. by reference to various industry and
market reports, economic releases and surveys, and our general and specific
knowledge of the real estate markets in which we lend, in order to determine
what impact, if any, such trends may have on the level of our
ALLL.  We also use ratio analyses as a supplemental tool for
evaluating the overall reasonableness of the ALLL.  We consider the
observed trends in the ratios, taking into consideration the composition of our
loan portfolio compared to our peers, in combination with our historical loss
experience.  We also review the actual performance and charge-off
history of our portfolio and compare that to our previously determined allowance
coverage percentages and specific valuation allowances.  In addition,
the OTS reviews the adequacy of the Company’s ALLL during its examination
process.  We consider any comments from the OTS when assessing the
appropriateness of our ALLL.  Reviewing these quantitative and
qualitative factors assists management in evaluating the overall reasonableness
of the ALLL and whether changes need to be made to our
assumptions.  Our ALLL methodology is applied in a consistent manner;
however, the methodology can be modified in response to changing
conditions.





Each
quarter, the loan portfolio is segregated into categories in the formula
analysis based on certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.), interest payments (fixed-rate,
adjustable-rate), loan source (originated or purchased), loan-to-value ratios,
borrower’s credit score and payment status (i.e. current or number of days
delinquent).  Consumer loans, such as second mortgages and home equity
lines of credit, with the same underlying collateral as a one- to four-family
loan are combined with the one- to four-family loan in the formula analysis to
calculate a combined loan-to-value ratio.  Loss factors are assigned
to each category in the formula analysis based on management’s assessment of the
potential risk inherent in each category.  The greater the risks
associated with a particular category, the higher the loss
factor.  Loss factors increase as individual loans become classified
or delinquent, the foreclosure process begins or as economic and market
conditions and trends warrant.  All loans that are not impaired are
included in a formula analysis.  Impaired loans are defined as
non-accrual loans and troubled debt restructurings (“TDRs”) that have not been
performing under the restructured terms for 12 consecutive months.





The loss
factors applied in the formula analysis are reviewed quarterly by management to
assess whether the factors adequately cover probable and estimable losses
inherent in the loan portfolio.  The review considers such qualitative
and quantitative factors as the trends and composition of delinquent and
non-performing loans, the results of foreclosed property and short sale
transactions, and the status and trends of the local and national economies and
housing markets.  Our ALLL methodology permits modifications to any
loss factor used in the computation of the formula analysis in the event that,
in management’s judgment, significant factors which affect the collectibility of
the portfolio or any category of the loan portfolio, as of the evaluation date,
are not reflected in the current loss factors.  Management’s
evaluation of the qualitative factors with respect to these conditions is
subject to a higher degree of uncertainty because they are not identified with a
specific problem loan or portfolio segments. During the current quarter,
management increased the level of certain qualitative factors in our formula
analysis to account for lingering negative economic conditions.





Specific
valuation allowances are established in connection with individual loan reviews
of specifically identified problem and impaired loans.  Since the
majority of our loan portfolio is composed of one- to four-family real estate,
determining the estimated fair value of the underlying collateral is critical in
evaluating the amount of specific valuations required for problem and impaired
loans.  Estimated fair value of the underlying collateral is based on
current appraisals, real estate broker values or listing prices.  It
sometimes takes several months for a loan to work through the foreclosure
process.  For purchased loans, the estimated fair values received from
servicers when a loan becomes 90 days delinquent is not always an accurate
representation of the fair value once the collateral has been sold, due to the
continued decline in real estate values between the two points in time.  To
account for the declines in fair value on purchased loans, management applies a
market value adjustment to non-performing purchased loans to more accurately
estimate the fair values of the underlying collateral.  The
adjustments are determined based on the geographic location of the underlying
collateral, recent losses recognized on foreclosed property and short sale
transactions and trends of non-performing purchased loans entering foreclosure
in the various geographic areas.  Specific valuation allowances are
established if the adjusted estimated fair value, less estimated selling costs,
is less than the current loan balance.





Loans
with an outstanding balance of $1.5 million or more are individually reviewed
annually if secured by property in one of the following
categories:  multi-family (five or more units) property, unimproved
land, other improved commercial property, acquisition and development of land
projects, developed building lots, office building, single-use building, or
retail building.  Specific valuation allowances are established if the
individual loan review determines a quantifiable impairment.





19


Securities
Impairment.  Management monitors the securities portfolio for
OTTI on an ongoing basis and performs a formal review quarterly.  The
process involves monitoring market events and other items that could impact
issuers’ ability to perform.  The evaluation includes, but is not
limited to such factors as:  the nature of the investment, the length
of time the security has had a fair value less than the amortized cost basis,
the cause(s) and severity of the loss, expectation of an anticipated recovery
period, recent events specific to the issuer or industry including the issuer’s
financial condition and the current ability to make future payments in a timely
manner, external credit ratings and recent downgrades in such ratings, the
Company’s intent to sell and whether it is more likely than not the Company
would be required to sell prior to recovery for debt securities.





Management
determines whether OTTI losses should be recognized for impaired securities by
assessing all known facts and circumstances surrounding the
securities.  If the Company intends to sell an impaired security or if
it is more likely than not that the Company will be required to sell an impaired
security before recovery of its amortized cost basis, an OTTI will be recognized
and the difference between amortized cost and fair value will be recognized as a
loss in earnings.  At December 31, 2009, no securities had been
identified as other-than-temporarily impaired.





Fair Value
Measurements.  The Company uses fair value measurements
to record fair value adjustments to certain assets and to determine fair value
disclosures, per the provisions of ASC 820, Fair Value Measurements and
Disclosures.  The Company’s AFS securities are recorded at fair
value on a recurring basis.  Changes in the fair value of AFS
securities are recorded, net of tax, in accumulated other comprehensive income,
which is a component of stockholders’ equity.  The Company did not
have any liabilities that were measured at fair value at December 31,
2009.  Additionally, from time to time, the Company may be required to
record at fair value other assets or liabilities on a non-recurring basis, such
as REO and impaired loans. These non-recurring fair value adjustments involve
the application of lower-of-cost-or-fair value accounting or write-downs of
individual assets.





In
accordance with ASC 820, the Company groups its assets at fair value in three
levels, based on the markets in which the assets are traded and the reliability
of the underlying assumptions used to determine fair value, with Level 1 (quoted
prices for identical assets in an active market) being considered the most
reliable, and Level 3 having the most unobservable inputs and therefore being
considered the least reliable.  The Company bases its fair values on
the price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date.  As required by
ASC 820, the Company maximizes the use of observable inputs and minimizes the
use of unobservable inputs when measuring fair value.





20





Financial
Condition





Total
assets and total liabilities both decreased slightly from September 30, 2009 to
December 31, 2009.  Management may continue to maintain
interest-earning assets at current levels or below until market conditions
provide profitable growth opportunities that are consistent with interest rate
risk management policies.





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


Balance
      atDecember
      31,
            
            
            September
      30,
            
            
            June
      30,
            
            
            March
      31,
            
            
            December
      31,2009
            
            
            2009
            
            
            2009
            
            
            2009
            
            
            2008(Dollars
      in thousands, except per share amounts)Total
      assets
            
            $
            8,374,762
            
            
            $
            8,403,680
            
            
            $
            8,319,292
            
            
            $
            8,269,881
            
            
            $
            8,157,324Cash
      and cash equivalents
            
            
            105,128
            
            
            
            41,154
            
            
            
            74,101
            
            
            
            52,025
            
            
            
            143,134Investment
      securities
            
            
            651,943
            
            
            
            480,704
            
            
            
            322,166
            
            
            
            214,410
            
            
            
            105,965MBS
            
            
            1,877,969
            
            
            
            1,992,467
            
            
            
            2,100,998
            
            
            
            2,204,369
            
            
            
            2,176,302Loans
      receivable, net
            
            
            5,423,923
            
            
            
            5,603,965
            
            
            
            5,541,731
            
            
            
            5,377,699
            
            
            
            5,456,569Capital
      stock of FHLB
            
            
            134,064
            
            
            
            133,064
            
            
            
            132,071
            
            
            
            131,278
            
            
            
            131,230Deposits
            
            
            4,227,252
            
            
            
            4,228,609
            
            
            
            4,175,251
            
            
            
            4,116,514
            
            
            
            3,867,304Advances
      from FHLB
            
            
            2,394,214
            
            
            
            2,392,570
            
            
            
            2,410,949
            
            
            
            2,411,560
            
            
            
            2,596,964Other
      borrowings
            
            
            713,609
            
            
            
            713,609
            
            
            
            713,609
            
            
            
            713,609
            
            
            
            713,595Stockholders'
      equity
            
            
            941,999
            
            
            
            941,298
            
            
            
            922,634
            
            
            
            916,391
            
            
            
            897,435Accumulated
      other comprehensive income
            
            
            30,875
            
            
            
            33,870
            
            
            
            23,512
            
            
            
            24,622
            
            
            
            14,263Equity
      to total assets at end of period
            
            
            11.2
            %
            
            
            11.2
            %
            
            
            11.1
            %
            
            
            11.1
            %
            
            
            11.0
            %Book
      value per share
            
            
            12.86
            
            
            
            12.85
            
            
            
            12.60
            
            
            
            12.52
            
            
            
            12.27Bank
      tangible equity ratio (1)
            
            
            10.1
            %
            
            
            10.0
            %
            
            
            9.8
            %
            
            
            9.9
            %
            
            
            10.0
            %





(1) See
tangible equity to GAAP equity reconciliation in “Liquidity and Capital
Resources – Regulatory Capital.”


21





Loans
Receivable.  The loans receivable portfolio decreased $180.0
million from $5.60 billion at September 30, 2009 to $5.42 billion at December
31, 2009.  The decrease in the portfolio was a result of the loan swap
transaction that took place during the quarter, where $194.8 million of
originated fixed-rate mortgage loans were swapped for MBS as a means of reducing
future interest rate risk sensitivity. The Bank will continue to service these
loans. The MBS were classified as trading securities and sold during the current
quarter for a gain.  The proceeds from the sale were primarily
reinvested into investment securities with terms shorter than that of the loans
swapped.





The Bank
purchased $37.6 million of loans from nationwide lenders during the quarter, the
majority of which were adjustable-rate.  These loans had an average
credit score of 725 and a weighted average LTV ratio of 46% at the time of
purchase.  At December 31, 2009, loans purchased from nationwide
lenders represented 13% of our loan portfolio and were secured by properties
located in 47 of the continental United States and Washington,
D.C.  As of December 31, 2009, the average balance of a purchased
nationwide mortgage loan was approximately $350 thousand, the average balance of
a purchased correspondent loan was approximately $250 thousand, and the average
balance of an originated mortgage loan was approximately $125 thousand. By
purchasing loans from nationwide lenders, the Bank is able to attain some
geographic diversification in its loan portfolio, and help mitigate the Bank’s
interest rate risk exposure as the purchased loans are predominately
adjustable-rate or 15-year fixed-rate loans.  Although at the time
these loans were purchased, they met our underwriting standards; as a result of
the continued elevated levels of unemployment rates and the declines in real
estate values in some of the states where we have purchased loans, we have
experienced an increase in non-performing purchased loans.  See
additional discussion regarding non-performing purchased loans in “Asset Quality
– Loans and REO.”







Included
in the loan portfolio at December 31, 2009 were $243.7 million of interest-only
adjustable-rate mortgage (“ARM”) loans, the majority of which were purchased
from nationwide lenders during fiscal year 2005.  These loans do not
typically require principal payments during their initial term, and have initial
interest-only terms of either five or ten years.  The interest-only
loans purchased had an average credit score of 737 and an average LTV ratio of
80% or less at the time of purchase.  The Bank has not purchased any
interest-only ARM loans since 2006 and discontinued offering the product in its
local markets during 2008 to reduce future credit risk.  At December
31, 2009, $233.3 million, or 96%, of interest-only loans were still in their
interest-only payment term.  As of December 31, 2009, $110.7 million
will begin to amortize principal within two years, $16.4 million will begin to
amortize principal within two-to-five years, $89.7 million will begin to
amortize principal within five-to-seven years, and the remaining $16.4 million
will begin amortizing in seven-to-ten years.  At December 31, 2009,
$15.7 million or approximately 50% of non-performing loans were interest-only
and $2.8 million was reserved in the ALLL for these
loans.  Non-performing interest-only loans represent approximately 6%
of the total interest-only portfolio at December 31, 2009.  See
additional discussion regarding non-performing loans in “Asset Quality – Loans
and REO.”







22


The
following table presents loan origination, refinance and purchase activity for
the periods indicated.  Loan originations, purchases and refinances
are reported together.  The fixed-rate one- to four-family loans less
than or equal to 15 years have an original maturity at origination of less than
or equal to 15 years, while fixed-rate one- to four-family loans greater than 15
years have an original maturity at origination of greater than 15
years.  The adjustable-rate one- to four-family loans less than or
equal to 36 months have a term to first reset of less than or equal to 36 months
at origination and adjustable-rate one- to four-family loans greater than 36
months have a term to first reset of greater than 36 months at
origination.





For
      the Three Months Ended
            
            
            For
      the Three Months EndedDecember
      31, 2009
            
            
            December
      31, 2008Amount
            
            
            Rate
            
            
            %
      of Total
            
            
            Amount
            
            
            Rate
            
            
            %
      of TotalFixed-Rate:
            
            (Dollars
      in thousands)One-
      to four-family<=
      15 years
            
            $
            56,955
            
            
            
            4.60
            %
            
            
            21.9
            %
            
            $
            28,017
            
            
            
            5.47
            %
            
            
            9.0
            %>
      15 years
            
            
            117,783
            
            
            
            5.10
            
            
            
            45.4
            
            
            
            107,145
            
            
            
            5.79
            
            
            
            34.4Other
      real estate
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            5,965
            
            
            
            5.88
            
            
            
            1.9Home
      Equity
            
            
            1,500
            
            
            
            7.45
            
            
            
            0.6
            
            
            
            2,851
            
            
            
            7.45
            
            
            
            0.9Other
            
            
            418
            
            
            
            8.86
            
            
            
            0.2
            
            
            
            433
            
            
            
            8.52
            
            
            
            0.1Total
      fixed-rate
            
            
            176,656
            
            
            
            4.97
            
            
            
            68.1
            
            
            
            144,411
            
            
            
            5.77
            
            
            
            46.3Adjustable-Rate:One-
      to four-family<=
      36 months
            
            
            32,945
            
            
            
            3.34
            
            
            
            12.7
            
            
            
            88,076
            
            
            
            5.00
            
            
            
            28.2>
      36 months
            
            
            26,870
            
            
            
            4.36
            
            
            
            10.3
            
            
            
            55,922
            
            
            
            5.32
            
            
            
            17.9Other
      real estate
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Home
      Equity
            
            
            21,810
            
            
            
            4.86
            
            
            
            8.4
            
            
            
            22,749
            
            
            
            5.08
            
            
            
            7.3Other
            
            
            1,190
            
            
            
            4.73
            
            
            
            0.5
            
            
            
            754
            
            
            
            5.49
            
            
            
            0.3Total
      adjustable-rate
            
            
            82,815
            
            
            
            4.09
            
            
            
            31.9
            
            
            
            167,501
            
            
            
            5.12
            
            
            
            53.7Total
      originations, refinances and purchases
            
            $
            259,471
            
            
            
            4.69
            %
            
            
            100.0
            %
            
            $
            311,912
            
            
            
            5.42
            %
            
            
            100.0
            %Purchased
      loans included above:Fixed-Rate:Correspondent
            
            $
            17,811
            
            
            
            5.09
            %
            
            
            
            
            
            $
            13,749
            
            
            
            5.79
            %Nationwide
            
            
            2,338
            
            
            
            5.05
            
            
            
            
            
            
            
            256
            
            
            
            4.38Adjustable-Rate:Correspondent
            
            
            9,697
            
            
            
            4.49
            
            
            
            
            
            
            
            6,249
            
            
            
            5.76Nationwide
            
            
            35,233
            
            
            
            3.47
            
            
            
            
            
            
            
            125,815
            
            
            
            5.05Total
      purchased loans
            
            $
            65,079
            
            
            
            4.12
            %
            
            
            
            
            
            $
            146,069
            
            
            
            5.15
            %





Loan
modification activity is not included in the tables above because a new loan is
not generated at the time of modification.  During the three months
ended December 31, 2009 and 2008, the Bank modified $139.7 million and $24.8
million loans, respectively, with a weighted average rate decrease of 83 basis
points and 3 basis points, respectively.




The Bank
generally prices its one- to four-family loan products based upon prices
available in the secondary market.  During the three months ended
December 31, 2009, the average rate offered on the Bank’s 30-year fixed-rate
one- to four-family loans, with no points paid by the borrower, was
approximately 160 basis points above the average 10-year Treasury rate, while
the average rate offered on the Bank’s 15-year fixed-rate one- to four-family
loans were approximately 100 basis points above the average 10-year Treasury
rate.




23


The
following table summarizes the activity in the loan portfolio for the periods
indicated, excluding changes in loans in process, deferred fees and
ALLL.  Loans that were paid-off as a result of refinances are included
in “repayments.”  Purchased loans include purchases from correspondent
and nationwide lenders.  Loan modification activity is not included in
the activity in the following table because a new loan is not generated at the
time of modification.  See modification activity for the three months
ended December 31, 2009 on the previous page.  The modified balance
and rate are included in the ending loan portfolio balance and
rate.


For
      the Three Months EndedDecember
      31, 2009
            
            
            September
      30, 2009
            
            
            June
      30, 2009
            
            
            March
      31, 2009Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
      in thousands)Beginning
      balance
            
            $
            5,646,950
            
            
            
            5.29
            %
            
            $
            5,587,130
            
            
            
            5.36
            %
            
            $
            5,422,798
            
            
            
            5.50
            %
            
            $
            5,506,352
            
            
            
            5.63
            %Originations
      and refinances:Fixed
            
            
            156,507
            
            
            
            4.95
            
            
            
            255,441
            
            
            
            5.07
            
            
            
            325,640
            
            
            
            4.96
            
            
            
            276,888
            
            
            
            5.06Adjustable
            
            
            37,885
            
            
            
            4.57
            
            
            
            37,948
            
            
            
            4.75
            
            
            
            32,652
            
            
            
            4.78
            
            
            
            25,269
            
            
            
            4.83Purchases:Fixed
            
            
            20,149
            
            
            
            5.09
            
            
            
            24,670
            
            
            
            5.08
            
            
            
            37,912
            
            
            
            5.11
            
            
            
            33,226
            
            
            
            5.18Adjustable
            
            
            44,930
            
            
            
            3.69
            
            
            
            11,662
            
            
            
            4.82
            
            
            
            9,544
            
            
            
            5.04
            
            
            
            70,349
            
            
            
            4.90Repayments
            
            
            (245,838
            )
            
            
            
            
            
            
            (266,362
            )
            
            
            
            
            
            
            (322,104
            )
            
            
            
            
            
            
            (311,733
            )Transfer
      of loans to LHFS (1)
            
            
            (194,759
            )
            
            
            
            
            
            
            --
            
            
            
            
            
            
            
            81,190
            
            
            
            
            
            
            
            (175,862
            )Other(2)
            
            
            (2,080
            )
            
            
            
            
            
            
            (3,539
            )
            
            
            
            
            
            
            (502
            )
            
            
            
            
            
            
            (1,691
            )Ending
      balance
            
            $
            5,463,744
            
            
            
            5.23
            %
            
            $
            5,646,950
            
            
            
            5.29
            %
            
            $
            5,587,130
            
            
            
            5.36
            %
            
            $
            5,422,798
            
            
            
            5.50
            %







(1)
            “Transfer of loans
      to LHFS” in the December 31, 2009 quarter includes loans with a principal
      balance of $194.8 million related to the loan swap
      transaction.




(2)
            “Other”consists of transfers to
      REO and modification fees advanced.







24










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




December
      31, 2009
            
            
            September
      30, 2009Amount
            
            
            Average
      Rate
            
            
            %
      of Total
            
            
            Amount
            
            
            Average
      Rate
            
            
            %
      of Total(Dollars
      in thousands)Real Estate Loans:One-
      to four-family
            
            $
            5,155,773
            
            
            
            5.21
            %
            
            
            94.4
            %
            
            $
            5,321,935
            
            
            
            5.26
            %
            
            
            94.2
            %Multi-family
      and commercial
            
            
            71,395
            
            
            
            6.18
            
            
            
            1.3
            
            
            
            80,493
            
            
            
            6.01
            
            
            
            1.4Construction
            
            
            33,403
            
            
            
            5.15
            
            
            
            0.6
            
            
            
            39,535
            
            
            
            5.20
            
            
            
            0.7Total
      real estate loans
            
            
            5,260,571
            
            
            
            5.22
            
            
            
            96.3
            
            
            
            5,441,963
            
            
            
            5.27
            
            
            
            96.3Consumer and Other Loans:Home
      equity
            
            
            193,987
            
            
            
            5.60
            
            
            
            3.5
            
            
            
            195,557
            
            
            
            5.63
            
            
            
            3.5Other
            
            
            9,186
            
            
            
            6.00
            
            
            
            0.2
            
            
            
            9,430
            
            
            
            6.11
            
            
            
            0.2Total
      consumer and other loans
            
            
            203,173
            
            
            
            5.62
            
            
            
            3.7
            
            
            
            204,987
            
            
            
            5.65
            
            
            
            3.7Total
      loans receivable
            
            
            5,463,744
            
            
            
            5.23
            %
            
            
            100.0
            %
            
            
            5,646,950
            
            
            
            5.29
            %
            
            
            100.0
            %Less:Undisbursed
      loan funds
            
            
            17,089
            
            
            
            
            
            
            
            
            
            
            
            20,649Unearned
      loan fees and deferred costs
            
            
            10,525
            
            
            
            
            
            
            
            
            
            
            
            12,186ALLL
            
            
            12,207
            
            
            
            
            
            
            
            
            
            
            
            10,150Total
      loans receivable, net
            
            $
            5,423,923
            
            
            
            
            
            
            
            
            
            
            $
            5,603,965


25





The
following table presents the contractual maturity of our loan portfolio at
December 31, 2009.  Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due.  The table does not reflect the effects of possible prepayments
or enforcement of due on sale clauses.





Real
      EstateMulti-family
      andOne-
      to Four-Family
            
            
            Commercial
            
            
            Construction
      (2)
            
            
            Home
      Equity (3)
            
            
            Other
            
            
            TotalWeighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            AverageAmount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
      in thousands)Amounts
      due:Within
      one year (1)
            
            $
            2,131
            
            
            
            6.00
            %
            
            $
            22
            
            
            
            7.00
            %
            
            $
            17,673
            
            
            
            5.18
            %
            
            $
            4,024
            
            
            
            4.14
            %
            
            $
            1,478
            
            
            
            5.59
            %
            
            $
            25,328
            
            
            
            5.11
            %After
      one year:Over
      one to two
            
            
            5,117
            
            
            
            5.57
            
            
            
            --
            
            
            
            --
            
            
            
            15,730
            
            
            
            5.11
            
            
            
            1,456
            
            
            
            4.64
            
            
            
            1,083
            
            
            
            8.10
            
            
            
            23,386
            
            
            
            5.32Over
      two to three
            
            
            8,508
            
            
            
            5.53
            
            
            
            996
            
            
            
            5.72
            
            
            
            --
            
            
            
            --
            
            
            
            2,004
            
            
            
            5.23
            
            
            
            1,092
            
            
            
            6.56
            
            
            
            12,600
            
            
            
            5.59Over
      three to five
            
            
            45,562
            
            
            
            5.30
            
            
            
            34
            
            
            
            8.50
            
            
            
            --
            
            
            
            --
            
            
            
            3,580
            
            
            
            5.42
            
            
            
            5,136
            
            
            
            5.36
            
            
            
            54,312
            
            
            
            5.32Over
      five to ten
            
            
            479,433
            
            
            
            5.18
            
            
            
            6,867
            
            
            
            5.87
            
            
            
            --
            
            
            
            --
            
            
            
            32,187
            
            
            
            5.11
            
            
            
            368
            
            
            
            8.62
            
            
            
            518,855
            
            
            
            5.19Over
      10 to 15
            
            
            856,233
            
            
            
            5.00
            
            
            
            13,098
            
            
            
            6.40
            
            
            
            --
            
            
            
            --
            
            
            
            60,379
            
            
            
            4.87
            
            
            
            29
            
            
            
            6.50
            
            
            
            929,739
            
            
            
            5.01After
      15 years
            
            
            3,758,789
            
            
            
            5.25
            
            
            
            50,378
            
            
            
            6.17
            
            
            
            --
            
            
            
            --
            
            
            
            90,357
            
            
            
            6.37
            
            
            
            --
            
            
            
            --
            
            
            
            3,899,524
            
            
            
            5.29Total
      due after one year
            
            
            5,153,642
            
            
            
            5.21
            
            
            
            71,373
            
            
            
            6.18
            
            
            
            15,730
            
            
            
            5.11
            
            
            
            189,963
            
            
            
            5.64
            
            
            
            7,708
            
            
            
            6.07
            
            
            
            5,438,416
            
            
            
            5.23Total
      loans
            
            $
            5,155,773
            
            
            
            5.21
            %
            
            $
            71,395
            
            
            
            6.18
            %
            
            $
            34,403
            
            
            
            5.15
            %
            
            $
            193,987
            
            
            
            5.60
            %
            
            $
            9,186
            
            
            
            6.00
            %
            
            
            5,463,744
            
            
            
            5.23
            %Less:Undisbursed
      loan funds
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,089Unearned
      loan fees and deferred costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,525ALLL
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,207Total
      loans receivable, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            5,423,923





(1)  Includes
demand loans, loans having no stated maturity, and overdraft loans.


(2)  Construction
loans are presented based upon the term to complete construction.


(3)  For
home equity loans, the maturity date calculated assumes the customer always
makes the required minimum payment.  The majority of interest-only
home equity lines of credit  assume a balloon payment of unpaid
principal at 120 months.  All other home equity lines of credit
generally assume a term of 240 months.





26


The
following table presents, as of December 31, 2009, the amount of loans, net of
undisbursed loan funds, due after December 31, 2010, and whether these loans
have fixed or adjustable interest rates.





Fixed
            
            
            Adjustable
            
            
            Total(Dollars
      in thousands)Real
      Estate Loans:One-
      to four-family
            
            $
            4,096,494
            
            
            $
            1,057,148
            
            
            $
            5,153,642Multi-family
      and commercial
            
            
            68,902
            
            
            
            2,471
            
            
            
            71,373Construction
            
            
            15,185
            
            
            
            545
            
            
            
            15,730Consumer
      and Other Loans:Home
      equity
            
            
            53,203
            
            
            
            136,760
            
            
            
            189,963Other
            
            
            3,780
            
            
            
            3,928
            
            
            
            7,708Total
            
            $
            4,237,564
            
            
            $
            1,200,852
            
            
            $
            5,438,416








Asset
Quality – Loans and REO




The
Bank’s traditional underwriting guidelines have provided the Bank with generally
low delinquencies and low levels of non-performing assets compared to national
levels.  Of particular importance is the complete documentation
required for each loan the Bank originates and purchases.  This allows
the Bank to make an informed credit decision based upon a thorough assessment of
the borrower’s ability to repay the loan compared to underwriting methodologies
that do not require full documentation.  See additional discussion
regarding underwriting standards in “Lending Practices and Underwriting
Standards” in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2009.





For one-
to four-family loans and home equity loans, when a borrower fails to make a loan
payment 15 days after the due date, a late charge is assessed and a notice is
mailed.  All delinquent balances are reviewed by collection personnel
once the loan is 16 or more days past due.  Attempts to contact the
borrower occur by personal letter and, if no response is received, by telephone,
with the purpose of establishing repayment arrangements for the borrower to
bring the loan current.  Repayment arrangements may be approved by a
designated bank officer.  Once a loan becomes 90 days delinquent, a
demand letter is issued requiring the loan to be brought current or foreclosure
procedures will be implemented.  Once a loan becomes 120 days
delinquent, and an acceptable repayment plan has not been established, the loan
is forwarded to legal counsel to initiate foreclosure.  We also
monitor whether mortgagors who filed for bankruptcy are meeting their obligation
to pay the mortgage debt in accordance with the terms of the bankruptcy
petition.





We
monitor delinquencies on our purchased loan portfolio with reports we receive
from the servicers.  We monitor these servicer reports to ensure that
the servicer is upholding the terms of the servicing agreement.  The
reports generally provide total principal and interest due and length of
delinquency, and are used to prepare monthly management reports and perform
delinquent loan trend analysis.  Management also utilizes information
from the servicers to monitor property valuations and identify the need to
record specific valuation allowances.  The servicers handle collection
efforts per the terms of the servicing agreement.  In the event of a
foreclosure, the servicer obtains our approval prior to initiating foreclosure
proceedings, and handles all aspects of the repossession and disposition of the
repossessed property, which is also governed by the terms of the servicing
agreement.


27


The
following matrix shows the balance of one-to four-family mortgage loans as of
December 31, 2009 cross-referenced by LTV ratio and credit score.  The
LTV ratios used in the matrix were based on the current loan balance and the
most recent bank appraisal available, or the lesser of the purchase price or
original appraisal.  In most cases, the most recent appraisal was
obtained at the time of origination.  The LTV ratios based upon
appraisals obtained at the time of origination may not necessarily indicate the
extent to which we may incur a loss on any given loan that may go into
foreclosure as the value of the underlying collateral may have declined since
the time of origination.  Credit scores were updated in March 2009 for
loans originated by the Bank and in September 2009 for purchased
loans.  Management will continue to update credit scores as deemed
necessary based upon economic conditions.  Per the matrix, the
greatest concentration of loans fall into the “751 and above” credit score
category and have a LTV ratio of less than 70%.  The loans falling
into the “less than 660” credit score category and having LTV ratios of more
than 80% comprise the lowest concentration.  The average LTV ratio and
credit score for our one-to four-family purchased loans at December 31, 2009 was
approximately 67% and 758, respectively.  The average LTV ratio and
credit score for our one-to four-family originated loans at December 31, 2009
was approximately 59% and 742, respectively.








Credit
      ScoreLess
      than 660
            
            
            661
      to 700
            
            
            701
      to 750
            
            
            751
      and above
            
            Total%
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      ofLTV ratio
            
            Amount
            
            
            total
            
            
            Amount
            
            
            total
            
            
            Amount
            
            
            total
            
            
            Amount
            
            
            total
            
            
            Amount
            
            
            total(Dollars
      in thousands)Less
      than 70%
            
            $
            121,923
            
            
            
            2.4
            %
            
            $
            158,508
            
            
            
            3.1
            %
            
            $
            427,621
            
            
            
            8.3
            %
            
            $
            1,891,927
            
            
            
            36.7
            %
            
            $
            2,599,979
            
            
            
            50.5
            %70%
      to 80%
            
            
            114,771
            
            
            
            2.2
            
            
            
            125,766
            
            
            
            2.4
            
            
            
            406,457
            
            
            
            7.9
            
            
            
            1,152,435
            
            
            
            22.3
            
            
            
            1,799,429
            
            
            
            34.8More
      than 80%
            
            
            71,345
            
            
            
            1.4
            
            
            
            77,532
            
            
            
            1.5
            
            
            
            211,548
            
            
            
            4.1
            
            
            
            395,940
            
            
            
            7.7
            
            
            
            756,365
            
            
            
            14.7Total
            
            $
            308,039
            
            
            
            6.0
            %
            
            $
            361,806
            
            
            
            7.0
            %
            
            $
            1,045,626
            
            
            
            20.3
            %
            
            $
            3,440,302
            
            
            
            66.7
            %
            
            $
            5,155,773
            
            
            
            100.0
            %








28





Delinquent
and non-performing loans and REO


The
following tables present the Company’s 30 to 89 day delinquent loans,
non-performing loans, and REO at the dates indicated.  Purchased loans
include loans purchased from nationwide lenders.  Non-performing loans
are non-accrual loans that are 90 or more days delinquent or are in the process
of foreclosure.  Non-performing assets include non-performing loans and
REO.





December
      31,
              
              September
      30,
              
              June
      30,
              
              March
      31,
              
              December
      31,2009
              
              2009
              
              2009
              
              2009
              
              2008Number
              
              Amount
              
              Number
              
              Amount
              
              Number
              
              Amount
              
              Number
              
              Amount
              
              Number
              
              Amount30
      to 89 days delinquent
              (Dollars
      in thousands)One-
      to four-family:Originated
              184
              
              $   19,468
              
              159
              
              $   15,488
              
              140
              
              $   12,981
              
              115
              
              $   13,459
              
              147
              
              $   15,089Purchased
              44
              
              11,464
              
              41
              
              10,556
              
              49
              
              13,225
              
              43
              
              9,698
              
              42
              
              9,359Multi-family
      and commercial
              1
              
              5
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --Construction
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --Consumer
      and Other Loans:Home
      equity
              49
              
              1,021
              
              40
              
              708
              
              38
              
              746
              
              33
              
              611
              
              36
              
              496Other
              24
              
              114
              
              15
              
              89
              
              15
              
              98
              
              9
              
              50
              
              16
              
              106302
              
              $   32,072
              
              255
              
              $   26,841
              
              242
              
              $   27,050
              
              200
              
              $   23,818
              
              241
              
              $   25,05030
      to 89 days delinquent loansas
      a percentage of total loans
              
              
              0.59%
              
              
              
              0.48%
              
              
              
              0.49%
              
              
              
              0.44%
              
              
              
              0.46%








29





December
      31,
            
            
            September
      30,
            
            
            June
      30,
            
            
            March
      31,
            
            
            December
      31,2009
            
            
            2009
            
            
            2009
            
            
            2009
            
            
            2008Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount(Dollars
      in thousands)Non-performing
      loans:One-
      to four-family:Originated
            
            
            104
            
            
            $
            10,040
            
            
            
            99
            
            
            $
            9,248
            
            
            
            108
            
            
            $
            11,332
            
            
            
            96
            
            
            $
            9,748
            
            
            
            95
            
            
            $
            9,231Purchased
            
            
            70
            
            
            
            21,912
            
            
            
            70
            
            
            
            21,259
            
            
            
            59
            
            
            
            17,270
            
            
            
            45
            
            
            
            12,158
            
            
            
            32
            
            
            
            9,625Multi-family
      and commercial
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Construction
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Consumer
      and Other Loans:Home
      equity
            
            
            32
            
            
            
            516
            
            
            
            22
            
            
            
            367
            
            
            
            29
            
            
            
            448
            
            
            
            26
            
            
            
            407
            
            
            
            18
            
            
            
            275Other
            
            
            6
            
            
            
            9
            
            
            
            8
            
            
            
            45
            
            
            
            7
            
            
            
            60
            
            
            
            6
            
            
            
            58
            
            
            
            11
            
            
            
            101212
            
            
            
            32,477
            
            
            
            199
            
            
            
            30,919
            
            
            
            203
            
            
            
            29,110
            
            
            
            173
            
            
            
            22,371
            
            
            
            156
            
            
            
            19,232Non-performing
      loansas
      a percentage of total loans
            
            
            
            
            
            
            0.60
            %
            
            
            
            
            
            
            0.55
            %
            
            
            
            
            
            
            0.53
            %
            
            
            
            
            
            
            0.42
            %
            
            
            
            
            
            
            0.35
            %REO:One-
      to four-family:Originated (1)
            
            
            55
            
            
            
            4,726
            
            
            
            51
            
            
            
            5,702
            
            
            
            36
            
            
            
            3,950
            
            
            
            48
            
            
            
            4,119
            
            
            
            38
            
            
            
            2,833Purchased
            
            
            9
            
            
            
            1,911
            
            
            
            8
            
            
            
            1,702
            
            
            
            5
            
            
            
            1,127
            
            
            
            10
            
            
            
            1,705
            
            
            
            6
            
            
            
            1,644Multi-family
      and commercial
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Construction
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Consumer
      and Other Loans:Home
      equity
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Other
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --64
            
            
            
            6,637
            
            
            
            59
            
            
            
            7,404
            
            
            
            41
            
            
            
            5,077
            
            
            
            58
            
            
            
            5,824
            
            
            
            44
            
            
            
            4,477Total
      non-performing assets
            
            
            276
            
            
            $
            39,114
            
            
            
            258
            
            
            $
            38,323
            
            
            
            244
            
            
            $
            34,187
            
            
            
            231
            
            
            $
            28,195
            
            
            
            200
            
            
            $
            23,709Non-performing
      assetsas
      a percentage of total assets
            
            
            
            
            
            
            0.47
            %
            
            
            
            
            
            
            0.46
            %
            
            
            
            
            
            
            0.41
            %
            
            
            
            
            
            
            0.34
            %
            
            
            
            
            
            
            0.29
            %


(1)  Real
estate related consumer loans are included in the one- to four-family category
as the underlying collateral is one- to four-family property.


30


Loans 30
to 89 days delinquent increased $5.3 million from $26.8 million at September 30,
2009 to $32.1 million at December 31, 2009.  We believe the increase in the 30 to
89 day delinquent balance during the quarter was due to the continued elevated
level of unemployment.  The following table presents the average
percentage of one-to four-family loans, by principal balance, that entered the
30-89 days delinquent category during the past 12 months that paid off, returned
to performing status, stayed 30-89 days delinquent, or progressed to the
non-performing or REO categories.Purchased
loans include loans purchased from nationwide lenders.


30-89
      Day Delinquent Loan Trend Analysis30-89
      Days
              
              
              Non-Paid
      Off
              
              
              Performing
              
              
              Delinquent
              
              
              Performing
              
              
              REO
              
              
              TotalOriginated
              
              
              5.7
              %
              
              
              38.1
              %
              
              
              34.1
              %
              
              
              18.0
              %
              
              
              4.1
              %
              
              
              100.0
              %Purchased
              
              
              3.7
              %
              
              
              20.9
              %
              
              
              35.6
              %
              
              
              37.6
              %
              
              
              2.2
              %
              
              
              100.0
              %Total
      Portfolio Average
              
              
              4.8
              %
              
              
              30.9
              %
              
              
              35.3
              %
              
              
              25.9
              %
              
              
              3.1
              %
              
              
              100.0
              %


Non-performing
loans increased $1.6 million from $30.9 million at September 30, 2009 to $32.5
million at December 31, 2009.  The balance of non-performing loans
continues to remain at historically high levels due to the continued elevated
level of unemployment coupled with the decline in real estate values,
particularly in some of the states in which we have purchased
loans.  At December 31, 2009, one-to four-family non-performing loans
with LTV ratios greater than 80% comprised approximately 15% of total
non-performing loans.  Of these loans, 71% have PMI which reduces or
eliminates the Bank’s exposure to loss.  The balance of one-to
four-family non-performing loans with LTV ratios greater than 80% with no PMI
was $1.4 million at December 31, 2009.  At origination, these loans
generally had LTV ratios less than 80%, but as a result of updating the
appraisals, the LTV ratios are now in excess of 80%.





The
following table presents the top twelve states where our one- to four-family
mortgages are located, and the corresponding balance of 30-89 day delinquent
loans, non-performing loans and the weighted average LTV ratios for
non-performing loans at December 31, 2009.  The LTV ratios were based
on the current loan balance and the most recent appraisal available, or the
lesser of the purchase price or original appraisal.





Loans
      30 to 89One-
      to Four-Family
            
            
            Days
      Delinquent
            
            
            Non-Performing
      LoansState
            
            Balance
            
            
            %
      of Total
            
            
            Balance
            
            
            %
      of Total
            
            
            Balance
            
            
            %
      of Total
            
            
            Average
      LTV(Dollars
      in thousands)Kansas
            
            $
            3,717,625
            
            
            
            72.1
            %
            
            $
            14,290
            
            
            
            46.2
            %
            
            $
            8,442
            
            
            
            26.4
            %
            
            
            76
            %Missouri
            
            
            749,956
            
            
            
            14.6
            
            
            
            5,177
            
            
            
            16.7
            
            
            
            1,598
            
            
            
            5.0
            
            
            
            92Illinois
            
            
            78,757
            
            
            
            1.5
            
            
            
            1,008
            
            
            
            3.2
            
            
            
            2,129
            
            
            
            6.7
            
            
            
            67Texas
            
            
            51,295
            
            
            
            1.0
            
            
            
            753
            
            
            
            2.4
            
            
            
            58
            
            
            
            0.2
            
            
            
            74New
      York
            
            
            50,282
            
            
            
            1.0
            
            
            
            875
            
            
            
            2.8
            
            
            
            846
            
            
            
            2.6
            
            
            
            75Florida
            
            
            48,407
            
            
            
            0.9
            
            
            
            113
            
            
            
            0.4
            
            
            
            3,649
            
            
            
            11.4
            
            
            
            71Colorado
            
            
            35,069
            
            
            
            0.7
            
            
            
            204
            
            
            
            0.7
            
            
            
            415
            
            
            
            1.3
            
            
            
            79Arizona
            
            
            33,442
            
            
            
            0.6
            
            
            
            1,227
            
            
            
            4.0
            
            
            
            4,181
            
            
            
            13.1
            
            
            
            75Virginia
            
            
            31,185
            
            
            
            0.6
            
            
            
            1,816
            
            
            
            5.9
            
            
            
            444
            
            
            
            1.4
            
            
            
            71Connecticut
            
            
            31,016
            
            
            
            0.6
            
            
            
            --
            
            
            
            --
            
            
            
            151
            
            
            
            0.5
            
            
            
            68Minnesota
            
            
            28,835
            
            
            
            0.6
            
            
            
            676
            
            
            
            2.2
            
            
            
            129
            
            
            
            0.4
            
            
            
            70New
      Jersey
            
            
            27,560
            
            
            
            0.5
            
            
            
            327
            
            
            
            1.1
            
            
            
            360
            
            
            
            1.1
            
            
            
            59Other
      states
            
            
            272,344
            
            
            
            5.3
            
            
            
            4,466
            
            
            
            14.4
            
            
            
            9,550
            
            
            
            29.9
            
            
            
            71$
            5,155,773
            
            
            
            100.0
            %
            
            $
            30,932
            
            
            
            100.0
            %
            
            $
            31,952
            
            
            
            100.0
            %
            
            
            74
            %








31





Impaired
loans


A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due, including
principal and interest, according to the contractual terms of the loan
agreement.  Impaired loans totaled $47.4 million at December 31, 2009,
compared to $41.4 million at September 30, 2009.  All TDRs that have
not been performing under the new terms for 12 consecutive months and
non-accrual loans are considered to be impaired loans.





A TDR is
the situation where, due to a borrower’s financial difficulties, the Bank grants
a concession to the borrower that the Bank would not otherwise have
considered.  The majority of the Bank’s TDRs involve a restructuring
of loan terms such as a temporary reduction in the payment amount to require
only interest and escrow (if required) and extending the maturity date of the
loan.  TDRs are not reported as non-performing loans, unless the
restructured loans are more than 90 days delinquent.  At December 31,
2009, the balance of TDRs included in the impaired loan balance at December 31,
2009 was $15.2 million, of which 93%, or $14.3 million, were originated
loans.  Of the $15.2 million, $623 thousand was greater than 90 days
delinquent and was included in the non-performing loan balance at December 31,
2009.  Loans are removed from the TDR classification after 12
consecutive months of satisfactory repayment performance under the new loan
terms.





Classified
assets


In
accordance with our asset classification policy, we regularly review the problem
assets in our portfolio to determine whether any assets require classification
in accordance with applicable regulations.  The following table sets
forth the balance of assets, less specific valuation allowances, classified as
special mention, substandard, or doubtful at December 31,
2009.  Purchased loans and purchased REO represent loans purchased
from nationwide lenders.





Special
      Mention
            
            
            Substandard
            
            
            DoubtfulNumber
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount(Dollars
      in thousands)Real
      Estate Loans:One-
      to four-family:Originated
            
            
            57
            
            
            $
            9,546
            
            
            
            131
            
            
            $
            15,068
            
            
            
            --
            
            
            $
            --Purchased
            
            
            1
            
            
            
            262
            
            
            
            70
            
            
            
            18,691
            
            
            
            --
            
            
            
            --Multi-family
      and commercial
            
            
            1
            
            
            
            8,167
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Construction
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Consumer
      and Other Loans:Home
      equity
            
            
            6
            
            
            
            71
            
            
            
            38
            
            
            
            836
            
            
            
            --
            
            
            
            --Other
            
            
            --
            
            
            
            --
            
            
            
            8
            
            
            
            51
            
            
            
            --
            
            
            
            --Total
      loans
            
            
            65
            
            
            
            18,046
            
            
            
            247
            
            
            
            34,646
            
            
            
            --
            
            
            
            --REO:Originated
            
            
            --
            
            
            
            --
            
            
            
            55
            
            
            
            4,727
            
            
            
            --
            
            
            
            --Purchased
            
            
            --
            
            
            
            --
            
            
            
            9
            
            
            
            1,911
            
            
            
            --
            
            
            
            --Total
      REO
            
            
            --
            
            
            
            --
            
            
            
            64
            
            
            
            6,638
            
            
            
            --
            
            
            
            --Trust
      preferred securities
            
            
            --
            
            
            
            --
            
            
            
            1
            
            
            
            2,408
            
            
            
            --
            
            
            
            --Total
      classified assets
            
            
            65
            
            
            $
            18,046
            
            
            
            312
            
            
            $
            43,692
            
            
            
            --
            
            
            $
            --





32





Allowance
for loan losses


The
following table presents the Company’s activity for the ALLL and related ratios
at the dates and for the periods indicated.  Charge-offs represent
losses on loans transferred to REO and losses on short
sales.  Recoveries represent amounts recovered after a loan has been
charged-off.  Once a loan enters REO, any future write downs or
recoveries are reported in REO operations in other expenses on the consolidated
statement of income; therefore, recoveries of charge-offs are rare.


For
      the Three Months EndedDecember
      31,
            
            
            September
      30,
            
            
            December
      31,2009
            
            
            2009
            
            
            2008(Dollars
      in thousands)Balance
      at beginning of period
            
            $
            10,150
            
            
            $
            10,242
            
            
            $
            5,791Charge-offs:One-
      to four-family loans--originated
            
            
            39
            
            
            
            169
            
            
            
            10One-
      to four-family loans--purchased
            
            
            856
            
            
            
            540
            
            
            
            182Multi-family
      and commercial loans
            
            
            --
            
            
            
            --
            
            
            
            --Construction
            
            
            --
            
            
            
            --
            
            
            
            --Home
      equity
            
            
            23
            
            
            
            1
            
            
            
            --Other
      loans
            
            
            5
            
            
            
            5
            
            
            
            11Total
      charge-offs
            
            
            923
            
            
            
            715
            
            
            
            203Recoveries
            
            
            --
            
            
            
            --
            
            
            
            --Net
      charge-offs
            
            
            923
            
            
            
            715
            
            
            
            203ALLL
      on loans in the loan swap transaction
            
            
            (135
            )
            
            
            --
            
            
            
            --Provision
      for loan losses
            
            
            3,115
            
            
            
            623
            
            
            
            549Balance
      at end of period
            
            $
            12,207
            
            
            $
            10,150
            
            
            $
            6,137Ratio
      of net charge-offs during the period toaverage
      loans outstanding during the period (1)
            
            
            0.02
            %
            
            
            0.01
            %
            
            
            --
            %Ratio
      of net charge-offs during the period toaverage
      non-performing assets
            
            
            2.39
            %
            
            
            1.97
            %
            
            
            0.95
            %ALLL
      to non-performing loans
            
            
            37.59
            %
            
            
            32.83
            %
            
            
            31.91
            %ALLL
      to loans receivable, net
            
            
            0.23
            %
            
            
            0.18
            %
            
            
            0.11
            %





(1)Ratio for December 31, 2008 calculates to be less than .01%.





Historically,
non-performing loans have been a negligible percentage of our total loan
portfolio and, as a result, the ratio of the ALLL to non-performing loans was
higher than in current periods and did not serve as a reasonable measure of the
adequacy of our ALLL.  The ratio of the ALLL to non-performing loans,
absent other factors, is not necessarily an indication of the adequacy of our
ALLL since there is generally not a direct relationship between changes in
various asset quality ratios and changes in the ALLL and non-performing
loans.





Provisions
for loan losses are charged to income in order to maintain the ALLL at a level
management considers adequate to absorb known and inherent losses in the loan
portfolio.  Our ALLL methodology considers a number of quantitative
and qualitative factors, including the trend and composition of our delinquent
and non-performing loans, results of foreclosed property and short sale
transactions, and the status and trends of the local and national economies and
housing markets.  The amount of the ALLL is based on estimates, and
the ultimate losses may vary from such estimates as more information becomes
available or conditions change.  See “Critical Accounting Policies –
Allowance for Loan Losses.”  The $3.1 million provision for loan loss
recorded in the current quarter primarily reflects increases in the level of
certain qualitative factors in our general valuation allowance
model.  Despite the current economic operating environment and some
deterioration in our portfolio, particularly the purchased loan portfolio, our
credit quality continued to compare favorably to the industry and our
peers.  Although management believes the ALLL is established and
maintained at adequate levels, additions may be necessary if economic conditions
fail to improve or if other conditions differ substantially from the current
operating environment.


33





Historically,
our charge-offs have been low due to our low level of non-performing loans and
the amount of underlying equity in the properties collateralizing one- to
four-family loans.  The increase in non-performing purchased loans and
the decline in real estate and housing markets have begun to result in higher
charge-offs, particularly with purchased loans.  However, the overall
amount of charge-offs has not been significant because of our underwriting
standards and the relative economic stability of the geographic areas in which
the Bank originates loans.  A deterioration in economic conditions in
these areas, or continued or increased deterioration in other areas where the
property securing our purchased loans are located, could, however, lead to an
increase in charge-offs.





The
following table presents the Company’s allocation of the ALLL to each respective
loan category at December 31, 2009 and September 30, 2009.





At
            
            
            
            AtDecember
      31, 2009
            
            
            
            September
      30, 2009Amount
      of
            
            
            %
      of ALLL
            
            
            Total
            
            
            %
      of Loans
            
            
            
            Amount
      of
            
            
            %
      of ALLL
            
            
            Total
            
            
            %
      of LoansALLL
            
            
            to
      Total ALLL
            
            
            Loans
            
            
            to
      Total Loans
            
            
            
            ALLL
            
            
            to
      Total ALLL
            
            
            Loans
            
            
            to
      Total Loans(Dollars
      in thousands)One-
      to four-family:Originated
            
            $
            4,715
            
            
            
            38.6
            %
            
            $
            4,477,284
            
            
            
            82.0
            
            %
            
            $
            3,604
            
            
            
            35.5
            %
            
            $
            4,625,065
            
            
            
            81.9
            %Purchased
            
            
            6,814
            
            
            
            55.8
            
            
            
            678,489
            
            
            
            12.4
            
            
            
            
            5,972
            
            
            
            58.8
            
            
            
            696,870
            
            
            
            12.3Multi-family
      and commercial
            
            
            327
            
            
            
            2.7
            
            
            
            71,395
            
            
            
            1.3
            
            
            
            
            227
            
            
            
            2.2
            
            
            
            80,493
            
            
            
            1.4Construction
            
            
            20
            
            
            
            0.2
            
            
            
            33,403
            
            
            
            0.6
            
            
            
            
            22
            
            
            
            0.2
            
            
            
            39,535
            
            
            
            0.7Home
      equity
            
            
            283
            
            
            
            2.3
            
            
            
            193,987
            
            
            
            3.5
            
            
            
            
            268
            
            
            
            2.7
            
            
            
            195,557
            
            
            
            3.5Other
            
            
            48
            
            
            
            0.4
            
            
            
            9,186
            
            
            
            0.2
            
            
            
            
            57
            
            
            
            0.6
            
            
            
            9,430
            
            
            
            0.2$
            12,207
            
            
            
            100.0
            %
            
            $
            5,463,744
            
            
            
            100.0
            %
            
            
            $
            10,150
            
            
            
            100.0
            %
            
            $
            5,646,950
            
            
            
            100.0
            %








34


Securities.The
following table presents the distribution of our MBS and investment securities
portfolios, at amortized cost, at the dates indicated.  Overall,
fixed-rate securities comprised 63% of these portfolios at December 31,
2009.  The weighted average life (“WAL”) is the estimated remaining
maturity after historical prepayment speeds and projected call option
assumptions have been applied.  The increase in the WAL between
September 30, 2009 and December 31, 2009 was due primarily to an increase in the
WAL of the MBS portfolio, due to a slowdown in projected prepayment
speeds.  The decrease in the yield between September 30, 2009 and
December 31, 2009 was primarily a result of prepayments of MBS with yields
higher than that of the MBS portfolio.








December
      31, 2009
            
            
            September
      30, 2009
            
            
            December
      31, 2008Amortized
      Cost
            
            
            WAL
            
            
            Yield
            
            
            Amortized
      Cost
            
            
            WAL
            
            
            Yield
            
            
            Amortized
      Cost
            
            
            WAL
            
            
            Yield(Dollars
      in thousands)Fixed-rate
      securities:U.S.
      government-sponsored
              enterprises
            
            $
            576,698
            
            
            
            1.22
            
            
            
            1.94
            %
            
            $
            404,137
            
            
            
            0.86
            
            
            
            1.74
            %
            
            $
            45,036
            
            
            
            0.24
            
            
            
            3.22
            %MBS
            
            
            923,500
            
            
            
            3.62
            
            
            
            4.81
            
            
            
            976,895
            
            
            
            3.37
            
            
            
            4.81
            
            
            
            1,164,744
            
            
            
            5.08
            
            
            
            4.88Municipal
      bonds
            
            
            71,982
            
            
            
            3.47
            
            
            
            3.00
            
            
            
            73,194
            
            
            
            3.53
            
            
            
            3.01
            
            
            
            58,806
            
            
            
            4.17
            
            
            
            3.41Total
      fixed-rate securities
            
            
            1,572,180
            
            
            
            2.73
            
            
            
            3.67
            
            
            
            1,454,226
            
            
            
            2.68
            
            
            
            3.87
            
            
            
            1,268,586
            
            
            
            4.87
            
            
            
            4.75Adjustable-rate
      securities:MBS
            
            
            904,331
            
            
            
            6.61
            
            
            
            3.86
            
            
            
            960,718
            
            
            
            6.00
            
            
            
            4.02
            
            
            
            986,908
            
            
            
            6.68
            
            
            
            4.75Trust
      preferred securities
            
            
            3,762
            
            
            
            27.47
            
            
            
            1.92
            
            
            
            3,774
            
            
            
            27.73
            
            
            
            1.96
            
            
            
            3,842
            
            
            
            28.48
            
            
            
            3.66Total
      adjustable-rate securities
            
            
            908,093
            
            
            
            6.72
            
            
            
            3.86
            
            
            
            964,492
            
            
            
            6.11
            
            
            
            4.01
            
            
            
            990,750
            
            
            
            6.79
            
            
            
            4.75Total
      investment portfolio, at cost
            
            $
            2,480,273
            
            
            
            4.19
            
            
            
            3.74
            %
            
            $
            2,418,718
            
            
            
            4.05
            
            
            
            3.92
            %
            
            $
            2,259,336
            
            
            
            5.71
            
            
            
            4.75
            %








35


The
following table sets forth the composition of our MBS and investment securities
portfolio at the dates indicated. Our investment securities portfolio at
December 31, 2009 did not contain securities of any issuer with an aggregate
book value in excess of 10% of our stockholders’ equity, excluding those issued
or sponsored by the U.S. government.





December
      31, 2009
            
            
            September
      30, 2009
            
            
            December
      31, 2008Carrying
            
            
            %
      of
            
            
            Fair
            
            
            Carrying
            
            
            %
      of
            
            
            Fair
            
            
            Carrying
            
            
            %
      of
            
            
            FairValue
            
            
            Total
            
            
            Value
            
            
            Value
            
            
            Total
            
            
            Value
            
            
            Value
            
            
            Total
            
            
            Value(Dollars
      in thousands)AFS
      securities:MBS
            
            $
            1,305,096
            
            
            
            84.7
            %
            
            $
            1,305,096
            
            
            $
            1,389,211
            
            
            
            85.5
            %
            
            $
            1,389,211
            
            
            $
            1,466,761
            
            
            
            96.7
            %
            
            $
            1,466,761U.S.
      government-sponsored
              enterprises
            
            
            228,840
            
            
            
            14.9
            
            
            
            228,840
            
            
            
            229,875
            
            
            
            14.2
            
            
            
            229,875
            
            
            
            45,196
            
            
            
            3.0
            
            
            
            45,196Trust
      preferred securities
            
            
            2,408
            
            
            
            0.2
            
            
            
            2,408
            
            
            
            2,110
            
            
            
            0.1
            
            
            
            2,110
            
            
            
            1,919
            
            
            
            0.1
            
            
            
            1,919Municipal
      bonds
            
            
            2,753
            
            
            
            0.2
            
            
            
            2,753
            
            
            
            2,799
            
            
            
            0.2
            
            
            
            2,799
            
            
            
            2,726
            
            
            
            0.2
            
            
            
            2,726Total
      AFS securities
            
            
            1,539,097
            
            
            
            100.0
            %
            
            
            1,539,097
            
            
            
            1,623,995
            
            
            
            100.0
            %
            
            
            1,623,995
            
            
            
            1,516,602
            
            
            
            100.0
            %
            
            
            1,516,602HTM
      securities:MBS
            
            
            572,873
            
            
            
            57.8
            %
            
            
            594,365
            
            
            
            603,256
            
            
            
            71.0
            %
            
            
            627,829
            
            
            
            709,541
            
            
            
            92.7
            %
            
            
            720,442U.S.
      government-sponsored
              enterprises
            
            
            348,623
            
            
            
            35.2
            
            
            
            348,240
            
            
            
            175,394
            
            
            
            20.7
            
            
            
            175,929
            
            
            
            --
            
            
            
            --
            
            
            
            --Municipal
      bonds
            
            
            69,319
            
            
            
            7.0
            
            
            
            71,112
            
            
            
            70,526
            
            
            
            8.3
            
            
            
            73,000
            
            
            
            56,124
            
            
            
            7.3
            
            
            
            57,273Total
      HTM securities
            
            
            990,815
            
            
            
            100.0
            %
            
            
            1,013,717
            
            
            
            849,176
            
            
            
            100.0
            %
            
            
            876,758
            
            
            
            765,665
            
            
            
            100.0
            %
            
            
            777,715$
            2,529,912
            
            
            
            
            
            
            $
            2,552,814
            
            
            $
            2,473,171
            
            
            
            
            
            
            $
            2,500,753
            
            
            $
            2,282,267
            
            
            
            
            
            
            $
            2,294,317


36





Mortgage-Backed
Securities





The
balance of MBS, which primarily consists of securities of U.S.
government-sponsored enterprises, decreased $114.5 million from $1.99 billion at
September 30, 2009 to $1.88 billion at December 31, 2009.  The
decrease in the balance was a result of some cash flows from the MBS portfolio
being reinvested into investment securities.





During
the quarter, MBS with a fair value of $192.7 million were received in
conjunction with the loan swap transaction.  As previously discussed,
the related MBS were sold for a $6.5 million gain.  The proceeds from
the sale were primarily used to purchase investment securities with terms
shorter than that of the mortgage loans that were swapped.  The loan
swap transaction was primarily undertaken for interest rate risk management
purposes.





The
following table provides a summary of the activity in our portfolio of MBS for
the periods presented.  The yields and 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 weighted average yield of the MBS portfolio decreased
between December 31, 2009 and September 30, 2009 due primarily to the maturity
and repayment of securities with higher yields than the overall portfolio and
adjustable-rate MBS resetting to lower coupons due to a decline in related
indices.  The beginning and ending WAL is the estimated remaining
maturity after projected prepayment speeds have been applied.  The
increase in the WAL at December 31, 2009 compared to September 30, 2009 was due
to a slowdown in projected prepayment speeds due to an increase in mortgage
interest rates.








For
      the Three Months EndedDecember
      31, 2009
            
            September
      30, 2009
            
            June
      30, 2009
            
            March
      31, 2009Amount
            Yield
            
            WAL
            
            Amount
            Yield
            
            WAL
            
            Amount
            Yield
            
            WAL
            
            Amount
            Yield
            
            WAL(Dollars
      in thousands)Beginning
      balance
            $   1,992,467
            4.42
            %
            4.67
            
            $    2,100,998
            4.59
            %
            4.55
            
            $    2,204,369
            4.72
            %
            5.55
            
            $      2,176,302
            4.82
            %
            5.81Maturities
      and repayments
            (112,380)
            
            
            
            
            (142,182)
            
            
            
            
            (155,168)
            
            
            
            
            (107,388)Sale
      of securities, net of gains
            (192,690)Net
      amortization of premiums/(discounts)
            (392)
            
            
            
            
            (366)
            
            
            
            
            (189)
            
            
            
            
            46Purchases:Fixed
            2,990
            4.10
            
            7.48
            
            18,539
            2.80
            
            3.03
            
            3,217
            4.34
            
            8.49
            
            --
            --
            
            --Adjustable
            --
            --
            
            --
            
            --
            --
            
            --
            
            50,983
            2.83
            
            3.58
            
            118,469
            2.68
            
            1.90Fair
      value of securities received in loan swap transaction
            192,690Change
      in valuation on AFS securities
            (4,716)
            
            
            
            
            15,478
            
            
            
            
            (2,214)
            
            
            
            
            16,940Ending
      balance
            $   1,877,969
            4.34
            %
            5.09
            
            $    1,992,467
            4.42
            %
            4.67
            
            $    2,100,998
            4.59
            %
            4.55
            
            $      2,204,369
            4.72
            %
            5.55








37





Investment
Securities





Investment
securities, which consist primarily of U.S. government-sponsored enterprise debt
securities (primarily issued by Federal National Mortgage Association (“FNMA”),
FHLMC, or FHLB) and municipal investments, increased $171.2 million from $480.7
million at September 30, 2009 to $651.9 million at December 31,
2009.  The increase in the balance was a result of purchases of $173.4
million of investment securities.





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 first and last days of the periods
presented.  The increase in the yield at December 31, 2009 compared to
September 30, 2009 was a result of purchases of securities with yields higher
than the overall portfolio yield.  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 WAL at December 31, 2009 increased slightly from
September 30, 2009 due to an increase in interest rates, which extended the
WAL.





For
      the Three Months EndedDecember
      31, 2009
            
            September
      30, 2009
            
            June
      30, 2009
            
            March
      31, 2009Amount
            Yield
            
            WAL
            
            Amount
            Yield
            
            WAL
            
            Amount
            Yield
            
            WAL
            
            Amount
            Yield
            
            WAL(Dollars
      in thousands)Beginning
      balance
            $      480,704
            1.93
            %
            1.53
            
            $       322,166
            1.84
            %
            2.02
            
            $       214,410
            2.16
            %
            2.32
            
            $         105,965
            3.34
            %
            3.64Maturities
      and calls
            (1,033)
            
            
            
            
            (25,128)
            
            
            
            
            (25,036)
            
            
            
            
            (22,168)Net
      amortization of premiums/discounts
            (1,061)
            
            
            
            
            (901)
            
            
            
            
            (685)
            
            
            
            
            (329)Purchases:Fixed
            173,431
            2.39
            
            1.25
            
            183,391
            1.95
            
            2.17
            
            133,047
            1.41
            
            1.10
            
            131,229
            1.62
            
            1.04Adjustable
            --
            --
            
            --
            
            --
            --
            
            --
            
            --
            --
            
            --
            
            --
            --
            
            --Change
      in valuation of AFS securities
            (98)
            
            
            
            
            1,176
            
            
            
            
            430
            
            
            
            
            (287)Ending
      balance
            $      651,943
            2.05
            %
            1.65
            
            $       480,704
            1.93
            %
            1.53
            
            $       322,166
            1.84
            %
            2.02
            
            $         214,410
            2.16
            %
            2.32








38


Liabilities.   Total
liabilities remained relatively unchanged from $7.46 billion at September 30,
2009 to $7.43 billion at December 31, 2009.





Deposits





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





At
            
            At
            
            At
            
            AtDecember
      31, 2009
            
            September
      30, 2009
            
            June
      30, 2009
            
            March
      31, 2009Average
            
            %
      of
            
            
            
            
            Average
            
            %
      of
            
            
            
            
            Average
            
            %
      of
            
            
            
            
            Average
            
            %
      ofAmount
            
            
            Rate
            
            Total
            
            Amount
            
            
            Rate
            
            Total
            
            Amount
            
            
            Rate
            
            Total
            
            Amount
            
            
            Rate
            
            Total(Dollars
      in thousands)Checking
            
            $
            491,619
            
            
            
            0.13
            %
            
            
            11.7
            %
            
            $
            439,975
            
            
            
            0.17
            %
            
            
            10.4
            %
            
            $
            446,431
            
            
            
            0.21
            %
            
            
            10.7
            %
            
            $
            448,086
            
            
            
            0.21
            %
            
            
            10.9
            %Savings
            
            
            225,383
            
            
            
            0.56
            
            
            
            5.3
            
            
            
            226,396
            
            
            
            0.66
            
            
            
            5.4
            
            
            
            230,161
            
            
            
            0.72
            
            
            
            5.5
            
            
            
            229,905
            
            
            
            0.72
            
            
            
            5.6Money
      market
            
            
            888,131
            
            
            
            0.73
            
            
            
            21.0
            
            
            
            848,157
            
            
            
            0.82
            
            
            
            20.1
            
            
            
            841,522
            
            
            
            0.88
            
            
            
            20.2
            
            
            
            826,488
            
            
            
            1.04
            
            
            
            20.1Certificates
            
            
            2,622,119
            
            
            
            2.83
            
            
            
            62.0
            
            
            
            2,714,081
            
            
            
            3.09
            
            
            
            64.1
            
            
            
            2,657,137
            
            
            
            3.30
            
            
            
            63.6
            
            
            
            2,612,035
            
            
            
            3.45
            
            
            
            63.4Total
      deposits
            
            $
            4,227,252
            
            
            
            1.95
            %
            
            
            100.0
            %
            
            $
            4,228,609
            
            
            
            2.20
            %
            
            
            100.0
            %
            
            $
            4,175,251
            
            
            
            2.34
            %
            
            
            100.0
            %
            
            $
            4,116,514
            
            
            
            2.46
            %
            
            
            100.0
            %





At
December 31, 2009, there were no brokered deposits, as they all matured during
the quarter, compared to $71.5 million in brokered deposits at September 30,
2009.  Management regularly considers brokered deposits as a source of
funding, but does not currently consider the cost of this funding source to be
balanced with investment opportunities.  As of December 31, 2009,
$100.1 million in certificates were public unit deposits, compared to $91.5
million in public unit deposits at September 30, 2009.  Management
will continue to monitor the wholesale deposit market for attractive
opportunities.


39





The
following tables set forth maturity information for our certificate of deposit
portfolio at December 31, 2009.





Amount
      DueMore
      than
            
            
            More
      than
            
            
            
            
            
            
            
            
            Percent
      ofLess
      than
            
            
            1
      year to
            
            
            2
      to 3
            
            
            More
      than
            
            
            
            
            
            Total1 year
            
            
            2 years
            
            
            years
            
            
            3 years
            
            
            Total
            
            
            Certificates(Dollars
      in thousands)0.00
      – 0.99
            %
            
            $
            97,266
            
            
            $
            9
            
            
            $
            40
            
            
            $
            --
            
            
            $
            97,315
            
            
            
            3.7
            %1.00
      – 1.99
            %
            
            
            343,623
            
            
            
            149,140
            
            
            
            764
            
            
            
            --
            
            
            
            493,527
            
            
            
            18.82.00
      – 2.99
            %
            
            
            575,138
            
            
            
            212,376
            
            
            
            51,884
            
            
            
            65,804
            
            
            
            905,202
            
            
            
            34.53.00
      – 3.99
            %
            
            
            136,555
            
            
            
            285,942
            
            
            
            169,137
            
            
            
            93,093
            
            
            
            684,727
            
            
            
            26.14.00
      – 4.99
            %
            
            
            135,573
            
            
            
            122,784
            
            
            
            20,654
            
            
            
            3,340
            
            
            
            282,351
            
            
            
            10.85.00
      – 5.99
            %
            
            
            157,429
            
            
            
            612
            
            
            
            --
            
            
            
            --
            
            
            
            158,041
            
            
            
            6.06.00
      – 6.99
            %
            
            
            956
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            956
            
            
            
            0.1$
            1,446,540
            
            
            $
            770,863
            
            
            $
            242,479
            
            
            $
            162,237
            
            
            $
            2,622,119
            
            
            
            100.0
            %Total
      average maturity (in years)
            
            
            
            1.11








MaturityOver
            
            
            Over3
      months
            
            
            3
      to 6
            
            
            6
      to 12
            
            
            Overor
      less
            
            
            months
            
            
            months
            
            
            12
      months
            
            
            Total(Dollars
      in thousands)Certificates
      of deposit less than $100,000
            
            $
            288,552
            
            
            $
            297,159
            
            
            $
            430,530
            
            
            $
            879,674
            
            
            $
            1,895,915Certificates
      of deposit of $100,000 or more
            
            
            166,802
            
            
            
            116,532
            
            
            
            146,965
            
            
            
            295,905
            
            
            
            726,204Total
      certificates of deposit
            
            $
            455,354
            
            
            $
            413,691
            
            
            $
            577,495
            
            
            $
            1,175,579
            
            
            $
            2,622,119





40


Borrowings





The
following table presents the maturity of FHLB advances, at par, and repurchase
agreements as of December 31, 2009.  The balance of FHLB advances
excludes the deferred gain on the terminated interest rate swaps and the
deferred prepayment penalty.  Management will continue to monitor the
Bank’s investment opportunities and balance those opportunities with the cost of
FHLB advances or other funding sources.





Weighted
            
            
            WeightedFHLB
            
            
            Repurchase
            
            
            Average
            
            
            AverageMaturity
      by
            
            Advances
            
            
            Agreements
            
            
            Contractual
            
            
            EffectiveFiscal
      year
            
            Amount
            
            
            Amount
            
            
            Rate
            
            
            Rate
      (1)(Dollars
      in thousands)2010
            
            $
            350,000
            
            
            $
            45,000
            
            
            
            4.33
            %
            
            
            4.33
            %2011
            
            
            276,000
            
            
            
            200,000
            
            
            
            4.42
            
            
            
            4.422012
            
            
            350,000
            
            
            
            150,000
            
            
            
            3.67
            
            
            
            3.672013
            
            
            525,000
            
            
            
            145,000
            
            
            
            3.74
            
            
            
            4.002014
            
            
            450,000
            
            
            
            100,000
            
            
            
            3.33
            
            
            
            3.962015
            
            
            200,000
            
            
            
            20,000
            
            
            
            3.50
            
            
            
            4.162016
            
            
            275,000
            
            
            
            --
            
            
            
            3.86
            
            
            
            4.39$
            2,426,000
            
            
            $
            660,000
            
            
            
            3.83
            %
            
            
            4.09
            %





(1) The
effective rate includes the net impact of the amortization of deferred
prepayment penalties related to the prepayment of certain FHLB advances and
deferred gains related to the termination of interest rate swaps during fiscal
year 2008.





The
following table presents the maturity of FHLB advances and repurchase agreements
for the next four quarters as of December 31, 2009.





WeightedAverageMaturity
      by
            
            
            
            
            ContractualQuarter
      End
            
            Amount
            
            
            Rate(Dollars
      in thousands)March
      31, 2010
            
            $
            --
            
            
            
            --
            %June
      30, 2010
            
            
            100,000
            
            
            
            3.94September
      30, 2010
            
            
            295,000
            
            
            
            4.46December
      31, 2010
            
            
            300,000
            
            
            
            4.55$
            695,000
            
            
            
            4.42
            %








41


The
following table sets forth certain information relating to each category of
borrowings for which the average short-term balance outstanding during the
period was more than 30% of stockholders’ equity at the end of the
period.  The maximum balance, average balance, and weighted average
interest rate during the period reflect all borrowings that were scheduled to
mature within one year at any month-end during the period.  For the
period ended December 31, 2009, the repurchase agreements scheduled to mature
within one year did not exceed 30% of stockholders’ equity.  For the
other periods presented, there were no repurchase agreements scheduled to mature
within one year.








At
      or for the QuarterEnded
      December 31,
            
            
            At
      or for the Year September 30,2009
            
            
            2009
            
            
            2008(Dollars
      in thousands)FHLB Advances:Balance
      at period end
            
            $
            550,000
            
            
            $
            350,000
            
            
            $
            620,000Maximum
      balance outstanding at any month-end
      during period
            
            
            550,000
            
            
            
            795,000
            
            
            
            925,000Average
      balance
            
            
            450,000
            
            
            
            396,250
            
            
            
            742,500Weighted
      average interest rate during the period
            
            
            4.49
            %
            
            
            4.54
            %
            
            
            4.31
            %Weighted
      average interest rate at end of period
            
            
            4.57
            %
            
            
            4.49
            %
            
            
            4.27
            %


42





Stockholders’
Equity.Stockholders’ equity remained relatively flat from
$941.3 million at September 30, 2009 to $942.0 million at December 31,
2009.  During the quarter, $16.7 million of dividends, or $0.79 per
public share, were paid to stockholders, which included $6.1 million, or $0.29
per public share, related to the special dividend paid in December
2009.





As of
December 31, 2009, we had 54,590 shares remaining to be purchased under the
existing stock repurchase plan.  Subsequent to December 31, 2009, the
remaining 54,590 shares were repurchased by the Company at an average price of
$31.64. The board of directors approved a new stock purchase plan on January 26,
2010.  Under the new plan, the Company intends to repurchase up to
250,000 shares from time to time, depending on market conditions, at prevailing
market prices in open-market and other transactions. The shares would be held as
treasury stock for general corporate use.  The plan has no expiration
date.





Dividends
from the Company are the only source of funds for MHC.  It is expected
that MHC will waive future dividends except to the extent they are needed to
fund its continuing operations.  The following table shows the number
of shares eligible to receive dividends (“public shares”) because of the waiver
of dividends by MHC at December 31, 2009.  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, 2009
            
            
            74,099,355Treasury
      stock acquisitions
            
            
            (75,778
            )RRP
      grants
            
            
            --Options
      exercised
            
            
            --Total
      voting shares outstanding at December 31, 2009
            
            
            74,023,577Unvested
      shares in ESOP
            
            
            (806,556
            )Shares
      held by MHC
            
            
            (52,192,817
            )Total
      public shares at December 31, 2009
            
            
            21,024,204





43


The
following table presents quarterly dividends paid in calendar years 2010, 2009,
and 2008.  The dollar amounts represent dividends paid during the
quarter.  The actual amount of dividends to be paid during the quarter
ending March 31, 2010, as approved by the board of directors on January 26,
2010, will be based upon the number of shares referenced in the table as
“dividend shares,” outstanding on the record date of February 5,
2010.  All dividend shares outstanding presented in the table below,
except for the quarter ending March 31, 2010, are as of the date of record per
the dividend declaration.  For the purposes of the table below, the
number of dividend shares for the quarter ending March 31, 2010 is based upon
shares outstanding on January 25, 2010.  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 February
19, 2010.





Calendar
      Year2010
            
            
            2009
            
            
            2008(Dollars
      in thousands, except per share amounts)Quarter
      ended March 31Number
      of dividend shares
            
            
            21,472,314
            
            
            
            20,874,269
            
            
            
            20,660,510Dividend
      per share
            
            $
            0.50
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            $
            10,736
            
            
            $
            10,437
            
            
            $
            10,330Quarter
      ended June 30Number
      of dividend shares
            
            
            
            
            
            
            20,892,544
            
            
            
            20,661,660Dividend
      per share
            
            
            
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            
            
            
            
            $
            10,446
            
            
            $
            10,331Quarter
      ended September 30Number
      of dividend shares
            
            
            
            
            
            
            20,897,844
            
            
            
            20,668,519Dividend
      per share
            
            
            
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            
            
            
            
            $
            10,448
            
            
            $
            10,334Quarter
      ended December 31Number
      of dividend shares
            
            
            
            
            
            
            21,099,982
            
            
            
            20,881,157Dividend
      per share
            
            
            
            
            
            $
            0.50
            
            
            $
            0.50Total
      dividends paid
            
            
            
            
            
            $
            10,551
            
            
            $
            10,441Special
      year end dividendNumber
      of dividend shares
            
            
            
            
            
            
            21,099,982
            
            
            
            20,881,157Dividend
      per share
            
            
            
            
            
            $
            0.29
            
            
            $
            0.11Total
      dividends paid
            
            
            
            
            
            $
            6,119
            
            
            $
            2,297Calendar
      year-to-date dividends per share
            
            $
            0.50
            
            
            $
            2.29
            
            
            $
            2.11





44


Operating
Results





The
following table presents selected income statement information and financial
ratios for the quarters indicated.




For
      the Three Months EndedDecember
      31,
            
            
            September
      30,
            
            
            June
      30,
            
            
            March
      31,
            
            
            December
      31,2009
            
            
            2009
            
            
            2009
            
            
            2009
            
            
            2008(Dollars
      in thousands, except per share amounts)Interest
      and dividend income:Loans
      receivable
            
            $
            74,526
            
            
            $
            74,875
            
            
            $
            76,745
            
            
            $
            77,446
            
            
            $
            76,716MBS
            
            
            20,754
            
            
            
            22,225
            
            
            
            24,211
            
            
            
            25,088
            
            
            
            26,402Investment
      securities
            
            
            2,559
            
            
            
            1,973
            
            
            
            1,279
            
            
            
            955
            
            
            
            1,326Other
      interest and dividend income
            
            
            1,048
            
            
            
            1,027
            
            
            
            843
            
            
            
            846
            
            
            
            829Total
      interest and dividend income
            
            
            98,887
            
            
            
            100,100
            
            
            
            103,078
            
            
            
            104,335
            
            
            
            105,273Interest
      expense:FHLB
      advances
            
            
            24,819
            
            
            
            25,046
            
            
            
            25,307
            
            
            
            26,653
            
            
            
            29,545Deposits
            
            
            22,105
            
            
            
            24,270
            
            
            
            24,705
            
            
            
            24,711
            
            
            
            26,785Other
      borrowings
            
            
            7,109
            
            
            
            7,144
            
            
            
            7,144
            
            
            
            7,109
            
            
            
            7,725Total
      interest expense
            
            
            54,033
            
            
            
            56,460
            
            
            
            57,156
            
            
            
            58,473
            
            
            
            64,055Provision
      for loan losses
            
            
            3,115
            
            
            
            623
            
            
            
            3,112
            
            
            
            2,107
            
            
            
            549Net
      interest and dividend income(after
      provision for loan losses)
            
            
            41,739
            
            
            
            43,017
            
            
            
            42,810
            
            
            
            43,755
            
            
            
            40,669Other
      income
            
            
            13,131
            
            
            
            6,745
            
            
            
            8,232
            
            
            
            6,936
            
            
            
            6,642Other
      expenses
            
            
            22,749
            
            
            
            22,989
            
            
            
            26,411
            
            
            
            21,995
            
            
            
            22,187Income
      tax expense
            
            
            11,141
            
            
            
            9,935
            
            
            
            9,155
            
            
            
            10,564
            
            
            
            9,272Net
      income
            
            $
            20,980
            
            
            $
            16,838
            
            
            $
            15,476
            
            
            $
            18,132
            
            
            $
            15,852Efficiency
      ratio
            
            
            39.23
            %
            
            
            45.63
            %
            
            
            48.77
            %
            
            
            41.66
            %
            
            
            46.36
            %Basic
      EPS
            
            $
            0.29
            
            
            $
            0.23
            
            
            $
            0.21
            
            
            $
            0.25
            
            
            $
            0.22Diluted
      EPS
            
            
            0.29
            
            
            
            0.23
            
            
            
            0.21
            
            
            
            0.25
            
            
            
            0.22Dividends
      declared per public share
            
            
            0.79
            
            
            
            0.50
            
            
            
            0.50
            
            
            
            0.50
            
            
            
            0.61

















45


Operating Results for the Three
Months Ended December 31, 2009 and 2008.  Net income for the
quarter ended December 31, 2009 was $21.0 million compared to $15.9 million for
the same period in the prior fiscal year.  The $5.1 million increase
in net income between periods was primarily a result of a decrease in interest
expense of $10.1 million and an increase in other income of $6.5 million,
partially offset by a decrease in interest income of $6.4 million, an increase
in the provision for loan losses of $2.6 million and an increase in income tax
expense of $1.8 million.





Interest
and Dividend Income


Total
interest and dividend income for the current quarter was $98.9 million compared
to $105.3 million for the prior year quarter.  The $6.4 million
decrease was primarily a result of decreases in interest income on MBS of $5.6
million and loans receivable of $2.2 million, partially offset by an increase in
interest income on investment securities of $1.2 million.





Interest
income on loans receivable for the current quarter was $74.5 million compared to
$76.7 million for the prior year quarter.  The $2.2 million decrease
in interest income was primarily a result of a decrease of 29 basis points in
the weighted average yield to 5.37% for the current quarter, partially offset by
a $131.7 million increase in the average balance of the
portfolio.  The decrease in the weighted average yield was due to
purchases and originations at market rates which were lower than the existing
portfolio, a significant amount of loan modifications and refinances between
periods, partially offset by an increase in deferred fee amortization as a
result of prepayments, modifications, and refinances.  The increase in
the average balance was due to originations and loan purchases between
periods.





Interest
income on MBS for the current quarter was $20.8 million compared to $26.4
million for the prior year quarter.  The $5.6 million decrease was a
result of a $313.3 million decrease in the average balance and a decrease of 40
basis points in the weighted average yield to 4.40% for the current
quarter.  The decrease in the average balance of the portfolio was due
to principal repayments which were not replaced.  The weighted average
yield decreased between the two periods due to an increase of prepayments on MBS
with yields higher than the existing portfolio and, to a lesser extent,
purchases of MBS at a lower average yield than the existing portfolio between
the two periods, and adjustable-rate securities repricing to lower market
rates.





Interest
income on investment securities for the current quarter was $2.6 million
compared to $1.3 million for the prior year quarter.  The $1.3 million
increase was primarily a result of a $388.6 million increase in the average
balance, partially offset by a decrease in the average yield of 194 basis points
to 1.95% for the current quarter.  The average balance increased due
to the purchase of $621.1 million of investment securities between periods,
partially offset by calls and maturities of $73.4 million.  The
average yield decreased due to purchases at yields lower than the overall
portfolio yield.





Interest
Expense


Interest
expense decreased $10.1 million to $54.0 million for the current quarter from
$64.1 million for the prior year quarter.  The decrease in interest
expense was primarily due to a decrease of $4.7 million in interest expense on
both FHLB advances and deposits.





Interest
expense on FHLB advances for the current quarter was $24.8 million compared to
$29.5 million for the prior year quarter.  The $4.7 million decrease
in interest expense on FHLB advances was a result of the refinance of $875.0
million of FHLB advances during the second and third quarters of fiscal year
2009 and, to a lesser extent, a decrease in the average balance of $84.8 million
due to maturing advances that were not renewed.





Interest
expense on deposits for the current quarter was $22.1 million compared to $26.8
million for the prior year quarter.  The $4.7 million decrease in
interest expense on deposits was due to a decrease in the rates on the entire
deposit portfolio, primarily the certificates of deposit and money market
portfolios, due to the portfolios repricing to lower market
rates.  The average rate paid on the deposit portfolio decreased 64
basis points between the two periods, from 2.59% at December 31, 2008 to 1.95%
at December 31, 2009. The decrease in interest expense was partially offset by a
$322.8 million increase in the average balance of the deposit portfolio,
particularly the certificate of deposit and money market
portfolios.





Provision
for Loan Losses


The Bank
recorded a provision for loan losses of $3.1 million during the current quarter,
compared to a provision of $549 thousand in the quarter ended December 31,
2008.  The $3.1 million provision for loan losses primarily reflects
increases in the level of certain qualitative factors in our general valuation
allowance model to account for lingering negative economic
conditions.  See additional discussion regarding the provision for
loan losses in the sections entitled “Critical Accounting Policies – Allowance
for Loan Losses” and “Asset Quality – Loans and REO.”





46


Other
Income and Expense


Total
other income was $13.1 million for the current quarter compared to $6.6 million
for the prior year quarter.  The $6.5 million increase was due
primarily to a gain on the sale of trading MBS of $6.5 million.  As
previously discussed, the trading MBS were acquired in conjunction with the loan
swap transaction during the current quarter.





Total
other expenses for the current quarter were $22.7 million for the current
quarter, compared to $22.2 million in the prior quarter.  The slight
increase was due primarily to an increase in federal insurance premium of $1.6
million, partially offset by a decrease in other expense, net of $864 thousand
as a result of mortgage servicing activity and net REO
operations.  The increase in federal insurance premium was a result of
an increase in the regular quarterly deposit insurance premiums





Income
Tax Expense


Income
tax expense for the current quarter was $11.1 million compared to $9.3 million
for the prior year quarter.  The $1.8 million increase was due to an
increase in earnings between periods, partially offset by a decrease in the
effective tax rate between periods.  The effective tax rate for the quarter
ended December 31, 2009 was 34.7%, compared to 36.9% for the prior year
quarter.  The difference in the effective tax rate between periods was
primarily a result of a decrease in nondeductible expenses associated with the
ESOP and a reduction of unrecognized tax benefits due to the lapse of the
statute of limitations during the current quarter.







Average Balance
Sheet





Net
interest income represents the difference between interest income earned on
interest-earning assets, such as mortgage loans, investment securities, and MBS,
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.  The following table presents
the average balances of our assets, liabilities and stockholders’ equity and the
related annualized yields and rates on our interest-earning assets and
interest-bearing liabilities for the periods indicated and the yield/rate on our
interest-earning assets and interest-bearing liabilities at December 31,
2009.  Average yields are derived by dividing annualized income by the
average balance of the related assets and average rates are derived by dividing
annualized expense by the average balance of the related liabilities, for the
periods shown.  Average outstanding balances are derived from average
daily balances, except for other noninterest-earning assets, other
noninterest-earning liabilities and stockholders’ equity which were calculated
based on month-end balances.  The yields and rates include
amortization of fees, costs, premiums and discounts which are considered
adjustments to yields/rates. Yields on tax-exempt securities were not calculated
on a tax-equivalent basis.








47





At
            
            For
      the Three Months EndedDecember
      31, 2009
            
            December
      31, 2009
            
            December
      31, 2008Average
            
            Interest
            
            
            
            Average
            
            InterestYield/
            
            Outstanding
            
            Earned/
            
            Yield/
            
            Outstanding
            
            Earned/
            
            Yield/Rate
            
            Balance
            
            Paid
            
            Rate
            
            Balance
            
            Paid
            
            RateAssets:
            
            
            
            (Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable (1)
            
            5.34%
            
            $         5,550,883
            
            $        74,526
            
            5.37
            %
            $      5,419,179
            
            $           76,716
            
            5.66
            %MBS
      (2)
            
            4.34
            
            1,888,230
            
            20,754
            
            4.40
            
            2,201,531
            
            26,402
            
            4.80Investment
      securities (2)
      (3)
            
            2.05
            
            524,854
            
            2,559
            
            1.95
            
            136,295
            
            1,326
            
            3.89Capital
      stock of FHLB
            
            2.98
            
            133,075
            
            1,001
            
            2.98
            
            124,958
            
            780
            
            2.48Cash
      and cash equivalents
            
            0.23
            
            80,391
            
            47
            
            0.23
            
            33,025
            
            49
            
            0.58Total
      interest-earning assets
            
            4.76
            
            8,177,433
            
            98,887
            
            4.84
            
            7,914,988
            
            105,273
            
            5.32Other
      noninterest-earning assets
            
            
            
            225,321
            
            
            
            
            
            161,092Total
      assets
            
            
            
            $         8,402,754
            
            
            
            
            
            $      8,076,080Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Savings
            
            0.56%
            
            $            225,837
            
            $             361
            
            0.63
            %
            $         229,540
            
            $                618
            
            1.07
            %Checking
            
            0.13
            
            447,055
            
            176
            
            0.16
            
            405,787
            
            211
            
            0.21Money
      market
            
            0.73
            
            867,233
            
            1,740
            
            0.80
            
            775,386
            
            2,553
            
            1.31Certificates
            
            2.83
            
            2,667,141
            
            19,828
            
            2.95
            
            2,473,763
            
            23,403
            
            3.75Total
      deposits
            
            1.95
            
            4,207,266
            
            22,105
            
            2.09
            
            3,884,476
            
            26,785
            
            2.73FHLB
      advances (4)
            
            4.13
            
            2,393,134
            
            24,819
            
            4.11
            
            2,477,961
            
            29,545
            
            4.72Other
      borrowings
            
            3.90
            
            713,609
            
            7,109
            
            3.90
            
            713,585
            
            7,725
            
            4.24Total
      borrowings
            
            4.08
            
            3,106,743
            
            31,928
            
            4.06
            
            3,191,546
            
            37,270
            
            4.61Total
      interest-bearing liabilities
            
            2.85
            
            7,314,009
            
            54,033
            
            2.93
            
            7,076,022
            
            64,055
            
            3.58Other
      noninterest-bearing liabilities
            
            
            
            137,057
            
            
            
            
            
            121,970Stockholders'
      equity
            
            
            
            951,688
            
            
            
            
            
            878,088Total
      liabilities and stockholders' equity
            
            
            
            $         8,402,754
            
            
            
            
            
            $      8,076,080


(Continued)


48


Net
      interest rate spread
            
            1.91%
            
            
            
            
            
            1.91
            %
            
            
            
            
            1.74
            %Net
      interest-earning assets
            
            
            
            $            863,424
            
            
            
            
            
            $         838,966Net
      interest margin
            
            
            
            
            
            
            
            2.19
            
            
            
            
            
            2.08Ratio
      of interest-earning assetsto
      interest-bearing liabilities
            
            
            
            
            
            
            
            1.12
            
            
            
            
            
            1.12Selected
      Performance Ratios:Return
      on average assets (annualized)
            
            
            
            
            
            
            
            1.00
            %
            
            
            
            
            0.79
            %Return
      on average equity (annualized)
            
            
            
            
            
            
            
            8.82
            
            
            
            
            
            7.22Average
      equity to average assets
            
            
            
            
            
            
            
            11.33
            
            
            
            
            
            10.87





(Concluded)







(1)Calculated net of unearned loan fees, deferred costs, and undisbursed
loan funds.  Non-accruing loans are included in the loans receivable
average balance with a yield of zero percent. Balances include
LHFS.




(2)MBS
and investment securities classified as AFS are stated at amortized cost,
adjusted for unamortized purchase premiums or discounts.




(3) The
average balance of investment securities includes an average balance of
nontaxable securities of $71.6 million and $57.5 million for the periods ended
December 31, 2009 and December 31, 2008, respectively.




(4)FHLB advances are stated net of deferred gains and deferred prepayment
penalties. The rate at December 31, 2009 is the effective rate.










49


Rate/Volume
Analysis





The table below presents the dollar
amount of changes in interest income and interest expense for major components
of interest-earning assets and interest-bearing liabilities, comparing the
quarter ended December 31, 2009 to the quarter ended December 31,
2008.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate.





Quarter
      Ended December 31,2009
      vs. 2008Increase
      (Decrease) Due toVolume
            
            
            Rate
            
            
            Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
            
            $
            1,810
            
            
            $
            (4,000
            )
            
            $
            (2,190
            )MBS
            
            
            (3,562
            )
            
            
            (2,086
            )
            
            
            (5,648
            )Investment
      securities
            
            
            2,174
            
            
            
            (941
            )
            
            
            1,233Capital
      stock of FHLB
            
            
            53
            
            
            
            167
            
            
            
            220Cash
      equivalents
            
            
            40
            
            
            
            (41
            )
            
            
            (1
            )Total
      interest-earning assets
            
            $
            515
            
            
            $
            (6,901
            )
            
            $
            (6,386
            )Interest-bearing
      liabilities:Savings
            
            $
            (10
            )
            
            $
            (252
            )
            
            $
            (262
            )Checking
            
            
            20
            
            
            
            (55
            )
            
            
            (35
            )Money
      market
            
            
            271
            
            
            
            (1,086
            )
            
            
            (815
            )Certificates
            
            
            1,697
            
            
            
            (5,265
            )
            
            
            (3,568
            )FHLB
      advances
            
            
            (538
            )
            
            
            (4,188
            )
            
            
            (4,726
            )Other
      borrowings
            
            
            --
            
            
            
            (616
            )
            
            
            (616
            )Total
      interest-bearing liabilities
            
            $
            1,440
            
            
            $
            (11,462
            )
            
            $
            (10,022
            )Net
      change in net interest and dividend income
            
            $
            (925
            )
            
            $
            4,561
            
            
            $
            3,636










Operating Results for the Three
Months Ended December 31, 2009 and September 30, 2009.For the
quarter ended December 31, 2009, the Company recognized net income of $21.0
million, compared to net income of $16.8 million for the quarter ended September
30, 2009.  The $4.2 million increase in net income between periods was
primarily due to an increase in other income of $6.4 million due to the gain on
sale of securities acquired in the loan swap transaction, partially offset by an
increase in the provision for loan losses of $2.5 million.  The net
interest margin increased six basis points during the quarter ended December 31,
2009 as a result of a decrease in interest expense, primarily on certificates of
deposit.





Interest
and Dividend Income


Total
interest and dividend income for the current quarter was $98.9 million compared
to $100.1 million for the quarter ended September 30, 2009.  The
decrease of $1.2 million was primarily a result of decreases in interest income
on MBS of $1.5 million and loans receivable of $349 thousand, partially offset
by an increase in interest income on investment securities of $586
thousand.





50


Interest
income on loans receivable for the current quarter was $74.5 million compared to
$74.9 million for the quarter ended September 30, 2009.  The $349
thousand decrease in interest income was due to a $29.9 million decrease in the
average balance of the portfolio as a result of the loan swap
transaction.





Interest
income on MBS for the current quarter was $20.8 million compared to $22.2
million for the quarter ended September 30, 2009.  The $1.4 million
decrease was primarily a result of a $117.7 million decrease in the average
balance of the portfolio due to principal repayments which were not replaced.





Interest
income on investment securities for the current quarter was $2.6 million
compared to $2.0 million for the quarter ended September 30,
2009.  The $586 thousand increase was primarily a result of a $116.7
million increase in the average balance.  The average balance
increased due to the purchase of $173.4 million of investment securities during
the current quarter.  The funds for the purchases came primarily from
the sale of the trading MBS acquired through the loan swap
transaction.





Interest
Expense


Interest
expense decreased $2.5 million to $54.0 million for the current quarter from
$56.5 million for the quarter ended September 30, 2009.  The decrease
was due to a decrease in interest expense on deposits of $2.2 million, and, to a
lesser extent, a decrease in interest on FHLB advances of $227
thousand.  The decrease in interest expense on deposits related
primarily to a 25 basis point decrease in the weighted average rate of the
certificate of deposit portfolio due to $71.5 million of brokered deposits
maturing with weighted average rate of 5.20%.  The decrease in
interest expense on FHLB advances was primarily due to not replacing a $20.0
million advance that matured in late September 2009.





Provision
for Loan Losses


The Bank
recorded a provision for loan losses of $3.1 million during the current quarter,
compared to a provision of $623 thousand in the quarter ended September 30,
2009.  The $3.1 million provision for loan loss recorded in the
current quarter primarily reflects increases in the level of certain qualitative
factors in our general valuation allowance model to account for lingering
negative economic conditions.  See additional discussion regarding the
provision for loan losses in the sections entitled “Critical Accounting Policies
– Allowance for Loan Losses” and “Asset Quality – Loans and REO.”





Other
Income and Expense


Total
other income was $13.1 million for the current quarter compared to $6.7 million
for the quarter ended September 30, 2009.  The $6.4 million increase
was due primarily to a gain on the sale of trading MBS in conjunction with the
loan swap transaction.





Total
other expenses for the current quarter were $22.7 million for the current
quarter, compared to $23.0 million in the prior quarter.  The slight
decrease was primarily related to a decrease in the cost of employee benefits
and a decrease in other expenses, net.





Income
Tax Expense


Income
tax expense for the current quarter was $11.1 million compared to $9.9 million
for the quarter ended September 30, 2009.  The $1.2 million increase was
due to an increase in earnings between periods, partially offset by a decrease
in the effective tax rate.  The effective tax rate for the quarter ended
December 31, 2009 was 34.7%, compared to 37.1% for the quarter ended September
30, 2009.  The difference in the effective tax rate between periods was
primarily a result of a decrease in nondeductible expenses associated with the
ESOP and a reduction of unrecognized tax benefits due to the lapse of statute of
limitations during the current quarter.





Average Balance
Sheet





As
mentioned above, average yields are derived by dividing annualized income by the
average balance of the related assets and average rates are derived by dividing
annualized expense by the average balance of the related liabilities, for the
periods shown.  Average outstanding balances are derived from average
daily balances, except for other noninterest-earning assets, other
noninterest-earning liabilities and stockholders’ equity which were calculated
based on month-end balances.  The yields and rates include
amortization of fees, costs, premiums and discounts which are considered
adjustments to yields/rates. Yields on tax-exempt securities were not calculated
on a tax-equivalent basis.







51


For
      the Three Months EndedDecember
      31, 2009
            
            
            September
      30, 2009Average
            
            
            Interest
            
            
            
            
            
            Average
            
            
            InterestOutstanding
            
            
            Earned/
            
            
            Yield/
            
            
            Outstanding
            
            
            Earned/
            
            
            Yield/Balance
            
            
            Paid
            
            
            Rate
            
            
            Balance
            
            
            Paid
            
            
            RateAssets:
            
            (Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable (1)
            
            $
            5,550,883
            
            
            $
            74,526
            
            
            
            5.37
            %
            
            $
            5,580,785
            
            
            $
            74,875
            
            
            
            5.36
            %MBS
      (2)
            
            
            1,888,230
            
            
            
            20,754
            
            
            
            4.40
            
            
            
            2,005,892
            
            
            
            22,225
            
            
            
            4.43Investment
      securities (2)
      (3)
            
            
            524,854
            
            
            
            2,559
            
            
            
            1.95
            
            
            
            408,176
            
            
            
            1,973
            
            
            
            1.93Capital
      stock of FHLB
            
            
            133,075
            
            
            
            1,001
            
            
            
            2.98
            
            
            
            132,082
            
            
            
            993
            
            
            
            2.98Cash
      and cash equivalents
            
            
            80,391
            
            
            
            47
            
            
            
            0.23
            
            
            
            59,825
            
            
            
            34
            
            
            
            0.23Total
      interest-earning assets
            
            
            8,177,433
            
            
            
            98,887
            
            
            
            4.84
            
            
            
            8,186,760
            
            
            
            100,100
            
            
            
            4.89Other
      noninterest-earning assets
            
            
            225,321
            
            
            
            
            
            
            
            
            
            
            
            192,638Total
      assets
            
            $
            8,402,754
            
            
            
            
            
            
            
            
            
            
            $
            8,379,398Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Savings
            
            $
            225,837
            
            
            $
            361
            
            
            
            0.63
            %
            
            $
            227,667
            
            
            $
            424
            
            
            
            0.74
            %Checking
            
            
            447,055
            
            
            
            176
            
            
            
            0.16
            
            
            
            436,863
            
            
            
            227
            
            
            
            0.21Money
      market
            
            
            867,233
            
            
            
            1,740
            
            
            
            0.80
            
            
            
            845,703
            
            
            
            1,873
            
            
            
            0.88Certificates
            
            
            2,667,141
            
            
            
            19,828
            
            
            
            2.95
            
            
            
            2,699,398
            
            
            
            21,746
            
            
            
            3.20Total
      deposits
            
            
            4,207,266
            
            
            
            22,105
            
            
            
            2.09
            
            
            
            4,209,631
            
            
            
            24,270
            
            
            
            2.29FHLB
      advances (4)
            
            
            2,393,134
            
            
            
            24,819
            
            
            
            4.11
            
            
            
            2,411,077
            
            
            
            25,046
            
            
            
            4.12Other
      borrowings
            
            
            713,609
            
            
            
            7,109
            
            
            
            3.90
            
            
            
            713,609
            
            
            
            7,144
            
            
            
            3.92Total
      borrowings
            
            
            3,106,743
            
            
            
            31,928
            
            
            
            4.06
            
            
            
            3,124,686
            
            
            
            32,190
            
            
            
            4.08Total
      interest-bearing liabilities
            
            
            7,314,009
            
            
            
            54,033
            
            
            
            2.93
            
            
            
            7,334,317
            
            
            
            56,460
            
            
            
            3.05Other
      noninterest-bearing liabilities
            
            
            137,057
            
            
            
            
            
            
            
            
            
            
            
            109,651Stockholders'
      equity
            
            
            951,688
            
            
            
            
            
            
            
            
            
            
            
            935,430Total
      liabilities and
              stockholders'
      equity
            
            $
            8,402,754
            
            
            
            
            
            
            
            
            
            
            $
            8,379,398Net
      interest rate spread
            
            
            
            
            
            
            
            
            
            
            1.91
            %
            
            
            
            
            
            
            
            
            
            
            1.84
            %Net
      interest-earning assets
            
            $
            863,424
            
            
            
            
            
            
            
            
            
            
            $
            852,443Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.19
            
            
            
            
            
            
            
            
            
            
            
            2.13Ratio
      of interest-earning assetsto
      interest-bearing liabilities
            
            
            
            
            
            
            
            
            
            
            1.12
            
            
            
            
            
            
            
            
            
            
            
            1.12Selected
      performance ratios:Return
      on average assets (annualized)
            
            
            
            
            
            
            
            
            
            
            1.00
            %
            
            
            
            
            
            
            
            
            
            
            0.80
            %Return
      on average equity (annualized)
            
            
            
            
            
            
            
            
            
            
            8.82
            
            
            
            
            
            
            
            
            
            
            
            7.20Average
      equity to average assets
            
            
            
            
            
            
            
            
            
            
            11.33
            
            
            
            
            
            
            
            
            
            
            
            11.16







(1)Calculated net of unearned loan fees, deferred costs, and undisbursed
loan funds.  Non-accruing loans are included in the loans receivable
average balance with a yield of zero percent. Balance includes mortgage
LHFS.




(2)MBS
and investment securities classified as AFS are stated at amortized cost,
adjusted for unamortized purchase premiums or discounts.




(3) The
average balance of investment securities includes an average balance of
nontaxable securities of $71.6 million and $65.9 million for the periods ended
December 31, 2009 and September 30, 2009, respectively.




(4)FHLB advances are stated net of deferred gains and deferred prepayment
penalties.




52


Rate/Volume
Analysis





The table
below presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing
liabilities, comparing the quarter ended December 31, 2009 to the quarter ended
September 30, 2009.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate.





Quarter
      EndedDecember
      31, 2009 vs. September 30, 2009Increase
      (Decrease) Due toVolume
            
            
            Rate
            
            
            Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
            
            $
            (415
            )
            
            $
            66
            
            
            $
            (349
            )MBS
            
            
            (1,310
            )
            
            
            (161
            )
            
            
            (1,471
            )Investment
      securities
            
            
            569
            
            
            
            17
            
            
            
            586Capital
      stock of FHLB
            
            
            9
            
            
            
            (1
            )
            
            
            8Cash
      and cash equivalents
            
            
            12
            
            
            
            1
            
            
            
            13Total
      interest-earning assets
            
            $
            (1,135
            )
            
            $
            (78
            )
            
            $
            (1,213
            )Interest-bearing
      liabilities:Savings
            
            $
            (3
            )
            
            $
            (61
            )
            
            $
            (64
            )Checking
            
            
            5
            
            
            
            (56
            )
            
            
            (51
            )Money
      market
            
            
            46
            
            
            
            (172
            )
            
            
            (126
            )Certificates
            
            
            (255
            )
            
            
            (1,669
            )
            
            
            (1,924
            )FHLB
      advances
            
            
            (165
            )
            
            
            (63
            )
            
            
            (228
            )Other
      borrowings
            
            
            --
            
            
            
            (34
            )
            
            
            (34
            )Total
      interest-bearing liabilities
            
            $
            (372
            )
            
            $
            (2,055
            )
            
            $
            (2,427
            )Net
      change in net interest and dividend income
            
            $
            (763
            )
            
            $
            1,977
            
            
            $
            1,214








Liquidity
and Capital Resources





Liquidity
refers to our ability to generate sufficient cash to fund ongoing operations, to
pay maturing certificates of deposit and other deposit withdrawals, and to fund
loan commitments.  Liquidity management is both a daily and long-term
function of our business management.  The Bank’s most available liquid
assets are represented by cash and cash equivalents, AFS MBS and investment
securities, and short-term investment securities.  The Bank’s primary
sources of funds are deposits, FHLB advances, other borrowings, repayments on
and maturities of outstanding loans and MBS, other short-term investments, and
funds provided by operations.  The Bank’s borrowings primarily have
been used to invest in U.S. government sponsored enterprise securities in an
effort to safely improve the earnings of the Bank while maintaining capital
ratios in excess of regulatory standards for well-capitalized financial
institutions.  In addition, the Bank’s focus on managing risk has
provided additional liquidity capacity by remaining below FHLB borrowing limits
and by increasing the balance of MBS and investment securities available as
collateral for borrowings.


53





While
scheduled payments from the amortization of loans and MBS and payments on
short-term investments are relatively predictable sources of funds, deposit
flows, prepayments on loans and MBS, and calls of investment 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 loan and deposit portfolios by
the rates it offers customers.





At
December 31, 2009, cash and cash equivalents totaled $105.1 million, an increase
of $63.9 million from September 30, 2009.  The increase is related to
proceeds from the sale of trading MBS received in the loan swap transaction that
had not been fully reinvested at the end of the quarter.





During
the first quarter of fiscal year 2010, loan originations and purchases, net of
principal repayments was $18.2 million, compared to $138.1 million in the prior
year quarter.  Loan originations and purchases were funded by cash
flows from operations, as there were no additional borrowings during the quarter
and deposits remained virtually unchanged.





During
the first quarter of fiscal year 2010, the Bank received principal payments on
MBS of $112.4 million and proceeds from the sale of trading MBS received in the
loan swap transaction of $199.1


million.  These
cash inflows were largely reinvested in investment securities, and used to fund
loan purchases.  The investment securities purchased have terms
shorter than that of the mortgage loans swapped.  If market rates were
to rise, the short-term nature of these securities may allow management the
opportunity to reinvest the maturing funds at a yield higher than current
yields.





At
December 31, 2009, $1.45 billion of the $2.62 billion in certificates of deposit
were scheduled to mature within one year.  Included in the $1.45
billion are $100.1 million in public unit deposits, which have a weighted
average maturity of less than one year.  The Bank has pledged
securities with a fair value of $158.2 million as collateral for the public unit
deposits.  The securities pledged as collateral for public unit
deposits are held under joint custody receipt by the FHLB and generally will be
released upon deposit maturity.  Based on our deposit retention
experience and our pricing strategy, we anticipate the majority of the maturing
retail deposits will renew, although no assurance can be given in this
regard.  Management continuously monitors the wholesale deposit market
for opportunities to obtain brokered and public unit deposits at attractive
rates.





The Bank
utilizes FHLB advances to provide funds for lending and investment
activities.  FHLB lending guidelines set borrowing limits as part of
their underwriting standards.  At December 31, 2009, the Bank’s ratio
of the face amount of advances to total assets, as reported to the OTS, was
29%.  Our advances are secured by a blanket pledge of our loan
portfolio, as collateral, supported by quarterly reporting to
FHLB.  Advances in excess of 40% of total assets, but not exceeding
55% of total assets, may be approved by the president of FHLB based upon a
review of documentation supporting the use of the
advances.  Currently, the blanket pledge is sufficient collateral for
the FHLB advances.  It is possible that increases in our borrowings or
decreases in our loan portfolio could require the Bank to pledge securities as
collateral on the FHLB advances.  The Bank’s policy allows borrowing
from FHLB of up to 55% of total assets.  The Bank relies on the FHLB
advances as a primary source of borrowings.  There were no new FHLB
advances during the quarter.





The Bank
has access to and utilizes other sources for liquidity, such as secondary market
repurchase agreements, brokered deposits, and public unit
deposits.  The Bank’s policy allows for repurchase agreements up to
15% of total assets, brokered deposits up to 15% of total deposits, and public
unit deposits up to 10% of total deposits.  At December 31, 2009,
$1.04 billion of securities were eligible but unused for
collateral.  At December 31, 2009, the Bank had repurchase agreements
of $660.0 million, or approximately 8% of total assets, and public unit deposits
of $100.1 million, or 1% of total assets.  The Bank has pledged
securities with an estimated fair value of $765.3 million as collateral for
repurchase agreements.  At the maturity date, the securities pledged
for the repurchase agreements will be delivered back to the Bank. There were no
additional repurchase agreements during the quarter.  The Bank may
enter into additional repurchase agreements as management deems
appropriate.  The repurchase agreements are treated as secured
borrowings and are reported as a liability of the Company on a consolidated
basis.





In 2004,
the Company issued $53.6 million in 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 already 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.





54


During
the first quarter of fiscal year 2010, the Company paid cash dividends of $16.7
million, or $0.79 per share.  The $0.79 per share consists of one
quarterly dividend of $0.50 per share and a $0.29 special dividend per share
related to fiscal year 2009 earnings per the Company’s dividend
policy.  It is the board of directors’ intention to continue to pay
regular quarterly dividends of $0.50 per share for the foreseeable
future.  Dividend payments depend upon a number of factors including
the Company's financial condition and results of operations, the Bank’s
regulatory capital requirements, regulatory limitations on the Bank's ability to
make capital distributions to the Company, the amount of cash at the holding
company and the continued waiver of dividends by MHC.  At December 31,
2009, Capitol Federal Financial, at the holding company level, had $107.9
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.  See additional discussion regarding
limitations and potential limitations on dividends in the section entitled
“Regulation” in Part I, Item 1 and in Item 1A - Risk Factors of the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2009.





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.  The Bank has received a waiver from the OTS to distribute
capital from the Bank to the Company, not to exceed 100% of the Bank's net
quarterly earnings, through June 30, 2010.  So long as the Bank
continues to remain “well capitalized” after each capital distribution, operate
in a safe and sound manner, provide the OTS with updated capital levels, and
non-performing asset balances and ALLL information as requested, 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.





Due to
recent bank failures, in an effort to replenish the Deposit Insurance Fund, the
board of directors of the Federal Deposit Insurance Corporation (“FDIC”) adopted
a rule that required insured institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of calendar year 2009 and for all
of calendar year 2010, 2011 and 2012 during the quarter ended December 31,
2009.  Management paid FDIC premiums of $27.5 million during the
quarter ended December 31, 2009, which included $25.7 million of prepayments for
calendar years 2010, 2011 and 2012.





55








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 securities and
  MBS,


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


·
            terms
      and conditions of operating leases,
and


·
            funding
      withdrawals of deposit accounts.





The
Company’s contractual obligations related to operating leases, debentures, FHLB
advances, repurchase agreements, commitments to fund unused home equity lines of
credit, and unadvanced portion of construction loans have not changed
significantly from September 30, 2009.  The following table summarizes
our other contractual obligations as of December 31, 2009.





Maturity
      RangeLess
      than
            
            
            
            1 -
      3
            
            
            
            3 -
      5
            
            
            More
      thanTotal
            
            
            1
      year
            
            
            years
            
            
            years
            
            
            5
      years(Dollars
      in thousands)Certificates
      of Deposit
            
            $
            2,622,119
            
            
            $
            1,446,540
            
            
            $
            1,013,342
            
            
            $
            160,978
            
            
            $
            1,259Weighted
      average rate
            
            
            2.83
            %
            
            
            2.61
            %
            
            
            3.10
            %
            
            
            3.10
            %
            
            
            3.52
            %Commitments
      to originate andpurchase
      mortgage loans
            
            
            104,214
            
            
            
            104,214
            
            
            
            --
            
            
            
            --
            
            
            
            --Weighted
      average rate
            
            
            4.87
            
            
            
            4.87
            
            
            
            --
            
            
            
            --
            
            
            
            --





A
percentage of commitments to originate mortgage loans are expected to expire
unfunded, so the amounts reflected in the table above are not necessarily
indicative of future liquidity requirements.





The
maturity schedule for our certificate of deposit portfolio at December 31, 2009
is located under “Item 2. Management’s Discussion and Analysis – Financial
Condition.”  We anticipate we will continue to have sufficient funds,
through repayments and maturities of loans and securities, deposits and
borrowings, to meet our current commitments.




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.




56


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.  As of December 31, 2009, the Bank exceeded all
capital requirements of the OTS.  The following table presents the
Bank’s regulatory capital ratios at December 31, 2009 based upon regulatory
guidelines.







RegulatoryRequirementBank
            
            For
      “Well-Ratios
            
            Capitalized”
      StatusTangible
      equity
            10.1%
            
            N/ATier
      I (core) capital
            10.1%
            
            5.0%Tier
      I (core) risk-based capital
            23.8%
            
            6.0%Total
      risk-based capital
            24.0%
            
            10.0%





A
reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as
of December 31, 2009 is as follows (dollars in thousands):





Total
      equity as reported under GAAP
            
            $
            876,290Unrealized
      gains on AFS securities
            
            
            (30,875
            )Other
            
            
            (456
            )Total
      tangible and core capital
            
            
            844,959ALLL
      (1)
            
            
            8,180Total
      risk based capital
            
            $
            853,139





(1)
            This
      amount represents the general valuation allowances calculated using the
      formula analysis.  Specific valuation allowances are
      netted against the related loan balance on the Thrift Financial
      Report and are therefore not included in this amount.  See “Critical
      Accounting Policies - Allowance for Loan Losses” for additional
      information.









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, 2009, attached as Exhibit 13 to the Company’s Annual Report on
Form 10-K for the year ended September 30, 2009.





The
general objective of our interest rate risk management is to determine and
manage an appropriate level of interest rate risk while maximizing net interest
income, in a manner consistent with our policy to reduce, to the extent
possible, the exposure of our net interest income to changes in market interest
rates.  ALCO regularly reviews the interest rate risk exposure of the
Bank by forecasting the impact of hypothetical, alternative interest rate
environments on net interest income and market value of portfolio equity
(“MVPE”) at various dates.  The MVPE is defined as the net of the
present value of the cash flows of an institution’s existing assets, liabilities
and off-balance sheet instruments.  The present values are determined
in alternative interest rate environments providing potential changes in net
interest income and MVPE under those alternative interest rate environments. The
Bank’s analysis of its MVPE at December 31, 2009 indicates a general decrease in
its risk exposure compared to September 30, 2009 primarily due to the loan swap
transaction that resulted in a reduction in amount of long-term mortgage assets
outstanding at December 31, 2009.  The Bank’s analysis of the
sensitivity of its net interest income to parallel changes in interest rates at
December 31, 2009 indicates an increase in sensitivity since September 30,
2009.





57


For each
period end presented in the following table, the estimated percentage change in
the Bank’s net interest income based on the indicated instantaneous, parallel
and permanent change in interest rates is presented.  The percentage
change in each interest rate environment represents the difference between
estimated net interest income in the 0 basis point interest rate environment
(“base case”, assumes the forward market and product interest rates implied by
the yield curve are realized) and estimated net interest income in each
alternative interest rate environment (assumes market and product interest rates
have a parallel shift in rates across all maturities by the indicated change in
rates).  At December 31, 2009, the three-month Treasury bill yield was
less than one percent, so the -100 and -200 basis point scenarios are not
presented.  Estimations of net interest income used in preparing the
table below are based upon the assumptions that the total composition of
interest-earning assets and interest-bearing liabilities does not change
materially and that any repricing of assets or liabilities occurs at anticipated
product and market rates for the alternative rate environments as of the dates
presented.  The estimation of net interest income does not include any
projected gain or loss related to the sale of loans or securities, or income
derived from non-interest income sources, but does include the use of different
prepayment assumptions in the alternative interest rate
environments.  It is important to consider that the estimated changes
in net interest income are for a cumulative four-quarter
period.  These do not reflect the earnings expectations of
management.





Percentage
      Change in Net Interest IncomeChange(in
      Basis Points)
            
            Atin
      Interest Rates (1)
            
            December
      31, 2009
            
            September
      30, 2009-100
      bp
            
            N/A
            
            N/A000
      bp
            
            --
            
            --+100
      bp
            
            -0.65%
            
            0.84%+200
      bp
            
            -2.95%
            
            -0.54%+300
      bp
            
            -6.22%
            
            -2.41%





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





At
September 30, 2009 the projected net interest income increased in the +100 basis
point scenario before declining in the +200 and +300 basis point
scenarios.  At December 31, 2009 the net interest income projections
decline in all interest rate shock scenarios presented.  The primary
reason for the change in the net interest income projections between the two
periods is driven by the increase in interest rates during this time and the
resulting change in the cashflow projections of the Bank’s mortgage-related
assets.  Prepayment assumptions for mortgage- related assets change
under various interest rate environments because many borrowers look to obtain
financing at the lowest cost available.  Generally, there is no
penalty to prepay a mortgage loan.  If interest rates decrease, the
borrower has an economic incentive to lower their mortgage payment (through a
lower interest rate) with only the fees associated on the new mortgage or loan
modification.  This results in an increase in prepayments, and the
average life of a mortgage loan shortens compared to higher interest rate
environments.  When interest rates increase, the economic incentive
for borrowers to refinance or modify their mortgage payment is reduced,
resulting in lower prepayment assumptions and longer average lives.





With
interest rates increasing between September 30, 2009 and December 31, 2009, the
prepayment expectations decreased at December 31, 2009 compared to September 30,
2009.  As a result, there are fewer assets expected to reprice during
the upcoming year.  The amount of liabilities expected to reprice in
the rising interest rate scenarios presented is greater than the amount of
assets repricing, which results in a reduction in the Bank’s net interest margin
and thus lower net interest income projections in all scenarios.  At
September 30, 2009 the amount of assets expected to reprice remained greater
than the amount of liabilities in the +100 basis point scenario.  As
prepayment expectations continued to decrease in the +200 and +300 basis point
scenario, the amount of liabilities repricing exceeded the amount of assets
repricing, reducing the net interest income projections is these
scenarios.





58


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




Percentage
      Change in MVPEChange(in
      Basis Points)
            
            Atin
      Interest Rates (1)
            
            December
      31, 2009
            
            September
      30, 2009-100
      bp
            
            N/A
            
            N/A000
      bp
            
            --
            
            --+100
      bp
            
            -5.66%
            
            -4.92%+200
      bp
            
            -16.55%
            
            -18.11%+300
      bp
            
            -30.26%
            
            -34.32%





(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 are less sensitive to changes in interest
rates than the market value of longer term-to-maturity financial
instruments.  Because of this, our certificates of deposit (which have
relatively short average lives) tend to display less sensitivity to changes in
interest rates than do our mortgage-related assets (which have relatively long
average lives).  However, the average life expected on our
mortgage-related assets varies under different interest rate environments
because borrowers have the ability to prepay their mortgage loans, as discussed
above.





The MVPE
decreased in all interest rate shock scenarios presented at December 31, 2009
and became more sensitive to changes in interest rates in the +100 basis point
scenario compared to September 30, 2009.  The changes from September
30, 2009 were primarily driven by an increase in interest rates from September
30, 2009to December 31, 2009.  This resulted in a significant increase
in the WAL of all mortgage-related assets as borrowers have less economic
incentive to refinance or modify their mortgage loan, which increased the price
sensitivity of all mortgage-related assets and, as a result, assets as a
whole.  The sensitivity in the +200 and +300 basis point scenarios
decreased from September 30, 2009 as a result of the loan swap transaction
during the current quarter.  The loans swap transaction reduced the
amount of 30-year mortgage loans outstanding at December 31,
2009.  Thirty-year mortgage assets are the assets with the greatest
amount of interest rate sensitivity for the Bank.  The reduction of
these assets helped to reduce the overall level of interest rate risk at
December 31, 2009 as compared to September 30, 2009.





Gap Table:  The
following gap table summarizes the anticipated maturities or repricing of our
interest-earning assets and interest-bearing liabilities as of December 31,
2009, based on the information and assumptions set forth in the notes
below.  Cash flow projections for mortgage loans and MBS are
calculated based on current interest rates.  Prepayment projections
are subjective in nature, involve uncertainties and assumptions and, therefore,
cannot be determined with a high degree of accuracy. Although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
differently to changes in market interest rates.  Assumptions may not
reflect how actual yields and costs respond to market changes. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types of assets
and liabilities may lag behind changes in market interest
rates.  Certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the
asset.  In the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the gap table. For additional information regarding the impact
of changes in interest rates, see the Percentage Change in Net Interest Income
and Percentage Change in MVPE tables above.


59


Within
            
            
            Three
      to
            
            
            More
      Than
            
            
            More
      ThanThree
            
            
            Twelve
            
            
            One
      Year to
            
            
            Three
      Years
            
            
            OverMonths
            
            
            Months
            
            
            Three
      Yeas
            
            
            to
      Five Years
            
            
            Five
      Years
            
            
            TotalInterest-earning
      assets:
            
            (Dollars
      in thousands)Loans
      receivable (1):Mortgage
      loans:Fixed
            
            $
            210,343
            
            
            $
            479,397
            
            
            $
            858,370
            
            
            $
            606,868
            
            
            $
            2,017,014
            
            
            $
            4,171,992Adjustable
            
            
            92,394
            
            
            
            608,662
            
            
            
            252,229
            
            
            
            73,694
            
            
            
            19,123
            
            
            
            1,046,102Other
      loans
            
            
            137,984
            
            
            
            15,952
            
            
            
            21,835
            
            
            
            15,142
            
            
            
            11,735
            
            
            
            202,648Investment
      securities (2)
            
            
            99,459
            
            
            
            93,713
            
            
            
            167,564
            
            
            
            265,366
            
            
            
            26,340
            
            
            
            652,442MBS
      (3)
            
            
            220,651
            
            
            
            614,024
            
            
            
            421,116
            
            
            
            243,759
            
            
            
            328,281
            
            
            
            1,827,831Other
      interest-earning assets
            
            
            73,792
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            73,792Total
      interest-earning assets
            
            
            834,623
            
            
            
            1,811,748
            
            
            
            1,721,114
            
            
            
            1,204,829
            
            
            
            2,402,493
            
            
            
            7,974,807Interest-bearing
      liabilities:Deposits:Savings(4)
            
            
            97,768
            
            
            
            8,504
            
            
            
            19,608
            
            
            
            15,208
            
            
            
            84,295
            
            
            
            225,383Checking
      (4)
            
            
            11,104
            
            
            
            35,729
            
            
            
            121,381
            
            
            
            68,054
            
            
            
            255,351
            
            
            
            491,619Money
      market (4)
            
            
            39,078
            
            
            
            108,124
            
            
            
            215,196
            
            
            
            167,831
            
            
            
            357,902
            
            
            
            888,131Certificates
            
            
            472,775
            
            
            
            978,088
            
            
            
            1,009,708
            
            
            
            160,572
            
            
            
            976
            
            
            
            2,622,119Borrowings
      (5)
            
            
            53,609
            
            
            
            695,000
            
            
            
            776,000
            
            
            
            1,120,000
            
            
            
            495,000
            
            
            
            3,139,609Total
      interest-bearing liabilities
            
            
            674,334
            
            
            
            1,825,445
            
            
            
            2,141,893
            
            
            
            1,531,665
            
            
            
            1,193,524
            
            
            
            7,366,861Excess
      (deficiency) of interest-earning assets overinterest-bearing
      liabilities
            
            $
            160,289
            
            
            $
            (13,697
            )
            
            $
            (420,779
            )
            
            $
            (326,836
            )
            
            $
            1,208,969
            
            
            $
            607,946Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities
            
            $
            160,289
            
            
            $
            146,592
            
            
            $
            (274,187
            )
            
            $
            (601,023
            )
            
            $
            607,946Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities as apercent
      of total assets at:December
      31, 2009
            
            
            1.91
            %
            
            
            1.75
            %
            
            
            (3.27
            )%
            
            
            (7.18
            )%
            
            
            7.26
            %September
      30, 2009
            
            
            0.81
            
            
            
            6.78
            
            
            
            4.60
            
            
            
            (2.48
            )
            
            
            8.11


60





(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.  Balances have been reduced for non-performing loans,
which totaled $32.5 million at December 31, 2009.


(2)  Based
on contractual maturities, or terms to call date or pre-refunding dates as of
December 31, 2009, and excludes the unrealized loss adjustment of $499 thousand
on AFS investment securities.


(3)  Reflects
estimated prepayments of MBS in our portfolio, and excludes the unrealized gain
adjustment of $50.1 million on AFS MBS.


(4)  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 $1.16 billion, for a cumulative one-year gap of
(13.8)% of total assets.


(5)  Borrowings
exclude $32.5 million of deferred prepayment penalty costs and $756 thousand of
deferred gain on the terminated interest rate swaps.





The
change in the one-year gap to 1.75% at December 31, 2009 from 6.78% at September
30, 2009 was a result of an increase in interest rates, particularly mortgage
interest rates.  The increase in mortgage interest rates decreased
projected cash flows from mortgage loan prepayments which resulted in longer
average lives and slower repricing of interest-earning assets at December 31,
2009 compared to September 30, 2009.








Item 4.  Controls and
Procedures


Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the Company’s disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act
of 1934, as amended, the “Act”) as of December 31, 2009.  Based upon
this evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that as of December 31, 2009, such disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Act is accumulated and
communicated to the Company’s management (including the Chief Executive Officer
and Chief Financial Officer) to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.





Changes
in Internal Control Over Financial Reporting


During
the quarter ended December 31, 2009, there were no changes in the Company’s
internal control over financial reporting as defined by Rule 13a-15(d) of the
Act that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.





Part
II -   OTHER INFORMATION





Item 1.  Legal
Proceedings


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





Item 1A.  Risk
Factors


There
have been no material changes to our risk factors since the filing of our Annual
Report on Form 10-K for the fiscal year ended September 30, 2009.  For
a summary of other risk factors relevant to our operations, see Part I, Item 1A
in our 2009 Annual Report on Form 10-K.








61


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


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





The
following table summarizes our share repurchase activity during the three months
ended December 31, 2009 and additional information regarding our share
repurchase program.  As of December 31, 2009, we had 54,590 shares
remaining to be purchased under the existing stock repurchase
plan.  Subsequent to December 31, 2009, the remaining 54,590 shares
were repurchased by the Company.  The board of directors approved a
new stock purchase plan on January 26, 2010.  Under the new plan, the
Company intends to repurchase up to 250,000 shares from time to time, depending
on market conditions, at prevailing market prices in open-market and other
transactions. The shares would be held as treasury stock for general corporate
use.  The plan has no expiration date.  The previous plan
was completed on January 20, 2010.












Total
            
            Total
      Number of
            Maximum
      NumberNumber
      of
            Average
            Shares
      Purchased as
            of
      Shares that MayShares
            Price  Paid
            Part
      of Publicly
            Yet
      Be PurchasedPeriod
            Purchased
            per
      Share
            Announced
      Plans
            Under
      the PlanOctober
      1, 2009 throughOctober
      31, 2009
            --
            --
            --
            130,368November
      1, 2009 throughNovember
      30, 2009
            --
            --
            --
            130,368December
      1, 2009 throughDecember
      31, 2009
            75,778
            $      30.25
            75,778
            54,590Total
            75,778
            
            75,778
            54,590





<Index>


Item
3.  Defaults Upon Senior Securities


Not
applicable.





62


<Index>


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


At the
Annual Meeting of Stockholders for the fiscal year ended September 30, 2009,
held January 26, 2010, two matters were presented to
stockholders.  Stockholders elected John B. Dicus and Jeffrey R.
Thompson each to a three-year term as director.  Stockholders also
ratified the appointment of Deloitte & Touche, LLP as auditors for the
fiscal year ending September 30, 2010.  The votes cast as to each
matter are set forth below:





Number
      of VotesFor
            WithheldProposal
      1.Election
      of the following directors for the termsindicated:John
      B. Dicus (three years)
            67,591,312
            451,219Jeffrey
      R. Thompson (three years)
            67,760,932
            281,599The
      following directors had their term of officecontinue
      after the meeting:B.B.
      AndersenMorris
      J. Huey, IIJeffrey
      M. JohnsonMichael
      T. McCoy, M.D.Marilyn
      S. WardNumber
      of VotesFor
            Against
            AbstainProposal
      2.Ratification
      of Deloitte & Touche LLPas
      auditors.
            70,574,766
            246,009
            30,700





<Index>


Item
5.  Other Information


Not
applicable.





<Index>


Item
6.  Exhibits


See Index
to Exhibits.


63


SIGNATURES





Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





CAPITOL
FEDERAL FINANCIAL








Date:  February
4,
2010                                                By:
/s/ John B.
Dicus


John
B. Dicus, Chairman, President and


Chief
Executive Officer








Date:  February
4,
2010                                               By:
/s/ Kent G.
Townsend


Kent
G. Townsend, Executive Vice President and


Chief
Financial Officer








<Index>


64


INDEX TO EXHIBITS


Exhibit
              Number
            Document2.0
            
            Plan
      of Reorganization and Stock Issuance Plan*3(i)
            
            Federal
      Stock Charter of Capitol Federal Financial*3(ii)
            
            Bylaws
      of Capitol Federal Financial filed on November 29, 2007 as Exhibit 3(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference4(i)
            
            Form
      of Stock Certificate of Capitol Federal Financial*4(ii)
            
            The
      Registrant agrees to furnish to the Securities and Exchange Commission,
      upon request, theinstruments
      defining the rights of the holders of the Registrant’s long-term
      debt.10.1(i)
            
            Registrant’s
      Thrift Plan filed on November 29, 2007 as Exhibit 10.1(i)
    tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.1(ii)
            
            Registrant’s
      Stock Ownership Plan filed on November 29, 2007 as Exhibit 10.1(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.2
            
            Registrant’s
      2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
      April 13,2000
      as Appendix A to Registrant’s Revised Proxy Statement (File No. 000-25391)
      and incorporated herein by reference10.3
            
            Registrant’s
      2000 Recognition and Retention Plan (the “RRP”) filed on April 13, 2000
      asAppendix
      B to Registrant’s Revised Proxy Statement (File No. 000-25391) and
      incorporated herein by reference10.4
            
            Capitol
      Federal Financial Deferred Incentive Bonus Plan, as amended, filed on May
      5, 2009 as Exhibit 10.4 to the March 31, 2009 Form 10-Q 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
      30,2009
      as Exhibit 10.8 to the Annual Report on Form 10-K and incorporated herein
      by reference10.9
            
            Description
      of Director Fee Arrangements10.10
            
            Short-term
      Performance Plan filed on December 1, 2008 as Exhibit 10.10 to the
      AnnualReport
      on Form 10-K for the fiscal year ended September 30, 2008 and incorporated
      herein by reference11
            
            Statement
      re: computation of earnings per share**31.1
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by John B.
      Dicus, Chairman, President and Chief Executive Officer31.2
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G.
      Townsend, Executive Vice President and Chief Financial
Officer32
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President
      and Chief Executive Officer, and Kent G. Townsend, Executive Vice
      President and Chief Financial
Officer





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





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


65