10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended September 30, 2006 OR
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
		ACT OF 1934
		For the transition period from _____________________to_____________________
			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 or organization)					(I.R.S. Employer 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
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share          The Nasdaq Stock Market LLC
(Title of class)           (Exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. ¨ Yes þ No
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 filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ                                Accelerated filer ¨                                 Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, computed by reference to the
average of the closing bid and asked price of such stock on the NASDAQ Stock Market as of March 31, 2006, was $707.5 million.
The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the registrant.
	As of December 1, 2006, there were issued and outstanding 74,113,855 shares of the Registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for the year ended September 30, 2006.
Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting of Stockholders for the year ended September 30, 2006.

1

			Page No.
PART I	Item 1.	Business	4
	Item 1A.	Risk Factors	36
	Item 1B.	Unresolved Staff Comments	38
	Item 2.	Properties	38
	Item 3.	Legal Proceedings	38
	Item 4.	Submission of Matters to a Vote of Security Holders	38
PART II	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	39
	Item 6.	Selected Financial Data	39
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
	Item 8.	Financial Statements and Supplementary Data	39
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	39
	Item 9A.	Controls and Procedures	40
	Item 9B.	Other Information	40
PART III	Item 10.	Directors and Executive Officers of the Registrant	40
	Item 11.	Executive Compensation	40
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
	Item 13.	Certain Relationships and Related Transactions	41
	Item 14.	Principal Accounting Fees and Services	41
PART IV	Item 15.	Exhibits and Financial Statement Schedules	42
SIGNATURES			43
INDEX TO EXHIBITS

2

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

·   inflation, interest rate, market and monetary fluctuations;

·   our ability to access cost-effective funding;

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

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

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

·   the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities and insurance;

·   technological changes;

·   acquisitions and dispositions;

·   changes in consumer spending and saving habits; and

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

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

As used in this Form 10-K, 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.

3

PART I

Item 1.Business

General

The Company is a federally chartered mid-tier mutual holding company incorporated in March 1999. The Bank is a wholly-owned subsidiary of the Company, which is majority owned by Capitol Federal Savings Bank MHC (“MHC”), a federally chartered mutual holding company. The Company’s common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol “CFFN.”

The Bank is the only operating subsidiary of the Company. The Bank is a federally-chartered and insured savings bank headquartered in Topeka, Kansas and is examined and regulated by the Office of Thrift Supervision (“OTS”), its primary regulator. It is also regulated by the Federal Deposit Insurance Corporation (“FDIC”). We primarily serve the entire metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the metropolitan area of greater Kansas City through 29 traditional and nine in-store banking offices. At September 30, 2006, we had total assets of $8.20 billion, deposits of $3.90 billion and total equity of $863.2 million.

We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We attract retail deposits from the general public and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family (“single-family") residences. We also originate consumer loans, loans secured by first mortgages on nonowner-occupied one- to four-family residences, permanent and construction loans secured by one- to four-family residences, commercial real estate loans and multi-family real estate loans. While our primary business is the origination of one- to four-family mortgage loans funded through retail deposits, we also purchase one- to four-family mortgage loans from nationwide lenders and correspondent lenders located within our Kansas City and Wichita market areas and market areas within our geographic region, and invest in certain investment and mortgage-related securities funded through retail deposits and advances from Federal Home Loan Bank Topeka (“FHLB”). We may originate loans outside our market area on occasion, and most of the whole loans we purchase are secured by properties located outside of our market area.

Our revenues are derived principally from interest on loans and mortgage-related securities and interest and dividends on investment securities. Our primary sources of funds are customer deposits, borrowings, scheduled amortization and prepayments of mortgage loan principal and mortgage-backed securities and calls and maturities of investment securities and funds provided by operations.

We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include passbook and passcard savings accounts, money market accounts, interest bearing and non-interest bearing checking accounts and certificates of deposit with terms ranging from 91 days to 96 months.

Our executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603, and our telephone number at that address is (785) 235-1341.

Available Information

Our Internet website address is www.capfed.com. Financial information, including our 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 website. The above reports are available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports are also available on the SEC’s website at http://www.sec.gov.

Market Area and Competition

Our corporate office is located in Topeka, Kansas. We have a network of 38 branches located in 8 counties throughout the State of Kansas. We operate in three primary market areas: Johnson County, Kansas, the city of Wichita, Kansas and the cities of Topeka and Lawrence, Kansas. In addition to providing full service banking offices, we also provide our customers telephone and Internet banking capabilities. Management considers our strong retail banking network, together with our reputation for financial strength and customer service, as our major strengths in attracting and retaining customers in our market areas.

4

Johnson County, Kansas is located in the south central area of the Kansas City metropolitan area. According to the U.S. Census Bureau Population Estimates Program, Johnson County’s population increased approximately 12% from 2000 to 2005. Johnson County’s economy is well diversified. The 2005 inflation-adjusted local median household income in Johnson County was estimated to be $67 thousand compared to the estimated national average of $46 thousand and the estimated Kansas average of $43 thousand as reported by the U.S. Census Bureau. The Johnson County market represents the greatest concentration of the Bank’s retail operations, both lending and deposit gathering. Approximately half of the Bank’s branches are located in the Johnson County market. The Bank ranked first in deposit market share in Johnson County, with 12.1% market share based on the FDIC “Summary of Deposits - Market Share Report” dated June 30, 2006. The Bank’s market share percentage in Johnson County has been decreasing over the past 5 years, but we have continued to rank first in total deposit market share each of those years. The decrease in market share percentage has been a result of aggressive pricing in the market by other financial institutions and the entrance of new competitors such as credit unions, de novo institutions and increased banking locations. The Bank is consistently one of the top three lenders in Johnson County with regards to loan volume. We believe Johnson County’s highly diversified economy reduces our potential to a downturn in one or a handful of economic sectors.

Wichita is the largest city in Kansas. Approximately 70% of the U.S. general aviation aircraft is produced in Wichita. The Bank’s second greatest concentration in retail operations is in Wichita. The Bank has six branches located in Wichita, which is located in Sedgwick County. The Bank ranked seventh in deposit market share in Wichita, with 6.2% market share based on the FDIC “Summary of Deposits - Market Share Report” dated June 30, 2006. The Bank’s market share percentage and overall market ranking in Wichita has decreased over the past 5 years as a result of aggressive pricing by competitors and an increased number of financial institutions and banking locations. The decline in commercial airline and general aviation airplane sales following the 2001 terrorist attacks on the United States has had an impact on the Wichita-area economy, but we have not felt the impact of that downturn in the credit quality of our loan portfolio in Wichita. We believe this is a result of the majority of families having dual incomes and the gradual appreciation in the value of homes in Wichita. The Bank is consistently one of the top five lenders in Sedgwick County with regards to loan volume.

Topeka is the Kansas state capital and therefore houses numerous state agencies. The University of Kansas is located in Lawrence. Topeka and Lawrence represent the third greatest concentration of the Bank’s retail operations. The Bank has six branches, including the home office, located in Topeka and four branches located in Lawrence. The Bank ranked first in deposit market share in Topeka and Lawrence combined, with 33.0% market share based on the FDIC “Summary of Deposits - Market Share Report” dated June 30, 2006. The Bank’s market share percentage has been decreasing over the past 5 years, but we have continued to rank first in total deposit market share each of those years. The reason for the decrease in market share is the same as in our other major market areas. The Bank is consistently one of the top three lenders in this market area with regards to loan volume.

Deposit market share is measured by total deposits, without consideration for type of deposit. We do not have commercial deposit accounts because of our focus on retail deposits, while many of our competitors have both commercial and retail deposits in their total deposit base. This will tend to show the Bank underperforming in this category compared to other institutions in our market areas. We have lost market share when measured by total deposits.

We are one of the largest originators of one- to four-family mortgage loans in the state of Kansas. We attract customers through our strong relationships with real estate agents, our reputation, pricing, existing and walk-in customers and customers that apply on the Internet. Competition in originating one- to four-family mortgage loans primarily comes from other savings institutions, commercial banks, credit unions and mortgage bankers. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending.

We purchase one- to four-family mortgage loans from nationwide lenders and correspondent lenders located within our Kansas City and Wichita market areas and market areas within our geographic region. Purchasing loans from nationwide lenders provides geographic diversification, reducing our exposure to concentrations of credit risk. At September 30, 2006 all loans purchased from nationwide lenders were secured by properties located in 48 states, including Kansas, and Washington, D.C. At September 30, 2006, purchases from nationwide lenders in the following states comprised greater than 5% of total loans purchased from nationwide lenders: Illinois 13.9%; Florida 7.5%; Arizona 6.0%; Texas 5.7%, and Virginia 5.5%.

5

Lending Activities

General. Our primary lending activity is the origination of loans secured by first mortgages on one- to four-family residential properties. We also make consumer loans, construction loans secured by residential properties, commercial properties and multi-family real estate and loans secured by multi-family dwellings or commercial properties. Our mortgage loans carry either a fixed or an adjustable-rate of interest. Mortgage loans are generally long-term and amortize on a monthly basis with principal and interest due each month. At September 30, 2006, our net loan portfolio totaled $5.22 billion, which constituted 63.7% of our total assets. For a discussion of our market risk associated with loans, see“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K.

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

At September 30, 2006, the maximum amount which we could have loaned to any one borrower and the borrower’s related entities was approximately $116.9 million. Our largest lending relationship to a single borrower or a group of related borrowers on that date consisted of 14 multi-family real estate projects, two single-family homes and four commercial real estate projects located in Kansas and Texas, totaling $33.6 million. No single loan in this group exceeded $3.7 million at that date. Most of the multi-family real estate loans qualify for the low income housing tax credit program. We have 25 years experience with this group of borrowers, who usually build and manage their own properties. All of these loans were current and performing in accordance with their terms at September 30, 2006.

The second largest lending relationship at September 30, 2006, consisted of eight loans totaling $13.5 million. Four loans are secured by multi-family real estate units and four are secured by single-family homes. We have 25 years of experience with the borrowers. All units were built and are presently being managed by the borrowers. Each of the loans to this group of borrowers were current and performing in accordance with required terms at September 30, 2006.

6

Loan Portfolio. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages (before deductions for loans in process, net deferred fees and discounts and allowances for losses) as of the dates indicated.

	September 30,
	2006					2005					2004					2003					2002
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One- to four-family	$	4,931,505		93.80	%	$	5,189,006		94.44	%	$	4,492,205		93.70	%	$	4,069,197		93.43	%	$	4,612,543		93.94	%
Multi-family		48,331		0.92			40,636		0.74			35,421		0.74			38,464		0.88			45,985		0.94
Commercial		8,443		0.16			8,927		0.16			8,698		0.18			7,881		0.18			5,514		0.11
Construction and development(1)		45,452		0.87			45,312		0.83			54,782		1.14			48,537		1.11			48,023		0.98
Total real estate loans		5,033,731		95.75			5,283,881		96.17			4,591,106		95.76			4,164,079		95.60			4,712,065		95.97
Other Loans:
Consumer Loans:
Savings		6,250		0.12			8,377		0.15			9,141		0.19			10,963		0.25			11,931		0.24
Automobile		3,660		0.07			2,555		0.05			2,274		0.05			3,798		0.09			6,913		0.14
Home equity		210,008		3.99			197,626		3.60			189,861		3.96			173,656		3.99			175,551		3.58
Other		3,762		0.07			1,878		0.03			1,931		0.04			2,484		0.07			3,474		0.07
Total consumer loans		223,680		4.25			210,436		3.83			203,207		4.24			190,901		4.40			197,869		4.03
Commercial business loans		62		--			70		--			129		--			201		--			151		--
Total other loans		223,742		4.25			210,506		3.83			203,336		4.24			191,102		4.40			198,020		4.03
Total loans receivable		5,257,473		100.00	%		5,494,387		100.00	%		4,794,442		100.00	%		4,355,181		100.00	%		4,910,085		100.00	%
Less:
Loans in process		22,605					14,803					23,623					27,039					21,764
Net deferred fees and discounts		9,318					10,856					18,794					15,896					15,678
Allowance for losses		4,433					4,598					4,495					4,550					4,825
Total loans receivable, net	$	5,221,117				$	5,464,130				$	4,747,530				$	4,307,696				$	4,867,818

⁽¹⁾ At September 30, 2006, there were no development loans in the loan portfolio.

7

The following table shows the composition of our loan portfolio by fixed- and adjustable-rate loans at the dates indicated.

	September 30,
	2006					2005					2004					2003					2002
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family	$	3,031,734		57.67	%	$	3,273,627		59.58	%	$	3,118,912		65.06	%	$	3,005,475		69.01	%	$	3,418,360		69.62	%
Multi-family		47,669		0.91			40,100		0.73			34,828		0.73			37,819		0.87			44,494		0.91
Commercial		8,407		0.16			8,887		0.16			8,654		0.18			7,834		0.18			4,996		0.10
Construction and development(1)		30,685		0.58			26,418		0.49			38,058		0.79			36,588		0.84			31,944		0.65
Total real estate loans		3,118,495		59.32			3,349,032		60.96			3,200,452		66.76			3,087,716		70.90			3,499,794		71.28
Consumer		67,021		1.27			39,617		0.72			26,439		0.55			26,817		0.62			38,828		0.79
Commercial business		62		--			70		--			129		--			201		--			151		--
Total fixed-rate loans		3,185,578		60.59			3,388,719		61.68			3,227,020		67.31			3,114,734		71.52			3,538,773		72.07
Adjustable-Rate Loans:
Real estate:
One- to four-family		1,899,771		36.13			1,915,379		34.86			1,373,293		28.64			1,063,722		24.42			1,194,183		24.32
Multi-family		662		0.02			536		0.01			593		0.01			645		0.01			1,491		0.03
Commercial		36		--			40		--			44		--			47		--			518		0.01
Construction and development(1)		14,767		0.28			18,894		0.34			16,724		0.35			11,949		0.28			16,079		0.33
Total real estate loans		1,915,236		36.43			1,934,849		35.21			1,390,654		29.00			1,076,363		24.71			1,212,271		24.69
Consumer		156,659		2.98			170,819		3.11			176,768		3.69			164,084		3.77			159,041		3.24
Total adjustable-rate loans		2,071,895		39.41			2,105,668		38.32			1,567,422		32.69			1,240,447		28.48			1,371,312		27.93
Total loans		5,257,473		100.00	%		5,494,387		100.00	%		4,794,442		100.00	%		4,355,181		100.00	%		4,910,085		100.00	%
Less:
Loans in process		22,605					14,803					23,623					27,039					21,764
Net deferred fees and discounts		9,318					10,856					18,794					15,896					15,678
Allowance for loan losses		4,433					4,598					4,495					4,550					4,825
Total loans receivable, net	$	5,221,117				$	5,464,130				$	4,747,530				$	4,307,696				$	4,867,818

⁽¹⁾At September 30, 2006, there were no development loans in the loan portfolio.

8

The following table presents the contractual maturity of our loan portfolio at September 30, 2006, net of loans in process. Mortgage 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.

						Multi-family and															Commercial
	One- to Four-Family					Commercial					Construction (2)					Consumer					Business					Total
			Weighted					Weighted					Weighted					Weighted					Weighted					Weighted
			Average					Average					Average					Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in thousands)
Amounts due:
Within one year(1)	$	827		6.80	%	$	--		--	%	$	22,037		5.80	%	$	3,551		6.26	%	$	--		--	%	$	26,415		5.89	%
After one year:
One through five years		29,257		6.11			554		7.64			810		6.38			10,316		7.21			27		7.00			40,964		6.41
After five years		4,901,421		5.41			56,220		6.47			--		--			209,813		8.40			35		6.50			5,167,489		5.54
Total due after one year		4,930,678		5.41			56,774		6.48			810		6.38			220,129		8.34			62		6.72			5,208,453		5.55
Total loans	$	4,931,505		5.41	%	$	56,774		6.48	%	$	22,847		5.82	%	$	223,680		8.31	%	$	62		6.72	%		5,234,868		5.55	%
Less:
Deferred loan fees																											9,318
Allowance for loan losses																											4,433
Total loans receivable, net																										$	5,221,117

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

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

9

The following table presents, as of September 30, 2006, the amount of loans due after September 30, 2007, and whether these loans have fixed or adjustable interest rates.

	Fixed		Adjustable		Total
Real Estate Loans:
One- to four-family	$	3,030,953	$	1,899,725	$	4,930,678
Multi-family and Commercial		56,075		699		56,774
Construction		810		--		810
Consumer		63,722		156,407		220,129
Commercial Business		62		--		62
Total	$	3,151,622	$	2,056,831	$	5,208,453

One- to Four-Family Residential Real Estate Lending. We focus our lending efforts primarily on the origination and purchase of loans secured by first mortgages on owner-occupied one- to four-family residences in our market areas. We generate additional lending volume by purchasing whole one- to four-family mortgage loans from nationwide lenders. These purchases allow us to attain geographic diversification and manage credit concentration risks in our loan portfolio. At September 30, 2006, one- to four-family mortgage loans totaled $4.93 billion, or 93.8% of our total loan portfolio.

We generally underwrite our loans using an automated underwriting system developed by a third party, which closely resembles our manual underwriting standards, with emphasis on the applicant’s credit history, employment and income history, asset reserves and loan-to-value ratio. All information used for an automated decision is validated with supporting documentation. Loans that do not meet our automated underwriting standards are referred to a staff underwriter for manual underwriting. Presently, we lend up to 103% of the lesser of the appraised value or purchase price for one- to four-family mortgage loans. At September 30, 2006, less than 1% of our loan portfolio had a loan-to-value ratio greater than 100%. For loans with a loan-to-value ratio in excess of 80%, we require private mortgage insurance in order to reduce our loss exposure. Properties securing our one- to four-family loans are appraised by either staff appraisers or independent fee appraisers approved by the board of directors. We generally require our borrowers to obtain title insurance, hazard insurance and flood insurance, if necessary, in an amount not less than the value of the property and improvements. We require borrowers to maintain escrow accounts for property taxes with the Bank if their loan-to-value ratio exceeds 80%.

We originate one- to four-family mortgage loans on either a fixed or adjustable-rate basis, as consumer demand dictates. We primarily originate fixed-rate one- to four-family mortgage loans in our market areas. We purchase both fixed- and adjustable-rate one- to four-family loans, but we primarily purchase one- to four-family adjustable-rate mortgage (“ARM”) loans to supplement our ARM portfolio. At September 30, 2006, our fixed-rate one- to four-family mortgage loan portfolio totaled $3.03 billion, or 57.7% of our total loan portfolio. At that date the ARM one- to four-family loan portfolio totaled $1.90 billion, or 36.1% of our total loan portfolio.

Our pricing strategy for mortgage loans includes setting interest rates that are competitive with the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”) and local financial institutions, and consistent with our internal needs. ARM loans are offered with either a one-year, three-year, five-year or seven-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan generally adjusts annually for the remainder of the term of the loan. We use a number of different indices to reprice our ARM loans.

Fixed-rate loans secured by one- to four-family residences have contractual maturities of up to 30 years, and are fully amortizing, with payments due monthly. However, these loans normally remain outstanding for a substantially shorter period of time because of refinancing and other prepayments. A significant change in the current level of interest rates could alter the average life of a mortgage loan in our portfolio considerably. Our one- to four-family mortgage loans are generally not assumable and do not contain prepayment penalties. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

Our one- to four-family ARM loans are fully amortizing loans with contractual maturities of up to 30 years, with payments due monthly. Our current ARM loans generally provide for specified minimum and maximum interest rates,

10

with a lifetime cap and floor, a limit on the periodic adjustment on the interest rate over the rate in effect prior to adjustment and do not permit negative amortization of principal. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as our cost of funds. We also offer interest-only ARM loans that do not require principal payments for a period of up to ten years. At September 30, 2006, 8.5% of our loan portfolio consisted of interest-only ARM loans. As of September 30, 2006, approximately 83% of our interest-only ARM loans were purchased from nationwide lenders. Loan repayment schedules are determined at the repricing date for the remaining term of the ARM loan. Our ARM loans are not automatically convertible into fixed-rate loans. We do allow borrowers to pay a modification fee to convert an ARM loan to a fixed-rate loan. As of September 30, 2006, we have not experienced performance problems with our interest-only loans. See “Loan Originations, Purchases, Sales and Repayments.”

In order to remain competitive in its market areas, the Bank currently originates ARM loans at introductory rates that are in effect until the first repricing date. The Bank qualifies borrowers based on this initial discounted rate for our three, five and seven year ARM loans. For our interest-only loans, the Bank qualifies the borrower at the fully indexed rate. ARM loans can pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s monthly payment also rises, increasing the likelihood of default. This specific risk type is known as repricing risk. An increasing rate environment is not a favorable scenario for borrowers with ARM loans. In the current economic environment, repricing risk is an especially valid concern because the Federal Reserve has indicated that inflationary concerns were a factor behind many recent rate increases. The Federal Reserve has recently halted additional rate increases but has indicated that the halt may be temporary, citing potential remaining inflationary concerns. Except for our variable rate equity loans, we do not have loans that price off of indices directly related to the actions of the Federal Reserve.

ARM loans can pose different credit risks than fixed-rate loans, primarily because as interest rates rise the borrower’s payment also rises, increasing the potential for default. Historically, we have not experienced increased delinquencies with these loans in a rising rate environment. See“Asset Quality - Non-performing Assets” and“Asset Quality - Classified Assets.”

Multi-family and Commercial Real Estate Lending. We offer a variety of multi-family and commercial real estate loans. These loans are secured primarily by multi-family dwellings and small office buildings generally located in our market areas. At September 30, 2006, multi-family and commercial real estate loans totaled $56.8 million, or 1.1% of our total loan portfolio.

Our loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on ARM loans is based on a variety of indices, generally determined through negotiation with the borrower. Loan-to-value ratios on our multi-family and commercial real estate loans usually do not exceed 80% of the appraised value of the property securing the loan. While maximum maturities may extend to 30 years, loans frequently have shorter maturities and may not be fully amortizing, requiring balloon payments of unamortized principal at maturity.

Loans secured by multi-family and commercial real estate are granted based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. We generally require personal guarantees of the borrowers covering a portion of the debt in addition to the security property as collateral for such loans. We generally require an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are performed by independent state certified fee appraisers approved by the board of directors. See “Loan Originations, Purchases, Sales and Repayments.”

We generally do not maintain a tax or insurance escrow account for loans secured by multi-family or commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties of $1.5 million or more, the borrower is notified annually to provide financial information including rental rates and income, maintenance costs and an update of real estate property tax payments, as well as personal financial information.

Loans secured by multi-family and commercial real estate properties generally are larger and involve a greater degree of credit risk than one- to four-family mortgage loans. Such loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by multi-family and commercial real estate

11

properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “Asset Quality - Non-performing Loans.”

Construction Lending. At September 30, 2006, we had $45.5 million in construction permanent loans outstanding, representing 0.9% of our total loan portfolio. We originate construction loans primarily secured by one- to four-family residential real estate. Presently, all of the loans are secured by property located within our market areas. None of these loans were made to builders for speculative purposes. Construction loans are obtained principally by homeowners who will occupy the property when construction is complete. The application process includes submission of complete plans, specifications and costs of the project to be constructed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction, including the land and the building. We also conduct regular inspections of the construction project being financed.

Consumer Lending. Consumer loans generally have shorter terms to maturity or reprice more frequently, which reduces our exposure to changes in interest rates, and usually carry higher rates of interest than do one- to four-family mortgage loans. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. At September 30, 2006, our consumer loan portfolio totaled $223.7 million, or 4.3% of our total loan portfolio.

We offer a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, auto loans, student loans and loans secured by savings deposits. We also originate a very limited amount of unsecured loans. We currently originate all of our consumer loans in our market areas. Our home equity loans, including lines of credit and home improvement loans, comprised 4.0% of our total loan portfolio, or $210.0 million at September 30, 2006. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 100% of the value of the property securing the loan. As of September 30, 2006, 4.0% of the home equity portfolio was interest only. In order to minimize risk of loss, home equity loans of 90% or greater of the value of the property require private mortgage insurance.  The term-to-maturity of our home equity and home improvement loans may be up to 20 years. Home equity lines of credit have no stated term-to-maturity and require the payment of 1 1/2% of the outstanding loan balance per month, which may be reborrowed at any time. Other consumer loan terms vary according to the type of collateral and the length of contract. The majority of our consumer loan portfolio is comprised of home equity lines of credit, which have interest rates that can adjust monthly based upon changes in the prime rate, to a maximum of 18%. Since May 2006, the Bank has not increased the rates on existing home equity loans, despite the increase in the Prime rate. This action was taken to retain home equity loans that might otherwise have been refinanced.

We do not originate any consumer loans on an indirect basis. Indirect loans are contracts purchased from retailers of goods or services which have extended credit to their customers.

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

Consumer loans may entail greater risk than do one- to four-family mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as automobiles.

Loan Originations, Purchases, Sales and Repayments. We originate loans through referrals from real estate brokers and builders, our marketing efforts, and our existing and walk-in customers. While we originate both adjustable and fixed-rate loans, our ability to originate loans is dependent upon customer demand for loans in our market areas. Demand is affected by the local housing market, competition and the interest rate environment. During the 2006 and 2005 fiscal years, we originated and refinanced $148.0 million and $194.8 million of one- to four-family ARM loans, and $497.5 million and $514.0 million of one- to four-family fixed-rate mortgage loans, respectively.

12

In an effort to offset the impact of repayments and to retain our customers, we offer existing loan customers the opportunity to modify their original loan terms to terms generally consistent with those currently being offered in our market areas. This program helps ensure that we maintain the relationship with the customer and significantly reduces the amount of time it takes for borrowers to obtain current market pricing and terms without having to refinance their loan.

We purchase one- to four-family mortgage loans from nationwide lenders to reduce our risk of geographic concentration and to supplement our one- to four-family ARM loan origination volume as ARM loans are not considered as attractive to borrowers as fixed-rate mortgage loans in our local markets. The seller retains the servicing of these loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K. At September 30, 2006, our purchased loan portfolio from nationwide lenders totaled $1.12 billion, or 21.3% of our total loan portfolio.

The underwriting standards of the lenders from whom the Bank purchases loans are substantially similar to the Bank’s internal underwriting standards. Lenders are required to fully document all data sources for each application. “No Doc” or “Stated Income, Stated Assets” loans are not permitted. We believe these requirements reduce the credit risk associated with the loans we purchase. Before committing to purchase a pool of loans, the Bank’s Chief Lending Officer or Secondary Marketing Manager reviews specific criteria such as loan amount, credit scores, loan-to-value ratios, geographic location, and debt ratios of each loan in the pool. If the specific criteria do not meet the Bank’s underwriting standards and compensating factors are not sufficient, then a loan may be removed from the pool. Once the review of the specific criteria is complete and loans not meeting the Bank’s standards are removed from the pool, changes are sent back to the lender for acceptance and pricing. Before the pool is funded, an approved Bank loan underwriter reviews 25% of the loan files and the supporting documentation in the pool. If a loan does not meet the Bank’s underwriting standards for these loans, it is removed from the pool prior to funding.

During the 2006 and 2005 fiscal years, we purchased $165.3 million and $671.4 million of one- to four-family ARM loans and $12.8 million and $75.7 million of one- to four-family fixed-rate loans, respectively, from nationwide lenders. Included in the fiscal years 2006 and 2005 ARM loan volume was $73.9 million and $397.0 million, respectively, of interest-only loans. These loans do not typically require principal payments during their initial term. Of the interest-only loans purchased during the 2006 and 2005 fiscal years, approximately 59.4% of these loans do not require principal payments for five years and the other 40.6% do not require principal payments for ten years. Loans of this type generally are considered to be of greater risk to the lender because of the possibility that the borrower may default once principal payments are required. We attempt to mitigate the risk of interest-only loans by using prudent underwriting criteria. The interest-only loans we purchase have an average credit score of approximately 734 and an average loan-to-value ratio of less than 80% at the time of purchase.

We also purchase one- to four-family mortgage loans under contractual agreement through correspondent lenders located within our Kansas City and Wichita market areas and market areas within our geographic region. We purchase approved loans and the servicing rights, on a loan by loan basis. The loan product is originated for us to our specifications including interest rates, product description and underwriting standards. The loan products include fixed-rate and ARM loans. We set prices for loan products at least once each week. The underwriting generally is performed by a third party underwriter who is under contract with us to use our internal underwriting standards, which generally are in accordance with FNMA’s and FHLMC’s underwriting guidelines. During the 2006 and 2005 fiscal years, we purchased $80.6 million and $56.6 million of one- to four-family ARM loans and $70.6 million and $53.5 million of one- to four-family fixed-rate mortgage loans, respectively, from correspondent lenders.

The ability of financial institutions, including us, to originate or purchase large dollar volumes of real estate loans may be substantially reduced or restricted under certain economic conditions, with a resultant decrease in interest income from these assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K.

In September 2006, the Bank exchanged $404.8 million of mortgage loans with FHLMC for mortgage-related securities (“loan swap”). As required under Statement of Financial Accounting Standards (“SFAS”) No. 140 and Emerging Issues Task Force No. 88-11, management allocated the basis of the established mortgage servicing rights, excess servicing rights, and the fair value of the securities to establish the basis of each in the new securities. The

13

original basis of the securities received were adjusted for the general valuation allowance and net deferred fees/costs associated with the swapped loans. The Bank will earn 25 basis points on the servicing of the loans swapped. The fair value of the securities received was $395.8 million. Management classified the securities as trading securities and subsequent to September 30, 2006, sold the securities at approximately book value.

The following table shows our loan originations, loan purchases, loan sales and repayment activity for the periods indicated.

	Year Ended September 30,
	2006			2005		2004
	(Dollars in thousands)
Originations by type:
Adjustable-rate:
Real estate - one- to four-family	$	147,959		$	194,802	$	248,024
- multi-family		--			--		--
- commercial		--			--		--
Non-real estate - consumer		101,956			119,527		131,639
- commercial business		--			--		--
Total adjustable-rate loans originated		249,915			314,329		379,663
Fixed-rate:
Real estate - one- to four-family		497,458			514,023		490,963
- multi-family		9,688			4,418		4,233
- commercial		3,107			4,950		1,200
Non-real estate - consumer		51,078			29,802		17,761
- commercial business		--			--		12
Total fixed-rate originated		561,331			553,193		514,169
Total loans originated		811,246			867,522		893,832
Purchases:
Real estate - one- to four-family		329,319			857,207		537,065
- multi-family		--			--		--
- commercial		--			--		--
Non-real estate - consumer		--			--		--
Total loans purchased		329,319			857,207		537,065
Sales, Swaps and Repayments:
Real estate - one- to four-family		--			--		--
Total loans sold		--			--		--
Principal balance of loans related to loan swap transaction		404,819			--		--
Total sales and swaps		404,819			--		--
Principal repayments		973,054			1,026,175		992,425
Total reductions		1,377,873			1,026,175		992,425
Increase in other items, net		394			1,391		789
Net (decrease) increase	$	(236,914	)	$	699,945	$	439,261

14

Asset Quality

When a borrower fails to make a loan payment 15 days after the due date, a late charge is assessed and a late charge notice is mailed. All delinquent accounts are reviewed by collection personnel, who attempt to cure the delinquency by contacting the borrower. If the loan becomes 60 days delinquent, the collection personnel generally will send a personal letter to the borrower requesting payment of the delinquent amount in full, or the establishment of an acceptable repayment plan to bring the loan current, within the next 90 days. If the account becomes 90 days delinquent, and an acceptable repayment plan has not been agreed upon, the collection personnel generally will refer the account to legal counsel, with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 30 days to bring the account current. During this 30 day period a written repayment plan from the borrower which would bring the account current within the next 90 days may be approved by a designated Bank officer. Once the loan becomes 120 days delinquent, and an acceptable repayment plan has not been agreed upon, the collection officer, after receiving approval from the appropriate Bank officer as designated by our board of directors, will turn over the account to our legal counsel with instructions to initiate foreclosure.

At September 30, 2006, the asset quality of our portfolio of loans purchased from nationwide lenders is of essentially the same asset quality as loans originated locally.

Delinquent Loans. The following tables set forth our loans 30 - 89 delinquent days by type, number and amount as of the periods presented.

	Loans Delinquent for 30-89 Days
	2006					2005					2004
	Number		Amount			Number		Amount			Number		Amount
	(Dollars in thousands)
Real Estate Loans:
One- to four-family		256	$	19,612			267	$	25,111			310	$	22,252
Multi-family		1		222			--		--			--		--
Consumer		34		644			35		407			49		349
Total		291	$	20,478			302	$	25,518			359	$	22,601
Loans 30-89 days delinquent to total loans				0.39	%				0.47	%				0.48	%

15

Non-performing Assets. The table below sets forth the amounts and categories of non-performing assets. Loans are placed on non-accrual status when the loan is greater than 90 days delinquent. At all dates presented, we had no troubled debt restructurings which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than prevailing market rates, and no accruing loans more than 90 days delinquent. Real estate owned includes assets acquired in settlement of loans. The balance of one- to four-familyreal estate owned is represented by 35 properties totaling $2.4 million, or an average balance of less than $69 thousand per property.

	September 30,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Non-accruing loans:
One- to four-family	$	5,391		$	5,034		$	5,761		$	8,686		$	7,701
Consumer		218			124			310			258			273
Total non-accruing loans		5,609			5,158			6,071			8,944			7,974
Real estate owned:
One- to four-family		2,401			1,613			3,976			3,773			2,886
Construction and development(1)		--			--			273			273			--
Consumer		8			40			--			--			--
Total real estate owned		2,409			1,653			4,249			4,046			2,886
Total non-performing assets	$	8,018		$	6,811		$	10,320		$	12,990		$	10,860
Non-performing assets as a percentage of total assets		0.10	%		0.08	%		0.12	%		0.15	%		0.12	%
Non-performing loans as a percentage of total loans		0.11	%		0.09	%		0.13	%		0.21	%		0.16	%

At September 30, 2006, we had $5.6 million in non-accruing loans (these loans also may be referred to as “non-performing”), which constituted 0.11% of our total loan portfolio. At that date, there were no non-accruing loans to any one borrower or group of related borrowers that exceeded $1.0 million, either individually or in the aggregate. For the year ended September 30, 2006, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $105 thousand. The amount that was included in interest income on these loans, before non-accruing status, was $82 thousand for the year ended September 30, 2006.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OTS to be of lesser quality, as “special mention”, “substandard”, “doubtful” or “loss”. Assets classified as “special mention” are performing loans on which known information about the collateral pledged or the possible credit problems of the borrowers have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such assets in the non-performing asset categories. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent as those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When an insured institution classifies problem assets as either special mention, substandard or doubtful, it may establish allowances for loan losses in an amount deemed prudent by management and approved by the board of directors. General allowances may be established to recognize the inherent risk associated with lending activities, but unlike specific allowances, have not been allocated to specific problem assets within a portfolio of similar assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s

16

determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and the FDIC, which may order the establishment of additional loss allowances.

In connection with the filing of the Bank’s periodic reports with the OTS and 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 carrying amounts of our assets, exclusive of general valuation and specific allowances, classified as special mention, substandard or doubtful at September 30, 2006.

	Special Mention		Substandard		Doubtful
	Number	Amount	Number	Amount	Number	Amount
	(Dollars in thousands)
One- to four-family real estate	20	$ 1,238	102	$ 6,689	--	$ --
Real estate owned	--	--	36	2,409	--	--
Total classified assets	20	$ 1,238	138	$ 9,098	--	$ --

Provision for Loan Losses. We recorded a provision for loan losses in fiscal years 2006, 2005 and 2004 of $247 thousand, $215 thousand and $64 thousand, respectively. The provision for loan losses is charged to income to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed below under “Allowance for Loan Losses.” The provision for loan losses in fiscal year 2006 was based on management’s review of such factors which indicated that the allowance for loan losses was adequate to cover losses inherent in the loan portfolio as of September 30, 2006.

Allowance for Loan Losses. At September 30, 2006, our allowance for loan losses was $4.4 million or 0.08% of the total loan portfolio and approximately 79% of total non-accruing loans. This compares with an allowance for loan losses of $4.6 million or 0.08% of the total loan portfolio and approximately 89% of total non-accruing loans as of September 30, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K for a full discussion of the allowance for loan losses.

17

Historical net charge-offs are not necessarily indicative of the amount of net charge-offs that the Bank will realize in the future resulting from an increase in the one- to four-family mortgage loan portfolio. The following table provides a recap of our allowance for loan loss activity for the periods presented.

	Year Ended September 30,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Balance at beginning of period	$	4,598		$	4,495		$	4,550		$	4,825		$	4,837
Charge-offs:
One- to four-family		95			91			84			153			114
Consumer		37			56			77			144			85
Total charge-offs		132			147			161			297			199
Recoveries		1			35			42			22			3
Net charge-offs		131			112			119			275			196
Allowance on loans in the loan swap transaction		(281	)		--			--			--			--
Provisions charged to operations		247			215			64			--			184
Balance at end of period	$	4,433		$	4,598		$	4,495		$	4,550		$	4,825
Ratio of net charge-offs during the period to average
loans outstanding during the period (1)		--	%		--	%		--	%		--	%		--	%
Ratio of net charge-offs during the period to average
non-performing assets		1.77	%		1.31	%		1.02	%		2.31	%		2.11	%
Allowance as a percentage of non-accruing loans		79.03	%		89.14	%		74.04	%		50.87	%		60.51	%
Allowance as a percentage of total loans (end of period)		0.08	%		0.08	%		0.09	%		0.11	%		0.10	%

⁽¹⁾ Ratios calculate to be less than 0.01%.

18

The distribution of our allowance for loan losses at the dates indicated is summarized as follows:

	September 30,
	2006					2005					2004					2003					2002
			Percent					Percent					Percent					Percent					Percent
			of Loans					of Loans					of Loans					of Loans					of Loans
			in Each					in Each					in Each					in Each					in Each
	Amount of		Category			Amount of		Category			Amount of		Category			Amount of		Category			Amount of		Category
	Loan Loss		to Total			Loan Loss		to Total			Loan Loss		to Total			Loan Loss		to Total			Loan Loss		to Total
	Allowance		Loans			Allowance		Loans			Allowance		Loans			Allowance		Loans			Allowance		Loans
	(Dollars in thousands)
One- to four-family	$	3,796		94.18	%	$	3,866		94.78	%	$	3,561		94.19	%	$	3,468		93.99	%	$	3,792		94.13	%
Multi-family		46		0.92			203		0.74			177		0.74			272		0.89			322		0.91
Commercial real estate		8		0.16			67		0.16			65		0.18			59		0.18			38		0.11
Construction and
development(1)		258		0.46			129		0.47			197		0.60			143		0.52			177		0.53
Consumer		321		4.28			333		3.85			488		4.29			412		4.42			467		4.32
Commercial business		4		--			--		--			7		--			11		--			8		--
Unallocated		--		--			--		--			--		--			185		--			21		--
Total	$	4,433		100.00	%	$	4,598		100.00	%	$	4,495		100.00	%	$	4,550		100.00	%	$	4,825		100.00	%

⁽¹⁾ At September 30, 2006 there were no development loans in the loan portfolio.

19

Investment Activities

Federally chartered savings institutions have the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, government-sponsored enterprises, including callable agency securities, municipal bonds, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions also may invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. See“Regulation - Capitol Federal Savings Bank” and“Qualified Thrift Lender Test” for a discussion of additional restrictions on our investment activities.

The Chief Financial Officer has the primary responsibility for the management of the Bank’s investment portfolio, subject to the direction and guidance of the ALCO. The Chief Financial Officer considers various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of net deposit flows, the volume of loan sales and the anticipated demand for funds via withdrawals, repayments of borrowings, loan originations, and purchases.

The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including liquidity risk, interest rate risk, reinvestment risk and credit risk. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Cash flow projections are reviewed regularly and updated to assure that adequate liquidity is maintained. See“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K.

We classify securities as trading, available-for-sale or held-to-maturity at the date of purchase. Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in Gain on trading securities, net in the consolidated statements of income. Available-for-sale securities are reported at fair market value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) within stockholders’ equity, net of deferred income taxes. Management regularly reviews the available-for-sale portfolio for other-than-temporary impairment and records any such impairment in the consolidated statements of income. Held-to-maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. We have both the ability and intent to hold the held-to-maturity securities to maturity.

Investment Securities. Our investment securities portfolio consists of U.S. Government and agency notes, including those issued by government-sponsored enterprises such as FNMA and FHLMC, and municipal bonds. At September 30, 2006, our investment securities portfolio totaled $429.5 million. The portfolio consists of securities classified as held-to-maturity and available-for-sale. See “Note 2 of the Notes to Consolidated Financial Statements” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K.

Mortgage-Related Securities. Our mortgage-related securities portfolio consists primarily of securities issued by government-sponsored enterprises. At September 30, 2006, our mortgage-related securities portfolio totaled $2.08 billion. A portion of the mortgage-related securities portfolio consists of collateralized mortgage obligations (“CMOs”). CMOs are special types of pass-through debt securities in which the stream of principal and interest payments on the underlying mortgages or mortgage-related securities are used to create investment classes with different maturities and, in some cases, different amortization schedules, as well as a residual interest, with each such class possessing different risk characteristics. At September 30, 2006, we held CMOs totaling $10.9 million, none of which qualified as high risk mortgage securities as defined under OTS regulations. Our CMOs are currently classified as both held-to- maturity and available-for-sale. We do not purchase residual interest bonds.

During fiscal year 2006, our mortgage-related securities portfolio decreased $60.5 million from $2.15 billion at September 30, 2005 to $2.08 billion at September 30, 2006. Maturities and repayments totaled $564.4 million during fiscal year 2006 which were partially offset by $395.8 million of securities received in the loan swap transaction and $111.1 million of securities purchased. The securities received in the loan swap transaction were classified as trading and were sold subsequent to September 30, 2006 at approximately book value.

20

Of the $111.1 million of mortgage-related securities purchased, $11.1 million were fixed-rate with a weighted average life of 2.20 years and a weighted average yield of 6.42% and $100.0 million were adjustable-rate with a weighted average yield of 5.97% and an average of 2.08 years until their first repricing opportunity. See “Note 3 of the Notes to Consolidated Financial Statements” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K.

Mortgage-related securities generally yield less than the loans that underlie such securities because of the servicing fee retained by the servicer and the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-related securities are generally more liquid than individual mortgage loans and may be used to collateralize certain borrowings and public unit depositors of the Bank. In general, mortgage-related securities issued or guaranteed by FNMA or FHLMC are weighted at no more than 20% for risk-based capital purposes compared to the 50% risk-weighting assigned to most non-securitized mortgage loans.

When securities are purchased for a price other than par, the difference between the price paid and par is accreted to or amortized against the interest earned over the life of the security, depending on whether a discount or premium to par is paid. Movements in interest rates affect prepayment rates which, in turn, affect the average lives of mortgage-related securities and the speed at which the discount or premium is accreted to or amortized against earnings.

While mortgage-related securities, such as CMOs and Real Estate Mortgage Investment Conduits (“REMICs”), carry a reduced credit risk compared to whole loans, these securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of the underlying mortgage loans and so affect both the prepayment speed, and value, of the securities. As noted above, the Bank, on some transactions, pays a premium over par value for mortgage-related securities purchased. These premiums may be significant and may cause significant negative yield adjustments due to accelerated prepayments on the underlying mortgages.

21

The following table sets forth the composition of our investment and mortgage-related securities portfolio, excluding FHLB stock, at the dates indicated. Our investment securities portfolio at September 30, 2006 did not contain securities of any issuer with an aggregate book value in excess of 10% of our stockholders’ equity, excluding those issued by the government or its agencies. The carrying value of our investment in FHLB stock approximates its fair value. At September 30, 2006, 2005 and 2004, the carrying value of FHLB stock was $165.1 million, $182.3 million and $174.1 million, respectively, which was in excess of 10% of our stockholders’ equity.

	September 30,
	2006				2005				2004
	Carrying Value	% of Total		Fair Value	Carrying Value	% of Total		Fair Value	Carrying Value	% of Total		Fair Value
	(Dollars in thousands)
Trading Securities	$     396,904	100.00	%	$     396,904	$              --	--	%	$              --	$              --	--	%	$              --
Securities available-for-sale:
Mortgage-related securities	$     556,248	74.59	%	$     556,248	$     737,638	100.00	%	$     737,638	$  1,201,800	100.00	%	$  1,201,800
U.S. government and agency securities	188,264	25.25		188,264	--	--		--	--	--		--
Municipal investments	1,216	0.16		1,216	--	--		--	--	--		--
Total securities available-for-sale	$     745,728	100.00	%	$     745,728	$     737,638	100.00	%	$     737,638	$  1,201,800	100.00	%	$  1,201,800
Securities held-to-maturity:
Mortgage-related securities	$  1,131,634	82.50	%	$  1,101,159	$  1,407,616	76.58	%	$  1,383,268	$  1,446,908	69.40	%	$  1,443,168
U.S. government and agency securities	240,000	17.50		233,525	430,499	23.42		424,952	638,079	30.60		645,601
Total securities held-to-maturity	$  1,371,634	100.00	%	$  1,334,684	$  1,838,115	100.00	%	$  1,808,220	$  2,084,987	100.00	%	$  2,088,769
Total securities	$  2,514,266			$  2,477,316	$  2,575,753			$  2,545,858	$  3,286,787			$  3,290,569

22

The composition and maturities of the investment and mortgage-related securities portfolio, excluding FHLB stock, are indicated in the following table. The trading securities were all sold subsequent to September 30, 2006 for approximately book value. Yields on tax-exempt investments are not calculated on a taxable equivalent basis.

	September 30, 2006
	Less than 1 year			1 to 5 years			5 to 10 years			Over 10 years			Total Securities
		Weighted			Weighted			Weighted			Weighted			Weighted
	Carrying	Average		Carrying	Average		Carrying	Average		Carrying	Average		Carrying	Average		Fair
	Value	Yield		Value	Yield		Value	Yield		Value	Yield		Value	Yield		Value
	(Dollars in thousands)
Trading securities	$          --	--	%	$             --	--	%	$        8,077	4.50	%	$        388,827	5.28	%	$        396,904	5.26	%	$       396,904
Securities available-for-sale:
Mortgage-related securities	$            5	8.00	%	$     14,281	6.37	%	$      11,251	6.00	%	$        530,711	5.20	%	$        556,248	5.25	%	$       556,248
U.S. government and agency securities	45,213	5.22		143,051	4.99		--	--		--	--		188,264	5.05		188,264
Municipal investments	--	--		--	--		--	--		1,216	5.25		1,216	5.25		1,216
Total securities available-for-sale	$45,218	5.22	%	$    157,332	5.12	%	$      11,251	6.00	%	$        531,927	5.20	%	$        745,728	5.20	%	$       745,728
Securities held-to-maturity:
Mortgage-related securities	$           --	--	%	$      56,938	3.50	%	$             --	--	%	$     1,074,696	4.29	%	$     1,131,634	4.25	%	$    1,101,159
U.S. government and agency securities	--	--		190,000	3.23		--	--		50,000	5.83		240,000	3.77		233,525
Total securities held-to-maturity	$           --	--	%	$    246,938	3.29	%	$             --	--	%	$     1,124,696	4.36	%	$     1,371,634	4.17	%	$    1,334,684
Total securities	$   45,218	5.22	%	$    404,270	4.00	%	$      19,328	5.37	%	$     2,045,450	4.75	%	$     2,514,266	4.64	%	$    2,477,316

23

Sources of Funds

General. Our sources of funds are deposits, borrowings, repayment of principal and interest on loans and mortgage-related securities, interest earned on or maturities of other investment securities and funds provided from operations.

Deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms. Our deposits consist of passbook and passcard savings accounts, money market accounts, interest-bearing and non-interest bearing checking accounts and certificates of deposit. We rely primarily upon competitive pricing policies, marketing and customer service to attract and retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition.

The variety of deposit accounts we offer has allowed us to utilize strategic pricing to obtain funds and to respond with flexibility to changes in consumer demand. We endeavor to manage the pricing of our deposits in keeping with our asset and liability management, liquidity and profitability objectives. Based on our experience, we believe that our deposits are stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them has been, and will continue to be, significantly affected by market conditions.

The following table sets forth our deposit flows during the periods indicated. Included in the table are brokered and public unit deposits which totaled $233.5 million, $213.6 million and $194.6 million at September 30, 2006, 2005 and 2004, respectively. The growth in wholesale deposits from September 30, 2004 to September 30, 2006 partially offset the decrease in retail deposits for each year presented. During the years presented, the Bank experienced aggressive pricing by other financial institutions in the Bank’s local markets. The decrease in retail deposits is primarily a result of the Bank not matching top competitors’ rates because of the likely adverse impact on earnings.

	Year Ended September 30,
	2006			2005			2004
	(Dollars in thousands)
Opening balance	$	3,960,297		$	4,127,774		$	4,238,145
Deposits		7,422,474			6,935,934			6,507,746
Withdrawals		7,594,727			7,190,694			6,700,409
Interest credited		112,387			87,283			82,292
Ending balance	$	3,900,431		$	3,960,297		$	4,127,774
Net decrease	$	(59,866	)	$	(167,477	)	$	(110,371	)
Percent decrease		(1.51	)%		(4.06	)%		(2.60	)%

24

The following table sets forth the dollar amount of deposits in the various types of deposit programs we offered for the periods indicated.

	Year Ended September 30,
	2006					2005					2004
			Percent					Percent					Percent
	Amount		of Total			Amount		of Total			Amount		of Total
	(Dollars in thousands)
Transactions and Savings
Deposits:
Checking	$	402,898		10.33	%	$	398,490		10.06	%	$	380,765		9.22	%
Passbook and Passcard		106,347		2.73			121,133		3.06			125,992		3.05
Money market		808,910		20.74			873,570		22.06			929,862		22.53
Total non-certificates		1,318,155		33.80			1,393,193		35.18			1,436,619		34.80
Certificates (by rate):
0.00 - 0.99%		125		--			123		--			5,109		0.12
1.00 - 1.99%		--		--			137,442		3.47			636,282		15.41
2.00 - 2.99%		215,891		5.53			863,948		21.82			1,236,086		29.95
3.00 - 3.99%		541,236		13.88			905,058		22.85			449,464		10.89
4.00 - 4.99%		1,323,434		33.93			600,367		15.16			228,475		5.54
5.00 - 5.99%		497,453		12.75			2,611		0.07			22,221		0.54
6.00 - 6.99%		4,137		0.11			57,555		1.45			113,518		2.75
Total certificates		2,582,276		66.20			2,567,104		64.82			2,691,155		65.20
Total deposits	$	3,900,431		100.00	%	$	3,960,297		100.00	%	$	4,127,774		100.00	%

The following table sets forth the rate and maturity information for our certificate of deposit portfolio as of September 30, 2006.

	Amount		Rate
Certificates maturing:	(Dollars in thousands)
Within three months	$	518,974		4.40	%
Over three to six months		314,279		4.04
Over six months to one year		825,885		4.45
Over one to two years		695,580		4.38
Over two to three years		143,703		4.22
Over three to four years		47,735		4.10
Over four to five years		34,466		4.47
Thereafter		1,654		4.37
	$	2,582,276		4.35	%

25

The following table sets forth the maturity periods of our certificates of deposit in amounts of $100 thousand or more at September 30, 2006.

	Amount		Rate
	(Dollars in thousands)
Certificates maturing:
Three months or less	$	235,949		5.00	%
Over three months through six months		67,286		4.43
Over six months through twelve months		147,097		4.60
Over twelve months		164,017		4.52
	$	614,349		4.71	%

The board of directors has authorized the utilization of brokers to obtain deposits as a source of funds. The Bank has entered into several relationships with nationally recognized wholesale deposit brokerage firms to accept deposits from these firms. Depending on market conditions, the Bank may use brokered deposits from time to time to fund asset growth and gather deposits that may help to manage interest rate risk. The Bank’s policies limit the amount of brokered deposits that it may have at any time to 15% of total deposits. The rates paid on brokered deposits plus fees are generally equivalent to rates offered by FHLB on advances and comparable to some rates paid on retail deposits. At September 30, 2006 and 2005, the balance of brokered deposits was $4.3 million and $44.3 million, respectively.

The board of directors also has authorized the utilization of public unit deposits as a source of funds. The Bank’s policies limit the amount of public unit deposits that it may have at any time to 10% of total deposits. In order to qualify to obtain such deposits, the Bank must have a branch in each county in which it collects public unit deposits. At September 30, 2006 and 2005, the balance of public unit deposits was $229.2 million and $169.3 million, respectively.

Borrowings. Although deposits are our main source of funds, we may utilize borrowings when, at the time of the borrowing, they can be invested at a positive rate spread, when we desire additional capacity to fund loan demand or when they help us meet our asset and liability management objectives. Historically, our borrowings primarily have consisted of advances from FHLB and occasionally securities sold under agreement to repurchase. During the year, from time to time, we utilized our line-of-credit that we maintain at FHLB. At September 30, 2006, we did not have any borrowings on our line-of-credit. See “Note 8 of the Notes to Consolidated Financial Statements in the Annual Report to Stockholders” attached as Exhibit 13 to this Annual Report on Form 10-K.

The Bank has interest rate swaps with a notional amount of $800.0 million to hedge an equal amount of FHLB advances. The interest rate swaps are designated as fair value hedges and the Bank accounts for the hedges using the shortcut method. Unrealized gains (losses) in the fair value of the interest rate swaps are offset by an unrealized gain (loss) on the hedged FHLB advances. At September 30, 2006, the net fair value adjustment on the interest rate swaps was an unrealized loss of $27.3 million. The carrying amount of the FHLB advances was reduced by an identical amount.

We may obtain advances from FHLB upon the security of our blanket pledge agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Commitments” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate, maturity, repayment, and convertible features, if any. At September 30, 2006, we had $3.30 billion in FHLB advances outstanding.

In 2004, the Company formed Capitol Federal Financial Trust I (the “Trust”), which issued $52.0 million of variable rate cumulative trust preferred securities in a private transaction exempt from registration under the Securities Act of 1933. The Trust used the proceeds from the sale of its trust preferred securities and from the sale of $1.6 million of its common securities to the Company to purchase $53.6 million of Junior Subordinated Deferrable Interest Debentures (the “Debentures”) which are the sole assets of the Trust. See “Note 10 of the Notes to Consolidated Financial Statements” in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K. Interest on the Debentures is due quarterly in January, April, July and October until the maturity date of April 7, 2034. The interest rate on the Debentures, which is identical to the distribution rate paid on the trust securities and resets at each interest payment, is based upon the three month LIBOR rate plus 275 basis points. Principal is due at maturity. The Debentures are callable, in part or whole, beginning on April 7, 2009, at par, at the option of the Company.

26

Redemption of the Debentures by the Company will result in redemption of a like amount of trust preferred securities by the Trust. There are certain covenants that the Company is required to comply with regarding the Debentures. These covenants include a prohibition on cash dividends in the event of default or deferral of interest on the Debentures, annual certifications to the Trust and other covenants related to the payment of interest and principal and maintenance of the Trust. The Company was in compliance with all the covenants at September 30, 2006.

The following table sets forth certain information relating to each category of short-term borrowings for which the average balance outstanding during the period was more than 30% of stockholders’ equity at the end of the period. The average balance, maximum balance, and weighted average interest rate during fiscal year 2006 reflect all FHLB advances, including the FHLB line of credit, that were scheduled to mature within one year at any time during fiscal year 2006.

	(Dollars in thousands)
Balance at September 30, 2006	$ 750,000
Maximum balance during fiscal year 2006	1,019,000
Average balance during fiscal year 2006	817,332
Weighted average interest rate during fiscal year 2006	3.56%
Weighted average interest rate at September 30, 2006	3.52%

Subsidiary and Other Activities

As a federally chartered savings bank, we are permitted by OTS regulations to invest up to 2% of our assets, or $164.0 million at September 30, 2006, in the stock of, or as unsecured loans to, service corporation subsidiaries. We may invest an additional 1% of our assets in service corporations where such additional funds are used for inner-city or community development purposes. At September 30, 2006, the Bank had one subsidiary, Capitol Funds, Inc. As of September 30, 2006, our total investment in this subsidiary was $3.3 million. Capitol Funds, Inc. has a wholly owned subsidiary, Capitol Federal Mortgage Reinsurance Company (“CFMRC”). CFMRC serves as a reinsurance company for the private mortgage insurance companies the Bank uses in its normal course of operations. CFMRC assumes the risk of default on loans exceeding a five percent loss and less than a ten percent loss. During fiscal 2006, Capitol Funds, Inc. reported consolidated net income of $232 thousand which included net income of $236 thousand from CFMRC.

27

REGULATION

General

The Bank, as a federally chartered savings institution, is subject to federal regulation and oversight by the OTS extending to all aspects of its operations. The Bank also is subject to regulation by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law, and to requirements established by the Federal Reserve Board. Such regulation and supervision primarily is intended for the protection of depositors and borrowers and not for the purpose of protecting stockholders. The investment and lending authority of savings institutions is prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations.

The OTS regularly examines the Bank and prepares reports on the Bank’s operations, including any deficiencies. These reports are presented to the Bank’s board of directors. The FDIC also has the authority to examine the Bank in its role as the administrator of the Deposit Insurance Fund (“DIF”) which is the new fund established upon the merger of the Savings Association Insurance Fund (“SAIF”) and the Bank Insurance Fund (“BIF”) in March 2006. The Bank’s relationship with its depositors and borrowers is also regulated to a great extent by both federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of the Bank’s mortgage requirements. Any material change in such regulations, whether by the FDIC, the OTS, the Federal Reserve Board, Congress or states in which we do business, could have a material adverse impact on MHC, the Company and the Bank and their operations.

Capitol Federal Savings Bank MHC

MHC is a federal mutual holding company within the meaning of Section 10(o) of the Home Owners’ Loan Act. As such, MHC is required to register with and be subject to examination and supervision of the OTS as well as certain reporting requirements. In addition, the OTS has enforcement authority over MHC and its non-savings institution subsidiaries, if any. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of the Bank.

A mutual holding company is permitted to, among other things:

·   invest in the stock of a savings institution;

·   acquire a mutual institution through the merger of such institution into a savings institution subsidiary of such mutual holding company;

·   merge with or acquire another mutual holding company of a savings institution;

·   acquire non-controlling amounts of the stock of savings institutions and savings institution holding companies, subject to certain restrictions;

·   invest in a corporation the capital stock of which is available for purchase by a savings institution under Federal law or under the law of any state where a subsidiary savings institution has its home office;

·   furnish or perform management services for a savings institution subsidiary of such company;

·   hold, manage or liquidate assets owned or acquired from a savings institution subsidiary of such company;

·   hold or manage properties used or occupied by a savings institution subsidiary of such company; and

·   act as a trustee under deed or trust.

In addition, a mutual holding company may engage in the activities of a multiple savings and loan holding company which are permissible by statute and the activities of financial holding companies under the Bank Holding Company Act of 1956, as amended, subject to prior approval by the OTS.

Capitol Federal Financial

The purpose and powers of the Company are to pursue any or all of the lawful objectives of a federal mutual holding company and to exercise any of the powers accorded to a mutual holding company.

If the Bank fails the qualified thrift lender test, within one year of such failure MHC and the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a savings and loan holding company. If the Bank fails the test a second time, MHC and the Company must immediately register as, and become subject to, the

28

restrictions applicable to a bank holding company. See “Qualified Thrift Lender Test.”

MHC and the Company must obtain approval from the OTS before acquiring control of any other savings institution. Interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings institution.

Capitol Federal Savings Bank

The OTS has extensive authority over the operations of savings institutions. As part of this authority, the Bank is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and also may be examined by the FDIC. The last regular OTS examination of the Bank was as of December 31, 2005. All savings institutions are subject to a semi-annual assessment, based upon the savings institution’s total assets, to fund the operations of the OTS. The Bank’s OTS assessment for the fiscal year ended September 30, 2006 was $1.3 million.

The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank, the Company and MHC. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required.

In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws and the Bank is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings institutions also generally are authorized to branch nationwide. The Bank is in compliance with the noted restrictions.

The Bank’s general permissible lending limit for loans-to-one-borrower is equal to 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At September 30, 2006, the Bank’s lending limit under this restriction was $116.9 million. The Bank is in compliance with the loans-to-one-borrower limitation.

The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as information systems, loan underwriting and documentation, asset growth and quality, earnings, internal controls and audit systems, interest rate risk exposure, and excessive compensation and benefits. Any institution that fails to comply with these standards must submit a compliance plan.

Insurance of Accounts and Regulation by the FDIC

The Bank is a member of the DIF, which is administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The FDIC merged the BIF and the SAIF to form the DIF on March 31, 2006 in accordance with the Federal Deposit Insurance Reform Act of 2005. FDIC maintains the DIF by assessing depository institutions an insurance premium. The FDIC Board approved a new risk-based premium system in November 2006, effective January 1, 2007. The FDIC’s new regulations for risk-based deposit insurance assessments establish four Risk Categories. Risk Category I, for well-capitalized institutions that are financially sound with only a few minor weaknesses, includes approximately 95% of FDIC-insured institutions. Risk Categories II, III, and IV present progressively greater risks to the deposit insurance fund. Effective January 1, 2007, Risk Category I institutions pay quarterly assessments for deposit insurance at annual rates of five to seven basis points. The rates for Risk Categories II, III, and IV are seven, 28, and 43 basis points, respectively. Rates are subject to change with advance notice to insured institutions.

Within Risk Category I, the precise rate for an individual institution with less than $10 billion in assets is generally determined by a formula using CAMELS ratings which are assigned in examinations, and financial ratios. A different

29

method applies for larger institutions. The rate for an individual institution is applied to its assessment base, which is generally its deposit liabilities subject to certain adjustments. An institution insured by the FDIC on December 31, 1996 which had previously paid assessments (or its successor) is eligible for certain credit against deposit insurance assessments. As a result of the Bank’s credit, it anticipates no premium expense during calendar year 2007.

The Bank, like other former SAIF insured institutions and BIF insured institutions, is required to pay a Financing Corporation (“FICO”) assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the first quarter of fiscal year 2007, the annual rate for this assessment is 1.24 basis points for each $100 in domestic deposits. These assessments, which may be revised based upon the level of BIF and former SAIF classified insured institution’s deposits, will continue until the bonds mature in 2017 through 2019.

Regulatory Capital Requirements

Federally insured savings institutions, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio or core capital requirement and a risk-based capital requirement applicable to such savings institutions. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

As a result of the prompt corrective action regulations, to be adequately capitalized, a savings institution must have a ratio of core capital to total assets of at least 4% (unless its supervisory condition permits 3%), a ratio of core capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. To be well capitalized, these ratios must be at least 5%, 6% and 10%, respectively. On September 30, 2006, the Bank had core capital of $783.6 million, total risk-based capital of $781.4 million and risk-weighted assets of $3.47 billion. It had a core capital ratio of 9.5%, a core capital to risk-weighted assets ratio of 22.6% and a total risk weighted capital ratio of 22.5%.

Core capital generally consists of common stockholders’ equity and retained earnings, and noncumulative perpetual preferred stock and related surplus, adjusted for such items as certain intangible assets, disallowed servicing assets and accumulated gains/losses on available-for-sale securities. At September 30, 2006, the Bank had $433 thousand of technology based intangible assets and $692 thousand of disallowed servicing assets which were deducted from core capital and $1.5 million of accumulated losses on available-for-sale securities, net of taxes, which were added to core capital.

Total risk-based capital consists of core capital, as defined above, plus supplementary capital, less certain assets including equity investments. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings institution to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At September 30, 2006, the Bank had $4.4 million of general valuation loan loss allowances, which was less than 1.25% of risk-weighted assets. At September 30, 2006, the Bank had $6.6 million of equity investments deducted from total capital.

In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an approved insurer.

Under the prompt corrective action regulations, the OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings institutions that fail to meet their capital requirements. The OTS generally is required to take action to restrict the activities of any institution that is less than adequately capitalized. Any such institution must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS may also impose additional restrictions to significantly undercapitalized institutions.

As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized institution must agree that it will enter into a limited capital maintenance guarantee with respect to the institution’s achievement of its capital requirements.

30

Any savings institution that fails to comply with its capital plan or has core capital or core capital to risk-weighted assets ratios of less than 3% or a total capital to risk-weighted assets ratio of less than 6% and is considered “significantly undercapitalized” must be made subject to one or more additional specified actions and operating restrictions which may cover all aspects of its operations and may include a forced merger or acquisition of the institution. An institution that becomes “critically undercapitalized” because it has a tangible equity to total assets ratio of 2% or less is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized institutions. In addition, the OTS must appoint a receiver, or conservator with the concurrence of the FDIC, for a savings institution, with certain limited exceptions, within 90 days after it becomes critically undercapitalized.

The OTS generally is authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The imposition by the OTS or the FDIC of any of these measures on the Bank may have a substantial adverse effect on its operations and profitability.

Limitations on Dividends and Other Capital Distributions

OTS regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

Generally under OTS regulations, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. It is generally required under OTS regulations that the Bank remain well-capitalized before and after the proposed distribution. However, an institution deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. Savings institutions proposing to make any capital distribution within these limits need only submit written notice to the OTS 30 days prior to such distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. Savings institutions that desire to make a larger capital distribution, or are under special restrictions, or are not, or would not be, well-capitalized following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. See “Regulatory Capital Requirements.”

Due to the impact that refinancing FHLB advances had on earnings in 2004, the Bank cannot distribute capital to the Company unless it receives waivers of the safe harbor regulation from the OTS during the current waiver period. The Bank had previously reported that a waiver would be required for capital distributions through at least December 31, 2006. As a result of net interest margin compression earnings may not be at the levels originally forecast, which would likely result in a waiver being required through December 31, 2007. Currently, the Bank has authorization from the OTS to distribute capital from the Bank to the Company through the quarter ending June 30, 2007. So long as the Bank continues to maintain excess capital, operate in a safe and sound manner and comply with the interest rate risk management guidelines of the OTS, it is management’s belief that we will be able to continue to receive waivers to distribute, from the Bank to the Company, capital equal to the earnings of the Bank.

Anti-Money Laundering and Customer Identification

The Bank is subject to OTS regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Title III of the USA PATRIOT Act and the related OTS regulations impose the following requirements with respect to financial institutions:

·   establishment of anti-money laundering programs;

·   establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;

·   establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering;

·   prohibitions on correspondent accounts for foreign shell banks and compliance with record keeping obligations with respect to correspondent accounts of foreign banks.

31

Privacy Standards

The Bank is subject to OTS regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “non-public personal information” to customers at the time of establishing the customer relationship and annually thereafter.

The regulations also require the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, the Bank is required to provide its customers with the ability to “opt-out” of having the Bank share their non-public personal information with unaffiliated third parties, subject to certain exceptions.

The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.

Qualified Thrift Lender Test

All savings associations, including the Bank, are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its portfolio assets in qualified thrift investments (primarily residential housing related loans and investments) on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its total assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. At September 30, 2006, the Bank met the test and has always met the test.

Any savings association that fails to meet the qualified thrift lender test must convert to a national bank charter, unless it requalifies as a qualified thrift lender and thereafter remains a qualified thrift lender. If such an institution has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings institution and a national bank. Such institution is limited to national bank branching and it is subject to national bank limits for payment of dividends. If such an institution has not requalified or converted to a national bank within three years after the failure, it must divest all investments and cease all activities not permissible for a national bank. If any institution that fails the qualified thrift lender test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See “Regulation - Capitol Federal Financial.”

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, any federally chartered savings bank, including the Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The OTS must assess the Bank’s record of meeting the credit needs of its community and take such record into account in its evaluation of certain applications by the Bank.

Current CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests:

·   a lending test, to evaluate the institution’s record of making loans in its service areas;

·   an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and

·   a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.

The CRA also requires that CRA evaluations be public. The Bank has received a “satisfactory” rating in its most recent CRA examination. All insured depository institutions must publicly disclose certain agreements that are in fulfillment of the CRA. The Bank has no such agreements in place at this time.

32

Transactions with Affiliates

Generally, transactions between a savings institution or its subsidiaries and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the institution’s capital. Affiliates of the Bank include MHC, the Company, and any company which is under common control with the Bank. In addition, a savings institution may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings institutions as affiliates on a case-by-case basis.

Certain transactions with directors, officers or controlling persons are also subject to restrictions under regulations enforced by the OTS. These regulations also impose restrictions on loans to such persons and their related interests. Among other things, such loans must generally be made on terms and conditions substantially the same as for loans to unaffiliated individuals. As of September 30, 2006 management believes such loans were made under terms and conditions substantially the same as loans made to unaffiliated individuals and otherwise complied with applicable regulations.

Federal Securities Law

The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934.

The Company stock held by persons who are affiliates of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. Affiliates are generally considered to be officers, directors and principal stockholders. If the Company meets specified current public information requirements, each affiliate of the Company will be able to sell in the public market, without registration, a limited number of shares in any three-month period.

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which was signed into law in July 2002, impacts all companies with securities registered under the Securities Exchange Act of 1934, including the Company. Sarbanes-Oxley created new requirements in the areas of corporate governance and financial disclosure including, among other things:

·   increased responsibility for Chief Executive Officers and Chief Financial Officers with respect to the content of filings with the SEC;

·   enhanced requirements for audit committees, including independence and disclosure of expertise;

·   enhanced requirements for auditor independence and the types of non-audit services that auditors can provide;

·   enhanced requirements for controls and procedures;

·   accelerated filing requirements for SEC reports;

·   disclosure of a code of ethics; and

·   increased disclosure and reporting obligations for companies, their directors and their executive officers.

Certifications of the Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the “Exhibits” section of this Form 10-K.

Federal Reserve System

The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, primarily checking accounts. At September 30, 2006, the Bank was in compliance with these reserve requirements.

Savings institutions are authorized to borrow from the Federal Reserve Bank “discount window,” but Federal Reserve Board regulations require institutions to exhaust other reasonable alternative sources of funds, including FHLB

33

borrowings, before borrowing from the Federal Reserve Bank. The Bank has not established the required relationship with the Federal Reserve Bank to borrow from the discount window.

Federal Home Loan Bank System

The Bank is a member of FHLB Topeka, which is one of 12 regional Federal Home Loan Banks that administers the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the board of directors of FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from FHLB are required to be fully secured by sufficient collateral as determined by FHLB. In addition, all long-term advances are required to provide funds for residential home financing.

As a member, the Bank is required to purchase and maintain stock in FHLB. For the year ended September 30, 2006, the Bank had an average outstanding balance of $174.1 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLB stock. Over the past three fiscal years such dividends have averaged 4.62% and averaged 5.69% for fiscal year 2006. For the year ended September 30, 2006, stock dividends paid by FHLB to the Bank totaled $9.9 million.

Under federal law FHLBs are required to provide funds for the resolution of troubled savings institutions and for community investment and low- and moderate-income housing. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. A reduction in value of the Bank’s FHLB stock may result in a corresponding reduction in the Bank’s capital.

Federal Savings and Loan Holding Company Regulation

MHC and the Company are unitary savings and loan holding companies within the meaning of the Home Owners’ Loan Act (“HOLA”). As such, MHC and the Company are registered with the OTS and are subject to the OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over MHC, the Company and the Bank. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the Bank.

The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

TAXATION

Federal Taxation

General. We are subject to federal income taxation in the same general manner as other corporations with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank. Our federal income tax returns have been closed without audit by the IRS for the fiscal years ended September 30, 2002 through September 30, 2005 as of the close of business on December 15, 2005.

We file a consolidated federal income tax return using the accrual method of accounting. To the extent of the Company’s accumulated earnings and profits, any cash distributions made by the Company to its stockholders are considered to be taxable dividends and not as a non-taxable return of capital to stockholders for federal and state tax purposes. The Bank maintains a tax-sharing agreement with the Company and its subsidiary to provide for the payment of taxes based upon the taxable earnings of each company.

Bad Debt Reserves.Prior to the Small Business Job Protection Act, the Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act, savings associations must now use the specific charge-off method in computing bad debt deductions beginning with their 1996 federal tax return.

34

In addition, federal legislation required the Bank to recapture, over a six-year period, the excess of tax bad debt reserves at September 30, 1997 over those established as of the base year reserve balance as of September 30, 1989. The full amount of such reserve has been recaptured for the Bank. The Bank continues to utilize the reserve method in determining its privilege tax obligations to the State of Kansas. Prior to the Small Business Job Protection Act, bad debt reserves created prior to the year ended September 30, 1997 were subject to recapture into taxable income should the Bank fail to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions or cease to qualify as a Bank as defined in Code section 581.

State Taxation

The earnings of the Company may be combined with the Bank and its subsidiary for purposes of the Kansas privilege tax if certain principles of unitary relationships are maintained. Certain principles of unitary relationships are currently maintained so the Company files a consolidated Kansas privilege tax return. For Kansas privilege tax purposes, for taxable years beginning after 1997, the minimum tax rate is 4.5% of earnings, which is calculated based on federal taxable income, subject to certain adjustments.

As of September 30, 2006, the Company is currently undergoing a Kansas state tax audit for the years ended September 30, 2002, 2003 and 2004. Prior to September 30, 2006, the Company received notification from the state of a potential net tax liability of $280 thousand for the years under audit. The Company did not accrue for the potential net tax liability at September 30, 2006 as management believes the tax position for the years under audit is defendable. The Company intends to pursue all opportunities available in defending the tax position taken on the tax returns under audit.

Employees

At September 30, 2006, we had a total of 738 employees, including 142 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

Executive Officers of the Registrant

John C. Dicus. Age 73 years. Mr. Dicus is Chairman of the Board of Directors. He has served the Bank in various capacities since 1959. He served as President of the Bank from 1969 until 1996. He has served as Chairman of the Bank since 1989 and of the Company since its inception in March 1999. He also served as Chief Executive Officer of the Bank from 1989 to January 2003, and of the Company from March 1999 until January 2003. He is the father of Mr. John B. Dicus.

John B. Dicus. Age 45 years. Mr. Dicus is Chief Executive Officer and President of the Bank and the Company. He took over the responsibilities of Chief Executive Officer effective January 1, 2003. He has served as President of the Bank since 1996 and of the Company since its inception in March 1999. Prior to accepting the responsibilities of CEO he served as Chief Operating Officer of the Bank and the Company. Prior to that, he served as the Executive Vice President of Corporate Services for the Bank for four years. He has been with the Bank in various other positions since 1985. He is the son of Mr. John C. Dicus.

M. Jack Huey. Age 57 years. Mr. Huey has served as Executive Vice President and Chief Lending Officer of the Bank since June 2002. Since June 2002 he has also served as President of Capitol Funds Inc., a subsidiary of the Bank. Since August 2002, he has served as President of CFMRC. Prior to that, he served as the Central Region Lending Officer since joining the Bank in 1991.

Larry K. Brubaker. Age 59 years. Mr. Brubaker has been employed with the Bank since 1971 and currently serves as Executive Vice President for Corporate Services of Capitol Federal Savings, a position he has held since 1997. Prior to that, he was employed by the Bank as the Eastern Region Manager for seven years.

R. Joe Aleshire. Age 59 years. Mr. Aleshire has been employed with the Bank since 1973 and currently serves as Executive Vice President for Retail Operations of Capitol Federal Savings, a position he has held since 1997. Prior to that, he was employed by the Bank as the Wichita Area Manager for 17 years.

Kent G. Townsend. Age 45 years. Mr. Townsend serves as Executive Vice President, Chief Financial Officer and Treasurer of the Bank and the Company. Mr. Townsend was promoted to Executive Vice President, Chief Financial Officer and Treasurer on September 1, 2005. Prior to that, he served as Senior Vice President, a position he held since April 1999, and Controller of the Company, a position he held since March 1999. He has served in similar positions

35

with the Bank since September 1995. He served as the Financial Planning and Analysis Officer with the Bank for three years and other financial related positions since joining the Bank in 1984.

Tara D. Van Houweling. Age 33 years. Ms. Van Houweling has been employed with the Bank and Company since May 2003 and currently serves as First Vice President, Principal Accounting Officer and Reporting Director. She has held the position of Reporting Director since May 2003. Prior to being employed by the Bank and Company, Ms. Van Houweling was the Assistant Controller for First Specialty Insurance Corporation, a subsidiary of Employers Reinsurance Corporation from August 2002 to May 2003. Prior to that, Ms. Van Houweling was employed by Deloitte & Touche, LLP in the Audit Services Department as an Audit Senior and then Audit Manager from June 1999 to August 2002.

Item 1A. Risk Factors

The following is a summary of risk factors relating to the operations of the Bank and the Company. These risk factors are not necessarily presented in order of significance.

Changes in interest rates could have an adverse impact on our results of operations and financial condition.

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, mortgage-related securities, and investments, and the interest paid on deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of fluctuation. This type of risk is known as interest rate risk, and is affected by prevailing economic and competitive conditions.

During the majority of fiscal year 2006, the yield curve was flat or slightly inverted, which generally means the yield on treasuries with maturities longer than one year were either slightly lower than longer-term treasuries, equaled or exceeded the yield on long-term treasuries. This yield curve environment sustained the compression of the Company’s net interest margin during fiscal year 2006. The forward yield curve generally indicates that the market expects interest rates on treasury securities across all maturities to remain generally flat, with changes in rates of less than 25 basis points, through the first fiscal quarter of 2007. Although management continuously monitors the interest rate risk profile of the Bank, and is currently undertaking strategies to modify the Bank’s interest rate risk sensitivity, the current inverted-to-flat yield curve scenario is likely to cause a continuation of the net interest margin compression.

The impact of changes in interest rates on assets is generally observed on the balance sheet and income statement in later periods than the impact of changes on liabilities due to the duration of assets vs. liabilities, and also to the time lag between our commitment to originate or purchase a loan and the time we fund the loan, during which time interest rates may change. Interest-bearing liabilities tend to reflect changes in interest rates immediately, so the difference in timing may have an adverse effect on our net interest income.

Changes in interest rates can also have an adverse effect on our financial condition, as our trading securities and available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We record changes in the estimated fair value of our trading securities in the consolidated statement of income. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities.

Changes in interest rates as they relate to customers can also have an adverse impact on our financial condition and results of operations. In times of rising interest rates, default risk may increase among customers with adjustable-rate loans. Rising interest rate environments also entice customers with adjustable-rate loans to refinance into fixed-rate loans which further exposes the Bank to interest rate risk if refinanced internally. If the loan is refinanced externally, the Bank could be unable to reinvest cash received from the resulting prepayments at rates comparable to existing securities and loans, which subjects the Bank to reinvestment risk. Generally, prepayments occur in decreasing interest rate environments, so the payments received will be invested at the prevailing (decreasing) market rate. An influx of prepayments can result in an excess of liquidity, which could impact our net interest income if profitable reinvestment opportunities are not immediately available. Whereas prepayment rates are based on demographics, local economic factors, and seasonality, the main factors affecting prepayment rates are prevailing interest rates and competition. Fluctuations in interest rates also affect customer demand for deposit products. Local competition for deposit dollars could affect our ability to attract deposits, or could result in us paying more for deposits.

Our level of assets directly impacts the calculation of capital for the purposes of regulation by the OTS. The OTS Thrift Bulletin 13a provides guidance on the management of interest rate risk through analysis of the change in net portfolio

36

value. Net portfolio value is defined as the net present value of the expected future cash flows of an entity’s assets and liabilities. The OTS oversees the general safety and soundness of savings associations, and therefore retains the right to impose minimum capital requirements on institutions based upon the institutions compliance with written standards concerning net portfolio value analysis.

For additional information about interest rate risk, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our strategies to modify our interest rate risk profile may be difficult to implement and may shrink our balance sheet. We are currently undertaking asset management strategies designed to decrease our interest rate risk sensitivity. One such strategy is increasing the amount of adjustable-rate and/or short-term assets. We believe that the market anticipates interest rates to be flat or decreasing, which would generally create a decrease in borrower demand for adjustable-rate assets. An increase in investor demand for short-term assets could be reflected in premiums paid for adjustable-rate investments, or a reduction in yields earned on short-term assets. Additionally, there is no guarantee that any adjustable-rate assets obtained will not prepay. If we are unable to originate or purchase adjustable-rate assets at favorable rates, we may have difficulty executing this asset management strategy and/or it may result in a reduction in profitability.

Management is also considering paying off some portion of maturing FHLB advances, rather than renewing the advances, during fiscal year 2007. This strategy will most likely result in balance sheet shrinkage.

Changes in laws, government regulation, and monetary policy may have a material effect on our results of operations. The Bank, as a federally chartered savings institution, is subject to federal regulation, and as a thrift institution, is subject to oversight by the OTS extending to all aspects of its operations. The Bank is also subject to regulation by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law, and to requirements established by the Federal Reserve Board. Proposals for further regulation of the financial services industry are continually being introduced in Congress and various state legislatures. The Bank’s ability to lend funds or pay dividends is contingent upon satisfaction of certain regulatory criteria and standards, such as capital levels, classification of assets, and establishment of loan loss reserves. Such regulation and supervision is intended to protect depositors and not necessarily for the purpose of protecting stockholders. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Government agencies have substantial discretion to impose significant monetary penalties upon institutions who do not comply with regulations. Any change in such regulations, or violation of such regulations, whether by the FDIC, the OTS, the Federal Reserve Board, Congress or states in which we do business, could have a material adverse impact on MHC, the Company and the Bank and their operations.

The Company’s ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company and the waiver of dividends by MHC. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. Under OTS safe harbor regulations, the Bank may distribute to the Company capital not exceeding net income for the current calendar year and the prior two calendar years. Due to the impact refinancing the FHLB advances had on earnings in fiscal year 2004, the Bank cannot distribute capital to the Company unless it receives waivers of the safe harbor regulation from the OTS during the current waiver period. We believe the Bank will be required to receive a waiver for capital distributions through at least December 31, 2007. This date may change depending on the Bank’s earnings. Currently, the Bank has authorization from the OTS to distribute capital from the Bank to the Company through the quarter ending June 30, 2007. So long as the Bank continues to maintain excess capital, operate in a safe and sound manner, and comply with the interest rate risk management guidelines of the OTS, it is management’s belief that the Bank will continue to receive waivers allowing it to distribute the net income of the Bank to the Company, although no assurance can be given in this regard.

MHC owns approximately 70% of the Company’s outstanding stock. MHC waives its right to dividends on the shares that it owns, which means the amount of dividends paid to public shareholders is significantly higher than it would be if MHC accepted dividends. MHC is not required to waive dividends, but the Company expects this practice to continue indefinitely. As such, MHC is required to obtain a waiver from the OTS allowing it to waive its right to dividends. The current waiver is effective through June 2007.

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy. We are currently one of the largest mortgage loan originators in the State of Kansas. 79% of our loan portfolio is comprised of loans secured by property located in the market areas in which we do business. This makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local

37

economy such as inflation, unemployment, recession, or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause the Bank to realize a loss in the event of a foreclosure. Currently there is not a single employer or industry in the area on which the majority of our customers are dependent. For additional information on the local economy, see “Item 1. Business - Market Area and Competition.”

Strong competition may limit growth and profitability. As previously discussed, we are one of the largest loan originators in the State of Kansas, but we compete in the same market areas as local, regional, and national banks, commercial banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms, and savings institutions. We must also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area. Many of these competitors operate on a national or regional level, are a conglomerate of various financial services housed under one roof, or otherwise have substantially greater financial or technological resources than the Company. We compete primarily on the basis of the interest rates offered to depositors and the terms of loans offered to borrowers. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or cannot provide, as certain deposit and loan products fall outside of our acceptable level of risk. The Company’s profitability depends upon its ability to compete in its market areas.

Item 1B. Unresolved Staff Comments

None.

Item 2.Properties

At September 30, 2006, we had 29 traditional branch offices and nine in-store branch offices. The Bank owns the office building in which its home office and executive offices are located. At September 30, 2006, the Bank owned 24 of its other branch offices and the remaining 13 branch offices, including nine in-store locations, were leased.

For additional information regarding our lease obligations, see “Note 6 of the Consolidated Financial Statements” of the attached Annual Report to Stockholders for the year ended September 30, 2006.

Management believes that our current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.

Item 3.Legal Proceedings

The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.

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

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 2006.

38

PART II

Item 5.Market for the Registrant’s Common Stock, Related Security Holder Matters and Issuer Purchases of Equity Securities

The section entitled “Stockholder Information” of the attached Annual Report to Stockholders for the year ended September 30, 2006 is incorporated herein by reference.

See “Note 1 of the Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital” of the attached Annual Report to Stockholders for the year ended September 30, 2006 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 September 30, 2006 and additional information regarding our share repurchase program. The repurchase plan of 1,536,102 shares was completed on September 26, 2006. On May 26, 2006, the board of directors approved a new stock repurchase program. Under the new plan, the Company may repurchase up to 500,000 shares from time to time, depending on market conditions and other factors, in open-market and other transactions. The shares would be held as treasury stock for general corporate use. The plan has no expiration date and had 499,661 shares remaining as of September 30, 2006.

	Total		Total Number of	Maximum Number
	Number of	Average	Shares Purchased as	Of Shares that May
	Shares	Price Paid	Part of Publicly	Yet Be Purchased
Period	Purchased	per Share(1)	Announced Plans	Under the Plan
July 1, 2006 through
July 31, 2006	7,289	33.81	7,289	545,065
August 1, 2006 through
August 31, 2006	29,697	33.71	29,697	515,368
September 1, 2006 through
September 30, 2006	15,707	35.11	15,707	499,661
Total	52,693	34.14	52,693	499,661

(1)   Reflects the average price paid per share to purchase the shares acquired in the open market.

Item 6.Selected Financial Data

The section entitled “Selected Consolidated Financial Data” of the attached Annual Report to Stockholders for the fiscal years ended September 30, 2002 through September 30, 2006 is incorporated herein by reference.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the attached Annual Report to Stockholders for the year ended September 30, 2006 is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The section entitled “Management Discussion of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure about Market Risk” of the attached Annual Report to Stockholders for the year ended September 30, 2006 is incorporated herein by reference.

Item 8.Financial Statements and Supplementary Data

The section entitled “Consolidated Financial Statements” of the attached Annual Report to Stockholders for the fiscal year ended September 30, 2006 is incorporated herein by reference.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

39

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

John B. Dicus, the Company’s President and Chief Executive Officer, and Kent G. Townsend, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, have evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, the “Act”) as of September 30, 2006. Based upon their evaluation, they have concluded that as of September 30, 2006, 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.

Management’s report on our internal control over financial reporting and the report thereon of our independent registered public accounting firm are contained in the attached Annual Report to Stockholders for the fiscal year ended September 30, 2006 and incorporated herein by reference.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Act that occurred during the Company’s last fiscal quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.  Other Information

None.

PART III

Item 10.Directors and Executive Officers of the Registrant

Information required by this item concerning the Company’s directors and compliance with section 16(a) of the Act is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2007, except for information contained under the heading “Compensation Committee Report on Executive Compensation”, “Report of the Audit Committee of the Board of Directors” and “Stockholder Return Performance Presentation”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Pursuant to General Instruction G(3), information concerning executive officers of the Company is included in Part I, under the caption “Executive Officers” of this Form 10-K.

Information required by this item regarding the audit committee of the Company’s board of directors, including information regarding the audit committee financial expert serving on the audit committee, is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2007, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Code of Ethics

We have adopted a written code of ethics within the meaning of Item 406 of SEC Regulation S-K that applies to our principal executive officer and senior financial officers, and to all of our other employees and our directors, a copy of which is available free of charge by contacting Jim Wempe, our Investor Relations Officer, at (785) 270-6055 or from our Internet website (www.capfed.com).

Item 11.Executive Compensation

Information required by this item concerning compensation is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2007, except for information contained under the heading “Compensation Committee Report on Executive Compensation”, “Report of the Audit Committee of the Board of Directors” and “Stockholder Return Performance Presentation”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

40

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2007, except for information contained under the heading “Compensation Committee Report on Executive Compensation”, “Report of the Audit Committee of the Board of Directors” and “Stockholder Return Performance Presentation”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

The following table sets forth information as of September 30, 2006 with respect to compensation plans under which shares of our common stock may be issued:

Equity Compensation Plan Information
			Number of Shares
			Remaining Available
			for Future Issuance
	Number of Shares		Under Equity
	to be issued upon	Weighted Average	Compensation Plans
	Exercise of	Exercise Price of	(Excluding Shares
	Outstanding Options,	Outstanding Options,	Reflected in the
Plan Category	Warrants and Rights	Warrants and Rights	First Column)
Equity compensation plans approved
by stockholders	668,457	$20.43	563,305(1)
Equity compensation plans not approved
by stockholders	N/A	N/A	N/A
Total	668,457	$20.43	563,305

⁽¹⁾ This amount includes 180,587 shares issuable under the Company's Recognition and Retention Plan.

Item 13.  Certain Relationships and Related Transactions

Information required by this item concerning certain relationships and related transactions is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2007, except for information contained under the heading “Compensation Committee Report on Executive Compensation”, “Report of the Audit Committee of the Board of Directors” and “Stockholder Return Performance Presentation”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 14.Principal Accounting Fees and Services

Information required by this item concerning principal accountant fees and services is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2007, a copy of which will be filed not later than 120 days after the close of the fiscal year.

41

PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)     The following is a list of documents filed as part of this report:

(1)  Financial Statements:

The following financial statements are included under Part II, Item 8 of this Form 10-K:

1.    Report of Independent Registered Public Accounting Firm.

2.    Consolidated Balance Sheets as of September 30, 2006 and 2005.

3.    Consolidated Statements of Income for the Years Ended September 30, 2006, 2005 and 2004.

    4.    Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2006, 2005 and 2004.

5.    Consolidated Statements of Cash Flows for the Years Ended September 30, 2006, 2005 and 2004.

6.    Notes to Consolidated Financial Statements for the Years Ended September 30, 2006, 2005 and 2004.

(2)  Financial Statement Schedules:

All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.

(3)  Exhibits:

See Index to Exhibits.

42

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: December 14, 2006	By:	/s/ John B. Dicus
			John B. Dicus, President and
			Chief Executive Officer
			(Principal Executive Officer)

	Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the date indicated.
By:	/s/ John B. Dicus	By:	/s/ B. B. Andersen
	John B. Dicus, President		B. B. Andersen, Director
	and Chief Executive Officer		Date: December 14, 2006
	(Principal Executive Officer)
	Date: December 14, 2006
By:	/s/ John C. Dicus	By:	/s/ Michael T. McCoy, M.D.
	John C. Dicus, Chairman of the Board		Michael T. McCoy, M.D., Director
	Date: December 14, 2006		Date: December 14, 2006
By:	/s/ Kent G. Townsend	By:	/s/ Marilyn S. Ward
	Kent G. Townsend, Executive Vice President,		Marilyn S. Ward, Director
	Chief Financial Officer and Treasurer		Date: December 14, 2006
	(Principal Financial Officer)
	Date: December 14, 2006
By:	/s/ Jeffrey R. Thompson	By:	/s/ Tara D. Van Houweling
	Jeffrey R. Thompson, Director		Tara D. Van Houweling, First Vice President
	Date: December 14, 2006		and Reporting Director
			(Principal Accounting Officer)
By:	/s/ Jeffrey M. Johnson		Date: December 14, 2006
	Jeffrey M. Johnson, Director
	Date: December 14, 2006

43

INDEX TO EXHIBITS

Exhibit Number	Document
2.0	Plan of Reorganization and Stock Issuance Plan*
3(i)	Federal Stock Charter of Capitol Federal Financial*
3(ii)	Bylaws of Capitol Federal Financial filed on August 4, 2004 as Exhibit 3(ii) to
	the June 30, 2004 Form 10-Q
4(i)	Form of Stock Certificate of Capitol Federal Financial*
4(ii)	The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, the
	instruments defining the rights of the holders of the Registrant’s long-term debt.
10.1	Registrant’s Thrift and Stock Ownership Plan filed on December 14, 2005 as Exhibit 10.1 to
	the Annual Report on Form 10-K
10.2	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)
10.3	Registrant’s 2000 Recognition and Retention Plan (the “RRP) filed on April 13, 2000 as
	Appendix B to Registrant’s Revised Proxy Statement (File No. 000-25391)
10.4	Capitol Federal Financial Deferred Incentive Bonus Plan
10.5	Form of Incentive Stock Option Agreement under the Stock Option Plan filed on February 4, 2005
	as Exhibit 10.5 to the December 31, 2004 Form 10-Q
10.6	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
10.7	Form of Restricted Stock Agreement under the RRP filed on February 4, 2005 as Exhibit 10.7 to the
	December 31, 2004 Form 10-Q
10.8	Description of Named Executive Officer Salary and Bonus Arrangements
10.9	Description of Director Fee Arrangements filed on February 6, 2006 as Exhibit 10.9 to the
	December 31, 2005 Form 10-Q
10.10	Short-term Performance Plan filed on December 14, 2005 as Exhibit 10.10 to the Annual
	Report on Form 10-K for the fiscal year ended September 30, 2005
11	Statement re: computation of earnings per share**
13	Annual Report to Stockholders
14	Code of Ethics***
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, President and Chief Executive Officer
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer
32	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chief Executive Officer and President, and Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer

44

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

  **No statement is provided because the computation of per share earnings on both a basic and fully diluted basis can be clearly determined from the Financial Statements included in the 2006 Annual Report to Stockholders, filed herewith.

 ***May be obtained free of charge from the Registrant’s Investor Relations Officer by calling (785) 270-6055 or from the Registrant’s internet website at www.capfed.com.

EX-10.4

Exhibit 10.4

CAPITOL FEDERAL FINANCIAL

Deferred Incentive Bonus Plan

January 1, 2005

CAPITOL FEDERAL FINANCIAL

Deferred Incentive Bonus Plan

Table of Contents

	Page
ARTICLE I -- PURPOSE	1
ARTICLE II -- DEFINITIONS	1
ARTICLE III -- PARTICIPATION	4
ARTICLE IV -- DEFERRED ACCOUNTS	6
ARTICLE V -- BENEFITS	7
ARTICLE VI -- RESERVED	8
ARTICLE VII -- SOURCE OF BENEFITS	8
ARTICLE VIII -- ADMINISTRATION OF THIS PLAN	9
ARTICLE IX -- AMENDMENT	10
ARTICLE X -- TERMINATION	11
ARTICLE XI -- RESTRICTIONS ON ALIENATION OF BENEFITS	12
ARTICLE XII -- CLAIMS PROCEDURE	13
ARTICLE XIII -- MISCELLANEOUS	15

CAPITOL FEDERAL FINANCIAL

Deferred Incentive Bonus Plan

WITNESSET& #160;H: That;

WHEREAS, the Company maintains the Capitol Federal Financial Deferred Incentive Bonus Plan (the “Plan”) for the purpose of providing specified benefits to Senior Managers of the Company who contribute to the continued growth, development, and future business success of the Company; and

WHEREAS, the Company desires to amend and restate the Plan on the terms and conditions set forth herein; and

WHEREAS, the Committee has reviewed the terms and provisions hereof and approved the Plan, and such action by the Committee has been ratified by the Board.

NOW, THEREFORE, the Company hereby amends and restates the Plan on the terms and conditions set forth herein, which Plan shall be known as the “Capitol Federal Financial Deferred Incentive Bonus Plan.”

ARTICLE I -- PURPOSE

Section 1.01.Purpose. The purpose of this Plan is to provide specified benefits to Senior Managers of Capitol Federal Financial (“CFF”) and Capitol Federal Savings Bank (collectively the “Company”) who contribute to the continued growth, development, and future business success of the Company. This program shall be administered as an unfunded plan of deferred compensation for income tax purposes and shall be applicable solely to those Employees serving in the job classification of Chairman, Chief Executive Officer, President, Executive Vice-Presidents, and Senior Vice Presidents (“Senior Managers”). This Plan is intended to operate in conjunction with that certain Short Term Performance Plan adopted by the Company effective October 1, 2005.

ARTICLE II -- DEFINITIONS

For purposes of this Plan, the following phrases or terms shall have the indicated meanings unless otherwise clearly apparent from the context. Capitalized terms not specifically defined herein shall have the meanings set forth in the Short Term Performance Plan.

Section 2.01.“Affiliated Company(ies)” means each entity that has a relationship to the Company as described by Section 414(b) or (c) of the Code.

1

Section 2.02.“Approved Reason” means a reason for terminating employment with the Company which, in the opinion of the Committee, is in the best interest of the Company.

Section 2.03.“Award” or “Performance Award” means a lump sum cash payment granted under the Plan to a Participant by the Committee pursuant to such terms, conditions, restrictions and/or limitations, if any, as the Committee may establish.

Section 2.04.“Beneficiary or Beneficiaries” means the person, persons, entity or entities entitled to receive any benefits under this Plan pursuant to the designation of the Participant (or in default of such designation) as provided in Section 5.03 hereof.

Section 2.05.“Board of Directors” or “Board” means the Board of Directors of Capitol Federal Financial.

Section 2.06.“Cause” means:

(a) the willful and continued failure by an Employee to substantially perform his or her duties with his or her employer after written warnings identifying the lack of substantial performance are delivered to the Employee by his or her employer to specifically identify the manner in which the employer believes that the Employee has not substantially performed his or her duties, or

(b) the willful engaging by an Employee in illegal conduct which is materially and demonstrably injurious to CFF or a Subsidiary.

Section 2.07.“Change In Control” means the occurrence of any of the following three events: (i) any third person, other than Capitol Federal Savings Bank MHC, including a “group” as defined in Section 13(d)(3) of the Exchange Act, shall become the beneficial owner of shares of CFF with respect to which 25% or more of the total number of votes for the election of the Board may be cast, (ii) as a result of, or in connection with, any cash tender offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were Directors of CFF shall cease to constitute a majority of the Board, or (iii) the stockholders of CFF shall approve an agreement providing either for a transaction in which CFF will cease to be an independent publicly-owned corporation (whether in stand alone or mutual holding company form) or for a sale or other disposition of all or substantially all of the assets of CFF.

Section 2.08.“Code” means the Internal Revenue Code of 1986, as amended.

2

Section 2.09.“Committee”means the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan; provided, however, that the Committee shall consist of an odd number of three or more Directors, each of whom is a “Non-Employee Director” within the meaning of Rule 16b-3 under the Exchange Act, or any successor definition adopted.

Section 2.10. “Company” means Capitol Federal Financial and its wholly owned subsidiary, Capitol Federal Savings Bank.

Section 2.11.“Deferred Amount” means that portion of a Participant’s Performance Award, between $2,000 and 50% of such Award up to but not exceeding $100,000, which the Participant elects to defer under the terms of this Plan.

Section 2.12.“Deferred Account” or “Account” means the ledger entry established in accordance with ARTICLE III, which entry shall represent the Company’s unsecured and unfunded promise to pay the amount of benefits set forth by such entry.

Section 2.13.“Disability” means a disability under the terms of any long-term disability plan maintained by the Company.

Section 2.14.“Distribution Date” means the January 25th next following the last day of each Mandatory Deferral Period.

Section 2.15.“Employee” means a common law Employee of the Company paid from the Company payroll account.

Section 2.16.“Mandatory Deferral Period” means the consecutive thirty-six month period beginning on the applicable Award Payment Date and ending at midnight on the applicable December 31st.

Section 2.17.“Officer” means only those certain salaried Employees of the Company who are administrative executives in continuous service with the Company employed by the Company in one of the following job classifications: Chairman, Chief Executive Officer, President, Executive Vice-President, Senior Vice-President, First Vice-President, Vice-President, Assistant Vice-President, and Assistant Cashier.

Section 2.18.“Participant” means a common law Employee paid from the Company payroll account who is an Officer classified as Chairman, Chief Executive Officer, President, Executive Vice-President, or Senior Vice-President and who has been designated by the Committee as eligible to participate in this Plan and who has satisfied all of the threshold eligibility criteria applicable to this Plan.

Section 2.19.“Plan” means the Capitol Federal Financial Deferred Incentive Bonus Plan.

3

Section 2.20.“Plan Year” means the Company fiscal year ending each September 30th.

Section 2.21.“Retirement” means, for all Plan purposes other than the Plan’s change of control provision, a termination of employment from the Company on or after attainment of age 65.

Section 2.22.“Section 409A” means Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.

Section 2.23.“Senior Manager” means a Company Officer classified as Chairman, Chief Executive Officer, President, Executive Vice-President, or Senior Vice-President.

Section 2.24.“Separation from Service” means the termination of employment with the Company and all Affiliated Companies. The term includes, but is not limited to, termination of employment due to a Participant’s death, Disability, Retirement, discharge (with or without cause), or voluntary termination. The term shall not include any temporary absences due to vacation, sickness, or other leaves of absence granted to Participant by the Company. A Separation from Service shall not be deemed to occur, however, upon a transfer involving any combination of the Company and any Affiliated Company. No termination of employment shall constitute a “Separation from Service” unless the termination event also constitutes a “separation from service” within the meaning of Section 409A.

Section 2.25.“Short Term Performance Plan” or “STPP” means the

incentive bonus arrangement sponsored and maintained by the Company for the benefit of eligible Officers. The Short Term Performance Plan is incorporated herein by reference.

Section 2.26.“Sole Discretion”means the right and power to decide a matter, which may be exercised arbitrarily at any time and from time to time.

Section 2.27.“Subsidiary” means a corporation or other business entity in which CFF directly or indirectly has an ownership interest of 80 percent or more.

Section 2.28.“Taxable Year” means the 12-month period beginning January 1.

ARTICLE III -- PARTICIPATION

Section 3.01.Eligibility. In order to become a Participant in this Plan and defer Performance Awards granted under the STPP under this Plan, a Senior Manager must satisfy each of the following conditions:

4

A.Participation In The STPP. In order to be eligible for participation in this Plan, a Senior Manager must be eligible for, and an Active Participant in, the STPP.

B. Committee Designation. In addition to eligibility and participation in the STPP, a Senior Manager must be specifically designated as eligible to defer under this Plan. The Committee shall have the unrestricted right and power, which may be exercised in its Sole Discretion and at any time and from time to time, to designate Senior Managers who are eligible to participate in this Plan. The Committee also shall have the right, in its Sole Discretion, to terminate an individual’s future participation in this Plan, but only to the extent permitted by Section 409A. If an individual’s participation in this Plan is terminated, the Participant (or Participant’s Beneficiary) shall be entitled to receive the Participant’s Account at the time and in the manner determined under Article V.

C. Timely Deferral Election. In addition to the criteria set forth above, participation in this Plan shall only be possible if the Senior Manager has timely executed and filed with the Committee the appropriate deferral election forms. Deferral election forms shall be considered timely filed only if they are properly completed, executed, and filed with the Committee in accordance with Committee rules and the provisions of Section 3.02.

Section 3.02.Incentive Bonus Deferral Agreements. For each Taxable Year (or portion of the Taxable Year after entry into the Plan), each Participant may elect to execute a deferral election agreement with respect to an Award at such time and in such form and manner as the Committee may from time to time prescribe for such purpose; provided, however, that in the case of a Senior Manager newly eligible to participate in the Plan, the Committee shall not prescribe a time later than 30 days after the date the Senior Manager is first eligible to participate in this Plan for such Senior Manager to make a deferral election for that taxable year. Any such election by a Participant to reduce the Participant’s compensation shall only apply to compensation attributable to services to be performed by the Participant after the date of such election; provided, however, that in the case of an election to defer any performance-based compensation payable with respect to services performed over a period of at least 12 months, such election must be made no later than 6 months before the end of such period. All calculations of the dollar amount of an Award shall be determined under the terms of the STPP.

The terms of any such deferral election agreement shall provide that the Participant agrees to accept a reduction in compensation from the Company with respect to an Award. The agreement shall be irrevocable by the Participant during the Taxable Year and each subsequent Taxable Year, unless the Participant enters into a new agreement prior to the beginning of the Taxable Year for which the change is to be effective. All elections, including modifications and revocation, shall be made upon such terms and conditions and at such time and in such manner as the Committee may from

5

time to time determine in its Sole Discretion. The agreement shall automatically terminate upon the termination of this Plan, upon a Participant’s Separation from Service.

Section 3.03.Limitations on Deferrals. Participants may elect to defer amounts of not less than two thousand dollars ($2,000.00), up to an amount equal to fifty percent (50%) of the Participant’s anticipated Performance Award for the upcoming performance year; provided, however, that the amount of a single deferral may not exceed one hundred thousand dollars ($100,000.00). No deferred amount may be distributed or withdrawn except as provided in Article V, and no deferral under the Plan shall continue past the applicable Distribution Date.

ARTICLE IV -- DEFERRED ACCOUNTS

Section 4.01.Deferred Account. The Deferred Amount described in Section 3.03 above shall be credited to the Participant’s Deferred Account.

A.   To the extent the Company is required to withhold any taxes or other amounts from the Deferred Amount pursuant to any federal, state, or local law, such amounts shall be taken out of the portion of the Participant’s Award or other Compensation not deferred under this Plan.

B.   The Company shall match each Deferred Amount by an amount equal to 50% of such Deferred Amount; provided, however, that such match shall be subject to forfeiture and shall be forfeited if the Participant terminates service with the Company at any time for any reason, including death, Disability, Retirement, or an Approved Reason, during the applicable Mandatory Deferral Period.

Section 4.02.Vesting. Each Participant shall be fully vested in the Participant’s Deferred Amount. However, Participants shall only become vested in the Company matching amount (credited to the Deferred Amount at the commencement of the Mandatory Deferral Period) if the Participant remains continuously employed with the Company during the Mandatory Deferral Period and is so employed on the applicable Distribution Date.

Section 4.03.Increases to the Account. The Participant’s Deferred Account shall be increased by an earnings factor. The earnings factor shall equal the amount that the Participant’s Deferred Account would have increased if, immediately following addition to the Account of the deemed Company match, the Account had been invested in the common stock of Capitol Federal Financial (“CFFN”) and that position had been held through the last December 31st of the Mandatory Deferral Period.

6

A.   In order to establish an initial value for the Account at the commencement of the Mandatory Deferral Period, the Committee shall utilize the closing

price of CFFN as of the December 31st immediately preceding the applicable Award Payment Date and shall deem the entire Account (including the forfeitable Company match) to be 100% invested in CFFN at such price. If, as of the December 31st immediately preceding the end of the Mandatory Deferral Period, the closing market price for CFFN is greater than the initial Value, the difference in value shall be converted to cash, added to the Account and paid on the Distribution Date along with the Deferred Amount, the Company match, and the Dividend Equivalents.

C.   The Committee shall credit the Account with an amount appropriate to reflect dividends actually paid on Capitol Federal Financial common stock during the Mandatory Deferral Period (Dividend Equivalents). Dividend Equivalents shall be credited to the Account as of the time dividends are actually paid on CFFN and shall be treated as additional units of CFFN; provided, however, that, notwithstanding anything hereinabove to the contrary, Dividend Equivalents shall be valued and paid based only upon the CFFN closing price as of the December 31st immediately preceding the end of the Mandatory Deferral Period.

C.   Notwithstanding anything to the contrary, the Company shall not be obligated to acquire any interest in any fund or investment option and any asset that may be acquired in order to provide a means for payment of any liability shall remain the property of the Company.

Section 4.04.Statement of Account. The Committee shall submit to each Participant, within 90 days after the close of each Plan Year, a statement setting forth the balance to the credit of each Participant of his or her Deferred Account.

ARTICLE V -- BENEFITS

Section 5.01.General. With respect to each Deferred Amount contributed to a Participant’s Deferred Account hereunder, if the Participant remains continuously employed by the Company during the applicable Mandatory Deferral Period and is so employed on the applicable Distribution Date, the portion of the Participant’s Deferred Account attributable to such Deferred Amount that the Participant is entitled to receive as of such Distribution Date (including any earnings and/or Company match credited to the Participant’s Deferred Account with respect to such Deferred Amount in accordance with Article IV hereof) will be paid to the Participant in a single lump sum payment on the applicable Distribution Date.

Section 5.02.Separation from Service. With respect to each Deferred Amount contributed to a Participant’s Deferred Account hereunder, if the Participant incurs a Separation from Service due to death, Disability, or any other reason at any time before the applicable Distribution Date, the portion of the Participant’s Deferred Account attributable to such Deferred Amount that the Participant is entitled to receive

7

as of the date of such Separation from Service shall be paid to the Participant in a single lump sum payment as soon as administratively practicable on or after the earlier of (i) the first day of the Taxable Year after the Taxable Year in which the Participant incurs such Separation from Service, or (ii) the date that would have been the applicable Distribution Date with respect to such Deferred Amount had the Participant remained continuously employed by the Company during the applicable Mandatory Deferral Period and on such Distribution Date (the “Payment Date”); provided, however, that payment hereunder shall not occur later than the later of (i) the end of the calendar year in which the Payment Date occurs, or (ii) the 15th day of the third calendar month after the Payment Date occurs. Notwithstanding the foregoing, in the event of a distribution described in this Section 5.02, no match or earnings described in Article IV hereof shall be payable to the Participant, and the Participant shall not be entitled to receive an amount greater than such Deferred Amount.

In the event a Participant entitled to receive payment in accordance with Section 5.02 dies before receipt of such payment, such payment shall be paid to the Participant’s Beneficiary.

Section 5.03.Beneficiary Designation. The Beneficiary of a Participant shall be the person, persons, entity, or entities designated by the Participant on a beneficiary designation form provided by the Committee. A Participant shall have the right to change his or her Beneficiary designation at any time; provided, however, that no change of a Beneficiary shall be effective until received by the Committee. All Beneficiary designations, and any amendments and revocations thereto, shall be made upon such form or forms and in such manner as the Committee may from time to time direct. In the event a Participant dies without having a Beneficiary designation in force, or in the event no named Beneficiary is alive or is in being at the time, all payments due hereunder shall be paid the Participant’s surviving spouse, if any. If the Participant leaves no surviving spouse then such payment shall be made to the Participant’s estate.

ARTICLE VI -- RESERVED

ARTICLE VII -- SOURCE OF BENEFITS

Section 7.01.Source of Benefits. Amounts payable hereunder shall be paid exclusively from the general assets of the Company. The Company’s obligation under this Plan shall constitute a mere promise to pay benefits in the future, and no person entitled to payment hereunder shall have any claim, right, security interest, or other interest in any fund, trust, account, insurance contract, or other asset of the Company. The Company is not obligated to invest in any specific assets or fund, but it may invest in any asset or assets it deems advisable in order to provide a means for the payment of any liabilities under this Plan. Each Participant shall be an unsecured general creditor of the Company and shall have no interest whatsoever in any such assets or

8

fund. The Company’s liability for the payment of benefits hereunder shall be evidenced only by this Plan.

ARTICLE VIII -- ADMINISTRATION OF THIS PLAN

Section 8.01.Appointment of Committee. This Plan shall be administered under the supervision of a Committee. It shall be a principal duty of the Committee to see that this Plan is carried out in accordance with its terms. The Committee shall have full power to administer this Plan in all of its details, subject, however, to the requirements of the Code, and other applicable laws. For this purpose, the Committee’s powers shall include, but are not limited to, the authority, in addition to all other powers provided by this Plan, to:

A. Determine in its discretion the eligibility of any Officer to participate in this Plan and of any individual to receive benefits under this Plan;

B. Exercise its discretion in making interpretations regarding the terms of this Plan and its interpretations to be final and conclusive on all persons claiming benefits under this Plan;

C. Compute and implement the proper deferral limitations and compute amounts payable for any Participant in accordance with the provisions of this Plan, the manner and time of payment and to determine and authorize the person or persons to whom such payments will be paid;

D. Receive claims for benefits and render decisions respecting such claims under this Plan;

E. Make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of this Plan;

F. Appoint such agents, specialists, legal counsel, accountants, actuaries, consultants, or other persons as the Committee deems advisable to assist in administering this Plan;

G. Allocate and delegate its responsibilities under this Plan and to designate other persons to carry out any of its responsibilities under this Plan, any such allocation, delegation, or designation to be in writing;

H. Be responsible for all reporting and disclosure requirements for this Plan under the law;

I. Receive from the Company, Participants and other persons such information as shall be necessary for the proper administration of this Plan;

9

J. Furnish to the Company upon request, such reports with respect to the administration of this Plan as are reasonable and appropriate; and

K. Maintain all records of this Plan.

Section 8.02.Examination of Records. The Committee shall make available to each Participant and his duly authorized representative, such of the records under this Plan as pertain to him, for examination at reasonable times during normal business hours.

Section 8.03.Committee. The Committee shall act by a decision of a majority. Any such action by the Committee may be taken either at a meeting or in writing signed by all Committee members without a meeting. Notwithstanding the foregoing, the Committee may, by written authorization, empower any member of the Committee to individually execute any document or documents on behalf of the Committee, such authorization to remain in effect until revoked by the Committee. The Committee shall elect one of its members as chairman, appoint a secretary, who may or may not be a Committee member and advise the Company of such actions in writing. The secretary shall keep a record of all meetings, actions, and data necessary for the proper administration of this Plan and shall forward all necessary communications to the Company, the Participants or other necessary person. A dissenting Committee member who, within a reasonable time after he has knowledge of any action or failure to act by majority, registers his dissent in writing delivered to the other Committee members and the Company shall not be responsible for any such action or failure to act.

Section 8.04.Reliance on Certificates, etc. The members of the Committee and the officers and directors of the Company shall be entitled to rely on all certificates and reports made by any duly appointed accountants and on all opinions given by any duly appointed legal counsel. Such legal counsel may be counsel for the Company.

ARTICLE IX -- AMENDMENT

Section 9.01.Right to Amend. The Board of Directors reserves the right, at will, at any time and from time to time, to modify, alter, or amend this Plan (including without limitation a retroactive modification, alteration, or amendment), in whole or in part, and any such modification, alteration, or amendment shall be binding upon the Company, Participants, and all other persons; provided, however, that no amendment will reduce the amount then credited to the Participant’s Deferred Account without the Participant’s written consent; provided, further, however, that no consent shall be required and the Board of Directors shall have the right to modify, alter, or amend this Plan (including a retroactive modification, alteration, amendment, or reduction in a Participant’s Deferred Account), if it determines in its Sole Discretion that such amendment is necessary to comply with applicable law, which shall include, but shall not be limited to, the right to apply any prospective or retroactive amendment necessary to keep this Plan an unfunded employee benefit plan described in Sections 201(2),

10

301(a)(3), and 401(a)(1) of ERISA or to comply with Section 409A or any other applicable provision of the Code or ERISA or any judicial or administrative guidance interpreting such provisions.

ARTICLE X -- TERMINATION

   Section 10.01.Termination of Plan. The Company has established this Plan with the bona fide intention and expectation that it will be continued indefinitely, but the Company will have no obligation whatsoever to maintain this Plan for any given length of time and may at will, and at any time, discontinue or terminate this Plan in whole or in part.

Section 10.02.Termination Procedures. Upon termination of this Plan, the Company shall give notice of the same to all Participants, the Committee, and any other affected person. Further, upon termination of this Plan, all elections related to this Plan shall terminate, and payment of a Participant’s Deferred Account shall be made at the time and in the manner provided in Article V. Not withstanding the foregoing, the Plan shall not be permitted to terminate unless all of the conditions set forth in Section 409A pertaining to voluntary plan terminations are satisfied.

Section 10.03.Effect of Complete Liquidation, Reorganization, or Change of Control.

A. Complete Liquidation. If the stockholders of the Company adopt a plan of complete liquidation (other than a plan which is part of a plan of reorganization described in Subsection B. hereof), the Plan shall be deemed to have been terminated as of the date the plan of liquidation is adopted. The rights of affected Participants upon such a liquidation shall be determined under the provisions of Sections 10.01 and 10.02 relative to a complete termination.

B. Reorganization. If the Company effectuates a merger, consolidation, or other transaction constituting a reorganization with another corporation or corporations, pursuant to which the shares of common stock of Company will be surrendered in exchange for the stock of another corporation (the “Surviving Corporation”) then this Plan shall be deemed to have been terminated as of the date the plan of reorganization is adopted. No termination shall occur, however, if express provisions are made for the continuance of this Plan in accordance with the terms hereof except the word “Company” shall mean and refer to the Surviving Corporation from and after the effective date of such reorganization.

Notwithstanding the foregoing, the Plan shall not be terminated pursuant to this Section 10.03 unless the termination would be permitted under Section 409A.

11

Section 10.04.Change in Control. Notwithstanding any provision contained in the Plan to the contrary, the provisions of this Section 10.04 shall control over any contrary provision. All Participants shall be eligible for the treatment afforded by this Section if they incur a Separation from Service within two years following a Change In Control, unless the Separation from Service is due to (a) Death; (b) Disability; (c) Cause; (d) resignation other than (1) resignation from a declined reassignment to a job that is not reasonably equivalent in responsibility or compensation, or that is not in the same geographic area, or (2) resignation within thirty days of a reduction in base pay; or (e) retirement.

A.   If a Participant qualifies for treatment under this Section, he or she shall immediately become fully vested in his or her Deferred Account. Such Account shall be paid, as soon as practicable but in no event later than 90 days after the date the Participant incurs a Separation from Service.

B.   Upon a Change In Control, no action, including, but not by way of limitation, the amendment, suspension, or termination of the Plan, shall be taken which would affect the rights of any Participant or the operation of the Plan with respect to any Account to which the Participant may have become entitled hereunder prior to the date of the Change In Control or to which he or she may become entitled as a result of such Change In Control.

ARTICLE XI -- RESTRICTIONS ON ALIENATION OF BENEFITS

Section 11.01.Restrictions on Alienation. Until the actual receipt of any benefit under this Plan by a Participant or Beneficiary, no right or benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, assignment, transfer, pledge, encumbrance, garnishment, execution, levy, or charge of any kind, whether voluntary or involuntary, including assignment or transfer to satisfy any liability for alimony or other payments for property settlement or support of a spouse or former spouse or other relative of a Participant or Beneficiary, whether upon divorce, legal separation, or otherwise. Any attempt to anticipate, alienate, sell, assign, transfer, pledge, encumber, garnish, execute upon, levy upon, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled to such benefit, and no right or benefit hereunder shall be considered an asset of such person in the event of his or her divorce, insolvency, or bankruptcy. To the extent permitted by law, the rights of a Participant or Beneficiary hereunder shall not be subject in any manner to attachment or other legal process for the debts of such Participant or Beneficiary.

12

ARTICLE XII -- CLAIMS PROCEDURE

Section 12.01. Claims. Benefit claim determinations arising under this Plan shall be made in accordance with the provisions of this Article and procedures established by the Committee. These claim procedures are designed to establish reasonable processes and safeguards to ensure that benefit claim determinations are made in accordance with the provisions thereof and, where appropriate, Plan provisions have been applied consistently with respect to similarly situated claimants. All claims for or relating to benefits whether made by a Participant or other person shall be in writing addressed and delivered to the Committee, at the Committee’s main office, and such claim shall contain the claimant’s name, mailing address, and telephone number, if any, and shall identify the claim in a manner reasonably calculated to make the claim understandable to the Committee.

Section 12.02.Claims Review. If a claim is wholly or partially denied, the Committee shall within a reasonable period of time, not to exceed 90 days (45 days in the case of a claim involving disability benefits), notify the claimant in writing of any adverse benefit determination, unless the Committee determines that special circumstances require an extension of time for processing the claim. If the Committee determines that an extension of time for processing the claim is necessary, written notice of the same shall be provided to the claimant prior to the expiration of the 90-day period (45-day period in the case of a claim involving disability benefits), and shall indicate the special circumstances which require the extension of time and the date by which the Committee expects to render the determination. The extension of time shall not exceed a 90-day period of time (30-day period in the case of a claim involving disability benefits), beginning at the end of the initial 90-day period (45-day period in the case of a claim involving disability benefits). In case of a disability claim, the Committee may determine that, due to matters beyond the control of the Plan, a second 30-day extension is necessary. In such case, the Committee shall notify the claimant before the expiration of the first 30-day extension period of the circumstances requiring the extension and the date by which the Plan expects to render a decision. In the case of a disability notice of extension, the notice must explain the standards on which entitlement to a benefit is based, the unresolved issues that prevent a decision, the additional information needed to resolve the issue, and that the claimant has at least 45 days to provide the specified information. The Committee’s notice shall be written in a manner calculated to be understood by the claimant and shall set forth:

A. The specific reason or reasons for the denial;

B. Specific reference to pertinent Plan provisions on which the denial is based;

C. A description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and

D. An explanation of the claim review procedure set forth in Sections 12.03 and 12.04 below (including a statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination).

13

Section 12.03.Appeal of Claim Denial. A claimant or the claimant’s duly authorized representative shall have 60 days within which to appeal an adverse benefit determination to the Committee. During the pendency of the review, the following provisions shall apply:

A. The claimant shall have the opportunity to submit written comments, documents, records and other information relating to the claim to the Committee; and

B. The claimant shall be provided, upon request and free of charge, reasonable access to and copies of, all documents, records and other relevant information relating to the claim for benefits.

Section 12.04.Review on Appeal. A decision on review shall be rendered within a reasonable period of time, not to exceed 60-days after the claimant’s request for review, unless the Committee determines that special circumstances require an extension of time for processing the appeal. If the Committee determines that an extension of time for processing the appeal is necessary, written notice of the extension shall be furnished to the claimant prior to the expiration of the 60 day period, and shall indicate the special circumstances requiring the extension and the date by which the Committee expects to render the determination. The extension of time shall not exceed a 60-day period of time beginning at the end of the initial 60-day period. For purposes of this Section 12.04, in the case of a claim involving disability benefits, 45 days shall apply instead of 60 days. The Committee’s decision on review shall be communicated in writing to the claimant and, if adverse, shall take into account all comments, documents, records and other information submitted by the claimant (without regard to whether such information was submitted or considered in the initial benefit determination). The decision on review shall be in a written manner calculated to be understood by the claimant and shall set forth the following:

A. The specific reason or reasons for the adverse determination;

B. Specific reference to pertinent plan provisions on which the benefit determination is based;

C. A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits; and

D. A statement of the claimant’s right to bring an action under ERISA Section 502(a).

14

Section 12.05.Litigation of Claim. Prior to initiating legal action concerning a claim in any court, state or federal, against this Plan, any trust used in conjunction with this Plan, the Company, or the Committee, a claimant must first exhaust the administrative remedies provided in this Article XII. Failure to exhaust the administrative remedies provided for in this Article XII shall be a bar to any civil action concerning a claim for benefits under the Plan.

ARTICLE XIII -- MISCELLANEOUS

Section 13.01.Payments Net of Withholding and Other Amounts. All payments under this Plan shall be net of any amount sufficient to satisfy all federal, state, and local withholding tax requirements, and shall also be net of all amounts owed by Participant, or Beneficiary or other recipient, to the Company.

Section 13.02.No Guarantee of Interests. Neither the Company nor any affiliated entity (as defined in the Code), nor the Committee (nor any of its members) may guarantee the payment of any amounts which may be or become due to any person or entity under this Plan. The liability of the Company to make any payment under this Plan is limited to the then existing assets of the Company.

Section 13.03.Company Records. Records of the Company as to any Employee or Participant shall be conclusive on all persons.

Section 13.04.Evidence. Evidence required of anyone under this Plan may be by certificate, affidavit, document, or other information which the person or entity acting on such evidence considers pertinent and reliable, and signed, made, or presented by the proper party or parties.

Section 13.05.Notice. Except as otherwise provided in this Plan, any notice or communication required to be given herein by any Participant, the Company, or Committee shall be deemed given when delivered or when placed in the United States mail, postage prepaid, in an envelope addressed to the last address of the person to whom the notice is being given which was communicated in writing to the person giving such notice.

Section 13.06.Change of Address. Any party may, from time to time, change the address to which notices shall be mailed by giving written notice of such new address.

Section 13.07.Effect of Provisions. The provisions of this Plan shall be binding upon the Company and its successors and assigns, and upon Participant, his/her Beneficiary, assigns, heirs, executors, and administrators.

15

Section 13.08.Other Benefits and Plans. The benefits provided for Participant and his/her Beneficiary hereunder are in addition to any other benefits available to Participant under any other program or plan of the Company, and, except as may otherwise be expressly provided for, this Plan shall supplement and shall not supersede, modify, or amend any other program or plan of the Company or Participant.

Section 13.09.Severability Clause. If any provision of this Plan is held to be invalid or unenforceable, such determination shall not affect the validity of this Plan or the other provisions of this Plan. In such event, this Plan shall be construed and enforced as if such provision had not been included therein; provided, that, nothing shall increase the Company’s liability for payment of benefits in any amount beyond the amounts specified in this Plan.

Section 13.10.Minors and Incompetents. If any person to whom a benefit is payable by the Company is legally incompetent, either by reason of age or by reason of mental or physical disability, the Company is authorized to cause the payments becoming due to such person to be made to another for his benefit without responsibility of the Company, Committee or the Board of Directors to see to the application of such payments. Payments made pursuant to this authority shall constitute a complete discharge of any duty hereunder of the Company, Committee, and the Board of Directors.

Section 13.11.Limitation of Rights. Neither the establishment of this Plan nor any amendment thereof will be construed as giving any Employee or other person any legal or equitable right against the Committee, Company, its Officers, directors, stockholders, except as expressly provided herein, and in no event will the terms of employment or service of any Employee be modified or in any way be affected hereby.

Section 13.12.Information to be Furnished. Each Participant shall provide the Company and Committee with such information and evidence, and shall sign such documents, as may reasonably be requested from time to time for the purpose of administration of this Plan.

Section 13.13.Word Usage. Wherever any words are used herein in the masculine or neuter gender, they shall be construed as though they were used in the feminine, masculine or neuter gender, as the context may require, and vice versa, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form, as the context may require, and vice versa.

Section 13.14.Erroneous Payments. If any Participant receives any amount of benefits that the Committee in its sole discretion later determines the Participant was not entitled to receive under the terms of the Plan, such Participant shall be required to make reimbursement to the Plan. In addition, the Committee shall have the right to offset any future claims for benefits under the Plan against amounts that the Participant was not otherwise entitled to receive.

16

Section 13.15.Indemnification by Company. The Company shall indemnify and save harmless each member of its Board of Directors, each Committee member, and any employee of the Company, from and against losses resulting from liability which they may be subjected by reason of any act or conduct (except willful or wanton misconduct) in their official capacities in the administration of this Plan. Expenses shall include the amount of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted, or a proceeding brought in settlement thereof. The foregoing right of indemnification shall be in addition to any other rights to which any such person may be entitled as a matter of law.

Section 13.16.Headings. The titles and heading of Articles and Sections are included for convenience of reference only and are not to be considered in the construction of the provisions of this Plan.

Section 13.17.No Contract of Employment. Nothing contained herein shall be construed to constitute a contract of employment between any employee and any employer. Nothing herein contained shall be deemed to give any employee the right to be retained in the employ of an employer or to interfere with the right of the employer to discharge any employee at any time without regard to the effect such discharge might have on the employee as a Participant under this Plan.

Section 13.18.Governing Law. It is the Company’s intention that the Plan comply with and satisfy the applicable provisions of the Code and ERISA, including, but not limited to, Section 409A, and, consistent with such provisions of the laws of the United States of America and in all other respects, the Plan and all agreements entered into under the Plan shall be governed, construed, administered, and regulated in accordance with the laws of the State of Kansas, without regard to the principles of conflicts of law, to the extent such laws are not preempted by the laws of the United States of America. Any action concerning the Plan or any agreement entered into under the Plan shall be maintained exclusively in the state or federal courts in Topeka, Kansas.

Section 13.19.No Acceleration. Except as otherwise permitted by law, no interpretation, modification, alteration, amendment, or complete or partial termination of the Plan or any provision of the Plan shall cause or permit acceleration of the time or schedule of any payment under the Plan, unless the acceleration is permitted by Section 409A.

17

IN WITNESS WHEREOF, this amended and restated Plan is executed this 7th day of December, 2006, to be effective as of January 1, 2005.

CAPITOL FEDERAL FINANCIAL

By___/s/ John C. Dicus__   

Chairman

EX-10.8

Capitol Federal Financial

Exhibit 10.8

Named Executive Officer Salary and Bonus Arrangements

Base Salaries

The base salaries, effective July 8, 2006, for the executive officers (the "named executive officers") of Capitol Federal Financial who will be named in the compensation table that appears in the Company's annual meeting proxy statement for the fiscal year ended September 30, 2006 are as follows:

Name and Title	Base Salary
John B. Dicus President and Chief Executive Officer	$477,000
John C. Dicus Chairman of the Board	$412,000
R. Joe Aleshire Executive Vice President	$209,500
Larry K. Brubaker Executive Vice President	$209,500
M. Jack Huey Executive Vice President	$200,000

Bonus Plans

On December 12, 2005, the Compensation Committee of the Company’s board of directors approved a short-term performance cash bonus plan. The plan was filed on December 14, 2005 as Exhibit 10.10 to the Annual Report on Form 10-K for the fiscal year ended September 30, 2005. The plan will expire following the payment of bonuses for fiscal 2011. The short-term performance plan provides for annual bonus awards, as a percentage of base salary, to selected management personnel based on the achievement of pre-established corporate and individual performance criteria. Awards, if any, are typically made in January for the fiscal year ended the preceding September 30th.

The corporate performance criteria under the short-term performance plan are comprised of targeted levels of the Company’s return on average equity, basic earnings per share and efficiency ratio. For each executive officer named below, 90% of his award will continue to be based on the attainment of corporate performance goals, with the remainder based on his achievement of individual performance objectives.

Under the short-term performance plan the maximum potential annual bonus awards for the executive officers whom the Company believes are likely to be named in the summary compensation table in the Company’s proxy statement for its annual meeting of stockholders following the end of fiscal year 2007 are as follows: John C. Dicus, Chairman, 60% of base salary; John B. Dicus, President and Chief Executive Officer, 60% of base salary; Larry K. Brubaker, Executive Vice President for Corporate Services, 40% of base salary; Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer, 40% of base salary; and Richard J. Aleshire, Executive Vice President for Retail Operations, 40% of base salary.

On December 7, 2006, the Compensation Committee of the Company’s board of directors approved a deferred incentive bonus plan (the “DFIB”). The new plan is essentially a continuation of the

Company’s existing DFIB. Under the new plan, which is consistent with the old plan, a portion of the bonus awarded under the short-term performance plan (from $2 thousand to as much as 50% of the award, up to a maximum of $100 thousand) to an officer eligible to participate in the DFIB may be deferred under the DFIB for a three year period. The total amount of the deferred bonus, plus a 50% Company match, is deemed to be invested in the Company’s common stock at the closing price as of the December 31st immediately preceding the deferral date. If the participant is still employed at the end of the deferral period, the participant will receive a cash payment equal to the sum of: (1) the deferred amount, (2) the Company match, (3) the value of all dividend equivalents paid during the deferral period on the Company common stock in which the participant is deemed to have invested and (4) the appreciation, if any, during the deferral period on the Company common stock in which the participant is deemed to have invested. A copy of the new DFIB is attached to this form 10-K as Exhibit 10.4.

EX-13

SELECTED CONSOLIDATED FINANCIAL DATA

The summary information presented below under "Selected Balance Sheet Data" and "Selected Operations Data" for, and as of the end of, each of the years ended September 30 is derived from our audited consolidated financial statements. The following information is only a summary and you should read it in conjunction with our consolidated financial statements and notes beginning on page 44.

	September 30,
	2006		2005		2004(1)			2003		2002
	(Dollars in thousands)
Selected Balance Sheet Data:
Total assets	$	8,199,073	$	8,409,687	$	8,541,124		$	8,582,733	$	8,781,187
Loans receivable, net		5,221,117		5,464,130		4,747,530			4,307,696		4,867,818
Investment securities:
Available-for-sale, at market value		189,480		--		--			--		--
Held-to-maturity, at cost		240,000		430,499		638,079			1,022,412		500,814
Mortgage-related securities:
Trading, at market value		396,904		--		--			--		--
Available-for-sale, at market value		556,248		737,638		1,201,800			2,128,721		1,318,974
Held-to-maturity, at cost		1,131,634		1,407,616		1,446,908			815,453		1,255,906
Capital stock of Federal Home Loan Bank (“FHLB”)		165,130		182,259		174,126			169,274		163,250
Deposits		3,900,431		3,960,297		4,127,774			4,238,145		4,392,123
Advances from FHLB		3,268,705		3,426,465		3,449,429			3,200,000		3,200,000
Other borrowings		53,467		53,410		53,348			81,146		101,301
Stockholders’ equity		863,219		865,063		832,414			976,445		987,430
	Year Ended September 30,
		2006		2005		2004(1)			2003		2002
	(Dollars and counts in thousands, except per share amounts)
Selected Operations Data:
Total interest and dividend income	$	410,928	$	400,107	$	384,833		$	441,536	$	557,132
Total interest expense		283,905		244,201		268,642			326,848		370,743
Net interest and dividend income		127,023		155,906		116,191			114,688		186,389
Provision for loan losses		247		215		64			--		184
Net interest and dividend income after provision
for loan losses		126,776		155,691		116,127			114,688		186,205
Retail fees and charges		17,007		16,029		15,119			15,157		11,611
Gains on sales of loans receivable held for sale		49		84		107			18,949		10,150
Other income		7,739		7,202		8,321			9,006		7,742
Total other income		24,795		23,315		23,547			43,112		29,503
Prepayment penalty on FHLB advances		--		--		236,109			--		--
Total other expenses		72,868		73,631		309,000			72,510		68,672
Income (loss) before income tax expense (benefit)		78,703		105,375		(169,326	)		85,290		147,036
Income tax expense (benefit)		30,586		40,316		(63,051	)		33,259		57,444
Net income (loss)		48,117		65,059		(106,275	)		52,031		89,592
Basic earnings (loss) per share	$	0.66	$	0.90	$	(1.48	)	$	0.74	$	1.25
Average shares outstanding		72,595		72,506		71,599			70,699		71,523
Diluted earnings (loss) per share	$	0.66	$	0.89	$	(1.48	)	$	0.72	$	1.22
Average diluted shares outstanding		72,854		73,082		71,599			72,392		73,579

6

		2006			2005			2004(1	)		2003			2002
Selected Performance and Financial Ratios
and Other Data:
Performance Ratios:
Return on average assets		0.58	%		0.77	%		(1.25	)%		0.60	%		1.02	%
Return on average equity		5.58			7.62			(11.36	)		5.28			9.25
Dividends paid per public share(2)	$	2.30		$	2.00		$	2.81		$	2.12		$	0.74
Dividend payout ratio		97.41	%		62.59	%		n/a			76.68	%		15.79	%
Ratio of operating expense to
average total assets		0.88			0.87			3.64	%		0.84			0.78
Efficiency ratio		48.03			41.19			221.83			46.05			31.81
Ratio of average interest-earning assets
to average interest-bearing liabilities		1.11			1.10			1.12			1.13			1.12
Interest rate spread information:
Average during period		1.19			1.59			1.05			0.90			1.66
End of period		1.07			1.46			1.77			0.42			1.50
Net interest margin		1.57			1.87			1.39			1.34			2.16
Asset Quality Ratios:
Non-performing assets to total assets		0.10			0.08			0.12			0.15			0.12
Non-performing loans to total loans		0.11			0.09			0.13			0.21			0.16
Allowance for loan losses to
non-accruing loans		79.03			89.14			74.04			50.87			60.51
Allowance for loan losses to
loans receivable, net		0.08			0.08			0.09			0.11			0.10
Capital Ratios:
Equity to total assets at end of period		10.53			10.29			9.75			11.38			11.24
Average equity to average assets		10.47			10.05			11.03			11.33			11.07
Regulatory Capital of Bank:
Core capital		9.5			9.1			8.8			11.0			10.9
Tier I risk-based capital		22.6			21.3			21.6			29.0			26.8
Total risk-based capital		22.5			21.3			21.6			29.1			26.9
Other Data:
Number of traditional offices		29			29			28			28			27
Number of in-store offices		9			8			8			7			7

(1) During 2004, the Bank refinanced $2.40 billion of its FHLB advances that were not hedged by interest rate swaps. In doing so, the Bank incurred a $236.1 million prepayment penalty.

(2) For all years shown, Capitol Federal Savings Bank MHC, which owns a majority of the outstanding shares of Capitol Federal Financial common stock, waived its right to receive dividends paid on the common stock with the exception of the $0.50 per share dividend paid on 500,000 shares in February 2005. Public shares exclude shares held by Capitol Federal Savings Bank MHC, as well as unallocated shares held in the Capitol Federal Financial Employee Stock Ownership Plan. See page 31 for additional information.

7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General Overview

Capitol Federal Financial (the “Company”) is the mid-tier holding company and the sole shareholder of Capitol Federal Savings Bank (the “Bank”). Capitol Federal Savings Bank MHC (“MHC”), a federally chartered mutual holding company, is the majority owner of the Company. MHC owns 52,192,817 shares of the 74,031,930 voting shares outstanding on September 30, 2006. The Company’s common stock is traded on the NASDAQ Stock Market under the symbol “CFFN.” The Bank comprises almost all of the assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company.

Forward-Looking Statements

We may from time to time make written or oral "forward-looking statements", including statements contained in our filings with the Securities and Exchange Commission (“SEC”). These forward-looking statements may be included in this annual report to stockholders and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

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

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

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

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

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

·   inflation, interest rates, market and monetary fluctuations;

·   our ability to access cost-effective funding;

·   the timely development 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, services and branching locations, when required;

·   the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities and insurance;

·   technological changes;

·   acquisitions and dispositions;

·   changes in consumer spending and saving habits; and

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

This list of important factors is not exclusive. 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.

8

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company. The discussion includes comments relating to the Bank, since the Bank is wholly owned by the Company and comprises the majority of assets and is the principal source of income for the Company.

Executive Summary

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

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

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

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, mortgage-related securities, and investments, and the interest paid on deposits and borrowings. We generally price our loan and deposit products based upon an analysis of our competition and changes in market rates. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. While we do not explicitly price our products at a margin to a specific market rate or index, our products tend to be priced at a margin to general market rates or indices. While national market rates change constantly, and rates offered by competitors with nationwide delivery channels may change during a business day, our offered rates generally remain available to customers for up to a week on deposit products and several days to a week on loan products. Our one- to four-family mortgage loans are generally priced based upon the 10-year Treasury rate while the rates on our deposits are generally priced based upon short-term Treasury rates. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our deposits have maturity or reprice dates of less than 2 years.

During the majority of fiscal year 2006, the yield curve was flat or slightly inverted, which generally means the yield on treasuries with maturities shorter than two years were either slightly lower than longer-term treasuries, or they equaled or exceeded the yield on long-term treasuries. This yield curve environment has resulted in the compression of the Company’s net interest margin during fiscal year 2006. The forward yield curve generally indicates that the market expects interest rates on treasury securities across all maturities to remain generally flat, with changes in rates of less than 25 basis points, through the first fiscal quarter of 2007. The current inverted-to-flat yield curve scenario is likely to cause a continuation of the net interest margin compression during fiscal year 2007 since the interest-earning assets of the Company generally take longer to reprice relative to its interest-bearing liabilities.

During fiscal year 2006, management implemented asset management strategies to shorten the average lives of the Bank’s assets to address the interest rate sensitivity that has occurred as a result of the current interest rate environment. One strategy entailed purchasing adjustable-rate mortgage-related securities, generally with terms to reprice of two years or less, rather than purchasing adjustable-rate mortgage (“ARM”) loans with longer terms to the initial repricing date. Management intends to continue to purchase adjustable-rate securities with terms to reprice of generally two years or less for the foreseeable future. In the fourth quarter of fiscal year 2006, the Bank entered into a transaction with Federal Home Loan Mortgage Corporation (“FHLMC”) to exchange $404.8 million of fixed-rate mortgage loans for adjustable-rate marketable securities (“loan swap”). Management classified the securities as trading. Subsequent to September 30, 2006, all trading securities were sold at approximately book value and the proceeds were reinvested into short-term investments to improve the Bank’s interest rate risk profile. Additionally, management is considering paying off some portion of maturing FHLB advances, rather than renewing the advances, during fiscal year 2007 also in an attempt to improve the Bank’s interest rate risk profile.

The increase in the Federal Funds rate could also constrain earnings, as the Federal Open Market Committee of the Federal Reserve Board increased the Federal Funds rate by 150 basis points from 3.75% to the current rate of 5.25% during fiscal year 2006. The increase that brought the rate to 5.25% was the 17^th consecutive increase, and was among increases widely perceived as measures to control inflation. The Federal Funds rate is the

9

rate at which depository institutions lend reserve requirement surplus balances at the Federal Reserve to other depository institutions in deficit of their reserve requirement. An increase in this rate does not directly impact the rates offered to loan consumers, but the trickle-down effect caused by an increase in borrowing costs for banks may be eventually realized in mortgage, consumer, and corporate loan rates. Since May 2006, the Bank has not increased the rates on existing home equity loans, despite the increase in the Federal Funds rate. This action was taken to retain home equity loans that might otherwise have been refinanced. See additional discussion of interest rate risk in "Item 7A. Quantitative and Qualitative Disclosure About Market Risk."

Net income for fiscal year 2006 was $48.1 million compared to $65.1 million in the prior fiscal year. The $17.0 million decrease in net income was primarily a result of a $39.7 million increase in interest expense, which was partially offset by a $10.8 million increase in interest and dividend income and a $9.7 million decrease in income tax expense as a result of decreased earnings. The increase in interest expense was mainly attributable to higher rates on the certificate of deposit portfolio, money market portfolio and the interest rate swaps which are all generally priced based upon short-term interest rates (two year and shorter maturities). The $10.8 million increase in interest and dividend income was primarily a result of a $29.9 million increase in loans receivable interest income which was partially offset by a $22.9 million decrease in interest income on mortgage-related securities and investment securities.

The Bank’s loan portfolio decreased $243.0 million during fiscal year 2006 to $5.22 billion at September 30, 2006. The decrease in the portfolio was largely a result of the loan swap transaction. The decrease in the portfolio was partially offset by originations and purchases of mortgage loans and a slowdown in prepayment speeds as a result of higher long-term interest rates during fiscal year 2006 compared to fiscal year 2005. Prepayments on loans generally decline as long-term rates rise because borrowers are less likely to refinance their current mortgage or move into more expensive homes due to costs associated with higher rates on new mortgages.

Cash and cash equivalents increased $124.7 million during fiscal year 2006 to $183.2 million at September 30, 2006 primarily due to the timing of cash receipts and subsequent reinvestment of those receipts. The cash balance in excess of short-term liquidity needs will continue to be invested in shorter term investments in an effort to manage interest rate risk exposure.

FHLB advances decreased $157.8 million during fiscal year 2006 to $3.27 billion at September 30, 2006. The primary reason for the decrease was the repayment of $200.0 million in FHLB advances which matured in the first half of fiscal year 2006.

The Bank experienced continued high levels of competition for retail deposit dollars due to aggressive pricing by other financial institutions in its local markets. The Bank increased the average rates on its money market and certificate of deposit portfolios to remain competitive, with an emphasis on the mid-term maturity certificate of deposit market. The Bank’s entire deposit portfolio decreased $59.9 million during fiscal year 2006 to $3.90 billion at September 30, 2006 which was primarily a result of a decrease in the money market portfolio. Management continues to monitor the Bank’s local deposit market pricing environment for its impact on the Bank’s operations and will adjust the Bank’s pricing on deposit accounts accordingly. Management actively looks for pricing opportunities that will allow the Bank to maintain its current size or grow in a profitable manner. On April 1, 2006, the Federal Deposit Insurance Corporation (“FDIC”) increased the level of insurance on certain retirement accounts from $100 thousand to $250 thousand. This change could potentially increase the level of IRA deposits held at the Bank from depositors who currently deposit at multiple financial institutions due to FDIC coverage limits.

The Bank opened a new in-store branch in September 2006 in Johnson County, Kansas. The Bank now has 38 branches in eight counties in the State of Kansas. Management will continue to explore branch expansion opportunities in the Bank’s market areas.

Critical Accounting Policies

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

Allowance for Loan Losses. Management maintains an allowance for loan losses to absorb losses known and inherent in the loan portfolio based upon ongoing quarterly assessments of the loan portfolio. Our methodology

10

for assessing the appropriateness of the allowance consists of several key elements, which includes a formula allowance, specific allowances for identified problem loans and portfolio segments, and knowledge of economic conditions that may lead to credit risk concerns about the loan portfolio or segments of the loan portfolio. In addition, the allowance incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

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

Management reviews the appropriateness of the allowance based upon its evaluation of then-existing economic and business conditions affecting our key lending areas. Other conditions management considers in determining the appropriateness of the allowance include, but are not limited to, changes in our underwriting standards, credit quality trends (including changes in the balance and characteristics of non-performing loans expected to result from existing economic conditions), trends in collateral values, loan volumes and concentrations, and recent loss experience in particular segments of the portfolio as of the balance sheet date. Management also measures the impact that such conditions were believed to have had on the collectibility of impaired loans.

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

The amounts actually observed with respect to these losses can vary significantly from the estimated amounts. Our methodology permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the portfolio, as of the evaluation date, are not reflected in the current loss factors. By assessing the estimated losses inherent in our loan portfolios on a quarterly basis, we can adjust specific and inherent loss estimates based upon more current information.

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

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

Valuation of Mortgage Servicing Rights. The Bank records MSR as a result of retaining the servicing of loans that are owned by another entity. Impairment exists if the carrying value of MSR exceeds the estimated fair value of the MSR. MSR are stratified by the underlying loan term and by interest rate. Individual impairment allowances for each stratum are established when necessary and then adjusted in subsequent periods to reflect

11

changes in the measurement of impairment. The estimated fair value of each MSR stratum is determined through analysis of future cash flows incorporating numerous assumptions including: servicing income, servicing costs, market discount rates, prepayment speeds and other market driven data.

The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSR. Generally, as interest rates decline, prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, prepayments slow which generally results in an increase in the fair value of MSR. All assumptions are reviewed for reasonableness on a quarterly basis and adjusted as necessary to reflect current and anticipated market conditions. Thus, any measurement of the fair value of MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if applied at a different point in time. Annually, we receive an independent appraisal of the fair value of our MSR. At September 30, 2006 the independent valuation exceeded our calculated MSR fair value.

Valuation of Deferred Income Tax Assets. Management assesses the available positive and negative evidence surrounding the recoverability of deferred income tax assets on a quarterly basis. A valuation allowance will be recorded to reduce deferred income tax assets when it is more likely than not that the assets will not be realized. Management believes no valuation allowance was required at September 30, 2006.

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

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

Recent Accounting Pronouncements

In November 2005, the Financial Accounting Standards Board (“FASB”) issued staff position (“FSP”) No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," with references to existing authoritative literature concerning other-than-temporary impairment determinations (principally SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and SEC Staff Accounting Bulletin (“SAB”) No. 59, "Accounting for Noncurrent Marketable Equity Securities"). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security's cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an other-than-temporary impairment loss be recorded when a decision to sell a security has been made and the fair value of the security is not expected to be fully recovered prior to the expected time of sale. FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005 with early adoption permitted. For the year ended September 30, 2006, the Bank recognized an other-than-temporary impairment as a result of management’s decision to sell securities with unrealized losses which were not expected to be fully recovered prior to the expected time of sale.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation, if the holder irrevocably elects to account for the whole instrument on a fair value basis, and clarifies various aspects of SFAS No. 133 and SFAS No. 140 relating to derivative financial instruments and qualifying special-purpose entities holding derivative financial instruments. SFAS No. 155 is effective for all financial instruments acquired or issued for fiscal years beginning after September 15, 2006, which for the Company is October 1, 2006. The Company has not yet completed its assessment of the impact of SFAS No. 155.

12

In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract as defined in the SFAS. It requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and allows an entity to choose between amortization or fair value measurement methods for each class of separately recognized servicing assets and servicing liabilities. It also permits a one-time reclassification of available-for-sale securities to trading without tainting the investment portfolio, provided the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006, which for the Company is October 1, 2006. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a process by which the likelihood of a tax position is gauged based upon the technical merits of the position, and then a subsequent measurement relates the maximum benefit and the degree of likelihood to determine the amount of benefit to recognize in the financial statements. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, which for the Company is October 1, 2007. The Company has not yet completed its assessment of the impact of FIN No. 48.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures regarding fair value measurements. The statement applies whenever other standards require or permit that assets or liabilities be measured at fair value. The statement does not require new fair value measurements, but rather provides a definition and framework for measuring fair value which will result in greater consistency and comparability among financial statements prepared under accounting principles generally accepted in the United States of America “GAAP”. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, which for the Company is October 1, 2008. The Company has not yet completed its assessment of the impact of SFAS No. 157.

In September 2006, the SEC issued SAB No. 108 “Correcting the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretation of the SEC’s views regarding the process of quantifying financial statement misstatements. SAB No. 108 requires registrants to quantify misstatements using a balance sheet and income statement approach and evaluate materiality as it pertains to relevant qualitative and quantitative factors. The SEC believes registrants must quantify the impact of correcting all misstatements on the current year financial statements. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006, which for the Company is September 30, 2007.

Management Strategy

Our strategy is to operate a retail-oriented financial institution dedicated to serving the needs of customers in our market areas. Our commitment is to provide the broadest possible access to home ownership through our mortgage lending programs and to offer a complete set of personal banking products and services. We strive to enhance stockholder value while maintaining a strong capital position. To achieve our strategy, we focus on the following:

·   Portfolio Lending. We are one of the largest originators of one- to four-family mortgage loans in the State of Kansas. We have primarily originated these loans for our own portfolio, rather than for sale, and generally we service the loans we originate. We provide retail customers with alternatives for their borrowing needs by offering both fixed- and adjustable-rate products with various terms to maturity and pricing alternatives. We offer special programs to individuals who may be first time home buyers, have low or moderate incomes or may have certain credit risk concerns in order to maximize our ability to deliver home ownership opportunities. We attract customers through our strong relationships with real estate agents, our reputation, pricing, existing and walk-in customers and customers that apply on the Internet. We also purchase one- to four-family mortgage loans from nationwide lenders and correspondent lenders secured by property primarily located within our Kansas City and Wichita market areas and market areas within our geographic region.

·   Retail Financial Services. We offer a wide array of deposit products and retail services for our customers. These products include checking, savings, money market, certificates of deposit and retirement accounts. These products and services are provided through a branch network of 38 locations which includes traditional branch and retail store locations, our call center which operates on extended hours, telephone bill payment services and Internet-based transaction services.

·   Cost Control. We generally are very effective at controlling our costs of operations, outside of the expense portion of our employee benefit plans that are tied to the Company’s stock price. By using technology, we are able to increase productivity and centralize our lending and deposit support functions for efficient processing. Our retail orientation allows us to serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch at September 30, 2006 and 2005 was over $121.8 million and $124.8 million, respectively. This large average deposit base helps to control costs. Our one- to four-family mortgage lending strategy, through effective management of credit risk, allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans.

13

·   Asset Quality. We utilize underwriting standards for our lending products that are designed to limit our exposure to credit risk, and have a portfolio of predominately one- to four-family mortgage loans which has resulted in minimal levels of delinquent and non-performing loans. At September 30, 2006, our ratio of non-performing assets to total assets was 0.10%.

·   Capital Position. Our policy has always been to protect the safety and soundness of the Bank through conservative credit and operational risk management, balance sheet strength, consistent earnings and sound operations. The end result of these activities is a capital ratio that is in excess of the well-capitalized standards set by the Office of Thrift Supervision (“OTS”). We believe that maintaining a strong capital position safeguards the long-term interests of the Bank, the Company and our stockholders.

·   Stockholder Value. We strive to enhance stockholder value while maintaining a strong capital position. We continue to provide returns to stockholders through our dividend payments. Total dividends declared during fiscal year 2006 were $2.30 per share. In October 2006, the board of directors declared a $0.50 per share dividend which was paid on November 17, 2006 to holders of record on November 3, 2006. Due to MHC's waiver of dividends, the dividend of $0.50 per share was paid only on public shares. On November 7, 2006, the board of directors approved a special year end cash dividend of $0.09 per share which was paid on December 1, 2006 to stockholders of record on November 17, 2006. The Company’s cash dividend payout policy is reviewed continually by management and the board of directors, and the ability to pay dividends under the policy depends upon a number of factors including the Company’s financial condition, results of operations, regulatory capital requirements of the Bank, other regulatory limitations on the Bank’s ability to make capital distributions to the Company and the continued waiver of dividends by MHC. Stockholder value is also enhanced by the Company repurchasing stock. During fiscal year 2006, the Company repurchased 486,668 shares of stock at an average price of $32.82. Excluded from the share repurchase numbers are shares that were received in exchange for the exercise of options. During fiscal year 2006, the board of directors approved a new stock repurchase program. Under the new plan, the Company intends to repurchase up to 500,000 shares from time to time, depending on market conditions and other factors, in open-market and other transactions. The shares will be held as treasury stock for general corporate use.

·   Interest Rate Risk Management. Changes in interest rates are our primary risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. To manage interest rate risk, the Asset and Liability Committee (“ALCO”) meets weekly to discuss and monitor the current interest rate environment compared to interest rates offered on our loan and deposit products. Additionally, ALCO meets once a month to review information that presents the effects that changes in interest rates will have on our earnings, the market value of our portfolio equity and cash flows. The members of ALCO are the Chairman, the Chief Executive Officer, the Chief Financial Officer (chair of ALCO), the Executive Vice President for Corporate Services, the Chief Lending Officer and the Executive Vice President for Retail Operations.

·   Cash Flow Management. The Bank must manage its daily cash flows and the cost of those cash flows. Cash flow management is accomplished through:

·   establishing interest rates on loan and deposit products;

·   investing cash flows not placed into mortgage loans;

·   purchasing investments that meet the long term objectives of earnings, liquidity management and interest rate risk management;

·   borrowing money if cash flows are not sufficient to meet local loan demand or to leverage excess capital.

Generally, management manages the Bank’s asset and liability portfolios, including the available-for-sale securities portfolio, as held-to-maturity portfolios. As such, changes in the balance or mix of products in these portfolios typically do not occur quickly, especially in a rising rate environment. Because of this, management looks at changes over a period of time to determine trends that can be changed through various strategies in our local markets, by the investments and mortgage loans we purchase or by borrowings we incur.

14

Quantitative and Qualitative Disclosure about Market Risk

Asset and Liability Management and Market Risk

The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows of those assets and liabilities and the market value of our assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by these changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. The risk associated with changes in interest rates on the earnings of the Bank and the market value of its financial assets and liabilities is known as interest rate risk. Interest rate risk is our most significant market risk and our ability to adapt to these changes is known as interest rate risk management.

Based upon management’s recommendations, the board of directors sets the asset and liability management policies of the Bank. These policies are implemented by ALCO. The purpose of ALCO is to communicate, coordinate and control asset and liability management consistent with the business plan and board-approved policies. ALCO sets goals for and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce the highest profitability balanced against liquidity, capital adequacy and risk management objectives. At each monthly meeting, ALCO recommends appropriate strategy changes. The Chief Financial Officer or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors, generally on a monthly basis.

The ability to maximize net interest income is dependent largely upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. The asset and liability repricing gap is a measure of the difference between the amount of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, maturing or repricing during the same period. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets maturing or repricing during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter repricing periods would result in an increase in net interest income. During a period of falling interest rates, the opposite would generally be true. As of September 30, 2006, the ratio of our one-year gap to total assets was a negative 13.62%, which primarily was a result of the monthly repricing of our interest rate swaps.

Management recognizes that dramatic changes in interest rates within a short period of time can cause an increase in our interest rate risk relative to the balance sheet. ALCO may decide to increase our interest rate risk position in an effort to increase our net interest margin or maintain it over a longer period of time. Management believes that maintaining and improving earnings is the best way to preserve a strong capital position. Conversely, management recognizes the need, in certain interest rate environments, to limit the Bank's exposure to changing interest rates and may implement strategies to reduce our interest rate risk which could, as a result, reduce earnings in the short-term. To minimize the potential for adverse effects of material and prolonged changes in interest rates on our results of operations, we have adopted asset and liability management policies to better balance the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities based on existing local and national interest rates.

During periods of economic uncertainty, rising interest rates or extreme competition for loans, the Bank’s ability to originate or purchase loans may be adversely affected. In such situations, the Bank alternatively may invest its funds into investment or mortgage-related securities. These alternate investments may have rates of interest lower than rates we could receive on loans, if we were able to originate or purchase them, potentially reducing the Bank’s interest income.

15

Qualitative Disclosure about Market Risk

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

Percentage Change in Net Interest Income (next four quarters)
Change	At
(in Basis Points)	September 30,	June 30,	March 31,	December 31,	September 30,
in Interest Rates(1)	2006	2006	2006	2005	2005
-200 bp	9.98	9.98	3.51	4.12	1.53
-100 bp	8.58	7.81	4.88	5.87	4.48
000 bp	--	--	--	--	--
+100 bp	-12.54	-9.54	-6.66	-9.11	-8.97
+200 bp	-27.20	-20.25	-14.76	-19.8	-19.47
+300 bp	-42.87	-31.55	-23.43	-31.26	-30.76

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

The primary drivers for the decrease in the estimated net interest income in the increasing rate environments are anticipated increases in costs of deposits and interest rate swaps in excess of the increases in yields in the loan and investment and mortgage-related securities portfolios. The increase in the cost of deposits is primarily a result of the relatively short average maturity of the Bank’s certificate of deposit portfolio due to customer behavior and an increase in public unit deposits, which are short term in nature. The increase in the cost of deposits is also due to anticipated increases in the cost of money market accounts. The increase in the costs of the interest rate swaps is due to the immediate repricing nature of the interest rate swaps, which would result in the interest rate swaps experiencing the full impact of the rate change immediately. Changes in the rates on the mortgage loan and mortgage-related securities portfolios happen at a slower pace, compared to the interest-bearing liabilities, because only the amount of cash flow received on the repayment of these portfolios is reinvested at the higher rates or caps on adjustable-rate products limit the increase in rates in these assets when rates rise. Prepayment rates have slowed between fiscal years ended September 30, 2005 and 2006, so the Bank is currently more susceptible to changes in interest rates because as interest rates increase, the rate of prepayment on loans generally decrease, which results in less cash available to be reinvested at higher rates.

The increase in the estimated net interest income if interest rates were to decrease is primarily the result of the immediate decrease in the cost of our interest rate swaps and the rapid decrease in the cost of deposits compared to a slower decrease in the yield on our interest-earning assets.

As a result of the flat or slightly inverted yield curve during fiscal year 2006 and the relatively short term to repricing of our liabilities compared to our assets, the Bank’s net interest margin was lower in fiscal year 2006 compared to fiscal year 2005. The forward yield curve generally indicates that the market expects interest rates on treasury securities across all maturities to remain generally flat, with changes in rates of less than 25 basis points, through the first fiscal quarter of 2007. If the current inverted-to-flat yield curve scenario continues into fiscal year 2007, net interest margin compression is likely. The extent of the compression in the net interest margin depends upon such factors as the increased cost of deposits based upon our deposit pricing in response to expected higher short-term market rates, the volume of deposit flows on a net basis into or out of the Bank, the amount of loan prepayments and the reinvestment of those prepayments into new assets, and the rates received on those assets relative to the change in the cost of liabilities.

16

The following table sets forth the estimated percentage change in market value of portfolio equity (“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 MVPE
Change	At
(in Basis Points)	September 30,	June 30,	March 31,	December 31,	September 30,
in Interest Rates(1)	2006	2006	2006	2005	2005
-200 bp	6.69	14.92	5.43	1.84	-3.08
-100 bp	8.09	12.83	7.81	6.30	2.89
000 bp	--	--	--	--	--
+100 bp	-15.59	-16.70	-12.48	-13.09	-11.68
+200 bp	-34.07	-35.37	-26.77	-28.60	-26.22
+300 bp	-54.36	-56.03	-42.78	-45.47	-41.87

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

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

The Bank’s measure of its MVPE sensitivity to decreases in interest rates indicates a positive change at September 30, 2006. The increase in MVPE if interest rates drop 100 basis points is primarily driven by the continued short-term nature of our liabilities compared to the shortening in the expected lives of our assets, compared to the base case rate scenario, as a result of an assumed increase in prepayment speeds on mortgage-related assets, primarily our fixed-rate loan portfolio. Given the current composition of our loan portfolio and the current interest rate environment, it is likely that many of our customers would be economically enticed to refinance or modify their mortgage loans with a 100 basis point decline in rates compared to the base case scenario. For the Bank’s MVPE to be negatively impacted in a decreasing rate environment, it would require an increase in cash flows from mortgage prepayments, refinances or modifications of loans to market rates lower than anticipated in the above analysis. The higher prepayment assumptions shorten the expected average lives on our fixed-rate assets thereby decreasing the sensitivity of the present value of their cash flows to changes in interest rates, while the expected average lives of our liabilities remains largely unchanged.

17

The Bank’s estimate of its changes in MVPE from the base case in rising rate environments continued its trend towards more sensitivity. This was primarily driven by the increase in the 30-year fixed-rate loan portfolio, the trend for customers to shorten the maturities of their certificates of deposit, and the average shorter maturity of our FHLB advances as they move toward maturity. As rates increase, the estimated fair values of the liabilities with short average lives do not respond to rates in the same manner as the longer maturity loans, such as our fixed-rate loans, which have longer average lives. The prepayment assumptions on the fixed-rate loans in particular, and all loans in general, anticipate prepayment rates in the increasing rate environments that would only be realized through normal changes in customers lives, such as divorce, death, job-related relocations, and other life changing events. The lower prepayment assumptions extend the expected average lives on these assets thereby increasing their sensitivity to changes in interest rates. The net effect of these characteristics of short-lived liabilities and long-lived assets is to increase the sensitivity of the Bank to changes in interest rates.

Management realizes that this level of sensitivity, while in compliance with limits established by the board of directors, exposes the Bank to significant challenges in its operations. As previously discussed, subsequent to September 30, 2006, management sold the trading securities acquired through the loan swap transaction. The proceeds from the sale were invested into investment securities with terms to maturity or terms to reprice of generally two years or less. Management intends to continue purchasing shorter duration securities for the foreseeable future. Additionally, management is considering paying off some portion of maturing FHLB advances, rather than renewing the advances, during fiscal year 2007. These strategies are expected to modestly reduce the Bank’s interest rate risk sensitivity. However, these changes may, depending on the shape of the yield curve and the resulting mix of funding and investing, cause the net interest margin of the Bank to continue to compress as a result of the yields on the short duration assets being significantly lower than yields on long duration assets and the increase in the cost of funding without the opportunity to increase the yields of the assets already on the Bank’s balance sheet.

The assumptions used by management to evaluate the sensitivity of our financial performance to changes in interest rates presented in the tables above are utilized in, and set forth under, the gap table and related notes beginning on page 19. Although management finds these assumptions reasonable given the constraints described above, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income and MVPE indicated in the above tables could vary substantially if different assumptions were used or actual experience differs from these assumptions.

18

Gap Table: The gap table summarizes the anticipated maturities or repricing of our interest-earning assets and interest-bearing liabilities as of September 30, 2006, based on the information and assumptions set forth in the notes below.

	Within Three Months				Three to Twelve Months		More Than One Year to Three Years		More Than Three Years to Five Years				Over  Five Years		Total
Interest-earning assets:	(Dollars in thousands)
Loans receivable(1) (2):
Mortgage loans:
Fixed	$	155,899		$	413,401		$	841,859		$	574,593		$	1,121,283		$	3,107,035
Adjustable		143,127			521,911			770,753			457,525			18,671			1,911,987
Other loans		159,445			5,535			8,950			6,696			42,898			223,524
Securities:
Non-mortgage(3)		--			111,610			266,464			--			51,201			429,275
Mortgage-related(4)		117,309			509,746			724,176			270,827			465,419			2,087,477
Other interest-earning assets		141,800			--			--			--			--			141,800
Total interest-earning assets		717,580			1,562,203			2,612,202			1,309,641			1,699,472			7,901,098
Interest-bearing liabilities:
Deposits:
Passbook and passcard (5)		2,207			6,620			17,867			14,995			64,658			106,347
Checking (5)		8,780			26,341			66,259			55,218			246,300			402,898
Money market (5)		35,794			107,383			193,329			148,570			323,834			808,910
Certificates		518,974			1,140,164			839,283			82,201			1,654			2,582,276
Borrowings (6)		800,000			750,000			1,520,000			226,000			53,609			3,349,609
Total interest-bearing liabilities		1,365,755			2,030,508			2,636,738			526,984			690,055			7,250,040
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities	$	(648,175	)	$	(468,305	)	$	(24,536	)	$	782,657		$	1,009,417		$	651,058
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities	$	(648,175	)	$	(1,116,480	)	$	(1,141,016	)	$	(358,359	)	$	651,058
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a
percent of total assets at September 30, 2006		(7.91	)%		(13.62	)%		(13.92	)%		(4.37	)%		7.94	%
Cumulative one-year gap at September 30, 2005					(4.01	)%
Cumulative one-year gap at September 30, 2004					(5.54	)%

19

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

(2)Balances have been reduced for non-performing loans, which totaled $5.6 million at September 30, 2006.

(3)Based on contractual maturities or term to call date based on the current rate environment, and excludes the unrealized loss adjustment of $205 thousand on available-for sale investment securities.

(4)Reflects estimated prepayments of mortgage-related securities in our portfolio, and excludes the unrealized loss adjustment of $2.7 million on available-for-sale mortgage-related securities. As previously discussed, subsequent to September 30, 2006, all trading securities ($396.9 million at September 30, 2006) were sold.

(5)Although our checking, passbook and passcard 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, passbook and passcard savings and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $2.25 billion, for a cumulative one-year gap of (27.41)% of total assets.

(6)Borrowings exclude the $27.3 million unrealized loss adjustment on the swapped FHLB advances and $142 thousand of capitalized debt issuance costs on other borrowings.

The increase in the negative cumulative gap in the table on the previous page is a result of the approaching FHLB advance maturity dates, and customers shifting from medium and long-term to short-term certificates of deposit. The Bank’s asset lives are extending as a result of the continued growth in the 30 year fixed-rate mortgage loan portfolio while the liability lives (FHLB advances and certificate of deposit portfolio) are shortening.

The table on the previous page contains certain assumptions which affect the presentation. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels likely would deviate significantly from those assumed in calculating the table.

The FHLB advances designated in hedging relationships have maturities ranging from May 2008 to August 2010. At September 30, 2006, the Bank was in a paying position on the interest rate swaps. If the one month LIBOR rate remains higher than 3.68% (weighted average break even LIBOR rate), then the Bank will continue to be in a paying position on the interest rate swaps. The following summarizes the interest rate swap agreements by maturity date at September 30, 2006:

	September 30, 2006
						Paying
Fiscal				Notional		1 Month									Receiving
Year	Fair			Principal		LIBOR						Interest			Interest
Maturity	Value(1)			Amount		Rate(2)			Margin			Rate			Rate			Spread
	(Dollars in thousands)
2008	$	(6,377	)	$	225,000		5.33	%		2.41	%		7.74	%		5.68	%		(2.06	)%
2010		(20,918	)		575,000		5.33			2.51			7.84			6.35			(1.49	)
	$	(27,295	)	$	800,000		5.33	%		2.48	%		7.81	%		6.16	%		(1.65	)%

(1)The one month LIBOR rate as of September 30, 2006 was 5.32%. This rate was used to calculate the fair value of the interest rate swaps at September 30, 2006. This rate plus the margin noted above will be the paying interest rate during October 2006.

(2)The one month LIBOR rate as of August 30, 2006 was 5.33%. This rate plus the margin noted above was the paying interest rate during September 2006.

20

Weighted Average Yields and Rates

The following table presents the weighted average yields earned on loans, investments and other interest-earning assets, the weighted average rates paid on deposits, certificates and borrowings and the resultant interest rate spreads at the dates indicated.

	At September 30,
		2006		2005		2004
Weighted average yield on:
Loans receivable		5.64	%	5.49	%	5.44	%
Mortgage-related securities		4.54		3.71		3.57
Investment securities		4.46		4.54		4.89
Capital stock of FHLB		6.24		4.70		3.75
Cash and cash equivalents		5.19		3.70		1.76
Combined weighted average yield on
interest-earning assets		5.29		4.96		4.72
Weighted average rate paid on:
Passbook and passcard deposits		0.65		0.65		0.65
Checking deposits		0.21		0.21		0.21
Money market deposits		3.31		2.06		1.33
Certificates of deposit		4.35		3.35		2.79
Borrowings		4.93		4.45		3.87
Combined weighted average rate paid on
interest-bearing liabilities		4.22		3.50		2.95
Spread		1.07	%	1.46	%	1.77	%

21

Average Balance Sheet: The following table presents certain information regarding our financial condition and net interest income for 2006, 2005, and 2004. The table presents the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. We derived the yields and costs by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated, except as noted. Interest income includes fees that we considered adjustments to yields. Yields on tax-exempt securities were not calculated on a tax-equivalent basis.

	September 30, 2006							September 30, 2005							September 30, 2004
	Average		Interest					Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate			Balance		Paid		Rate
Assets	(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)	$	5,314,972	$	286,372		5.39	%	$	4,838,914	$	260,294		5.38	%	$	4,230,033	$	236,917		5.60	%
Other loans		216,600		17,450		8.06			208,898		13,678		6.55			198,171		10,448		5.26
Total loans receivable, net		5,531,572		303,822		5.49			5,047,812		273,972		5.43			4,428,204		247,365		5.59
Mortgage-related securities		1,902,579		75,806		3.98			2,518,237		91,742		3.64			2,825,549		94,469		3.34
Investments and cash equivalents		475,484		21,387		4.50			577,361		26,259		4.55			907,752		36,895		4.07
Capital stock of FHLB		174,094		9,913		5.69			177,055		8,134		4.59			171,208		6,104		3.57
Total interest-earning assets(1)		8,083,729		410,928		5.08			8,320,465		400,107		4.81			8,332,713		384,833		4.62
Other noninterest-earning assets(2)		159,286							174,914							148,425
Total assets	$	8,243,015						$	8,495,379						$	8,481,138
Liabilities and stockholders' equity
Interest-bearing liabilities:
Passbook and passcard	$	114,234		697		0.61		$	124,969		780		0.62		$	123,077		778		0.63
Checking		396,934		857		0.22			393,645		871		0.22			382,528		863		0.23
Money market		845,233		22,443		2.66			917,596		16,688		1.82			934,499		12,054		1.29
Certificates		2,555,952		98,551		3.86			2,619,421		78,660		3.00			2,722,083		79,236		2.90
Total deposits		3,912,353		122,548		3.14			4,055,631		96,999		2.39			4,162,187		92,931		2.23
FHLB advances(3)		3,284,554		157,197		4.73			3,442,395		144,110		4.16			3,252,325		174,276		5.28
Borrowings, other		53,378		4,160		7.69			53,380		3,092		5.71			27,820		1,435		4.21
Total interest-bearing liabilities		7,250,285		283,905		3.89			7,551,406		244,201		3.22			7,442,332		268,642		3.57
Other noninterest-bearing liabilities(2)		129,875							89,943							103,582
Stockholders' equity(2)		862,855							854,030							935,224
Total liabilities and stockholders' equity	$	8,243,015						$	8,495,379						$	8,481,138
Net interest income			$	127,023						$	155,906						$	116,191
Net interest rate spread						1.19	%						1.59	%						1.05	%
Net earning assets	$	833,444						$	769,059						$	890,381
Net interest margin						1.57	%						1.87	%						1.39	%
Ratio of interest-earning assets to
interest-bearing liabilities						1.11							1.10							1.12

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

(2) Calculated using month end balances.

(3) Includes an increase in net interest expense of $8.6 million as a result of interest rate swaps for the year ended September 30, 2006. Includes a reduction in net interest expense of $7.3 million and $15.7 million as a result of interest rate swaps for the years ended September 30, 2005 and 2004, respectively.

22

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 fiscal years 2006 to 2005 and fiscal years 2005 to 2004. 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.

	Year Ended September 30,
	2006 vs. 2005									2005 vs. 2004
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	26,252		$	3,598		$	29,850		$	33,130		$	(6,523	)	$	26,607
Mortgage-related securities		(25,789	)		9,853			(15,936	)		(15,533	)		12,806			(2,727	)
Investment and cash equivalents		(4,859	)		(13	)		(4,872	)		(15,411	)		4,775			(10,636	)
Capital stock of FHLB		(134	)		1,913			1,779			214			1,816			2,030
Total interest-earning assets	$	(4,530	)	$	15,351		$	10,821		$	2,400		$	12,874		$	15,274
Interest-bearing liabilities:
Passbook and passcard	$	(66	)	$	(12	)	$	(78	)	$	12		$	(12	)	$	--
Checking		7			--			7			28			(41	)		(13	)
Money market		(1,192	)		6,975			5,783			(214	)		4,859			4,645
Certificates		(1,832	)		21,669			19,837			(3,894	)		3,330			(564	)
FHLB advances and other borrowings		(6,438	)		20,593			14,155			7,959			(36,468	)		(28,509	)
Total interest-bearing liabilities	$	(9,521	)	$	49,225		$	39,704		$	3,891		$	(28,332	)	$	(24,441	)
Net change in net interest and dividend income	$	4,991		$	(33,874	)	$	(28,883	)	$	(1,491	)	$	41,206		$	39,715

23

Financial Condition

Total assets decreased $210.6 million from $8.41 billion at September 30, 2005 to $8.20 billion at September 30, 2006. The decrease in assets was attributed mainly to a decrease in loans receivable of $243.0 million and partially to a decrease in mortgage-related securities of $60.5 million. These decreases were partially offset by an increase in cash and cash equivalents of $124.7 million.

Total liabilities decreased $208.8 million from $7.54 billion at September 30, 2005 to $7.34 billion at September 30, 2006. The decrease in liabilities was due primarily to the repayment of $200.0 million in FHLB advances, partially offset by a new advance of $46.0 million. Due to the flatness of the yield curve during fiscal year 2006, the investment opportunities available did not provide a net interest spread that would justify renewing the advances. The decrease in liabilities was also attributed to a decrease in deposits of $59.9 million, which was primarily a result of a decrease in the money market portfolio.

Stockholders’ equity decreased $1.9 million from $865.1 million at September 30, 2005 to $863.2 million at September 30, 2006. The decrease was primarily a result of $46.9 million in dividend payments and partially a result of $16.7 million in stock repurchases. The decrease in stockholders’ equity was partially offset by $48.1 million in net income and a $7.4 million increase in additional paid-in capital.

Loans Receivable. The loan portfolio decreased $243.0 million from $5.46 billion at September 30, 2005 to $5.22 billion at September 30, 2006. The decrease in the portfolio was primarily a result of principal repayments of $973.1 million and the exchange of $404.8 million of originated mortgage loans for mortgage-related securities with FHLMC in September 2006. The decrease in the loan portfolio was partially offset by loan originations of $811.2 million, mortgage loan purchases of $329.3 million and a modest slowdown in prepayment speeds during fiscal year 2006 compared to fiscal year 2005 as a result of an increase in long-term rates during fiscal year 2006.

Purchased loans from nationwide lenders represented 21.3% of the loan portfolio at September 30, 2006 compared to 21.8% at September 30, 2005. As of September 30, 2006, the average balance of a purchased loan was approximately $348 thousand compared to the average balance of approximately $139 thousand for an originated loan. Purchasing mortgage loans rather than mortgage-related securities has resulted in more assets earning a higher rate with no anticipated material increase in credit risk exposure.Our purchased mortgage loans, as measured for interest rate risk sensitivity, were less sensitive to changes in rates than the fixed-rate loans we originate as the majority of our purchased loans are ARM loans. Our purchased loans are more sensitive to changes in rates than the mortgage-related and investment securities we would have purchased, which would have likely consisted of ARMs with initial reprice terms of less than 36 months and other short duration investments.

Loans purchased from nationwide and correspondent lenders during the current fiscal year totaled $329.3 million at a weighted average rate of 5.52% compared to $857.2 million at a weighted average rate of 5.04% during the prior year. Of the loans purchased during the current and prior fiscal years, $245.9 million and $728.0 million, respectively, were adjustable-rate. The majority of purchased ARM loans have reprice terms of 36 months or greater. Generally, when acquired or originated, the initial rates on ARM loans are lower than the rates on fixed-rate loans.

Total one- to four-family loan originations during the current fiscal year were $645.4 million at an average rate of 5.96% compared to one- to four-family loan originations of $708.8 million at an average rate of 5.25% for the prior fiscal year. Of the one- to four- family loans originated, $497.5 million and $514.0 million, respectively, were fixed-rate.

The average yield on our loan portfolio increased 15 basis points from 5.49% at September 30, 2005 to 5.64% at September 30, 2006. The increase in the yield was a result of ARM loans repricing, fixed-rate mortgage loans originated or purchased at rates higher than the overall mortgage loan portfolio rate, home equity lines of credit repricing upward during the first half of fiscal year 2006 and consumer loans originated at rates higher than the overall consumer loan portfolio rate.

Generally, during the current fiscal year ended September 30, 2006, the Bank’s 30-year fixed-rate loans, with no points paid by the borrower, were priced at approximately 157 basis points above the average 10-year Treasury rate, while the Bank’s 15-year fixed-rate loans were priced approximately 120 basis points above the average 10-year Treasury rate. The Bank’s loan pricing is comparable to the secondary mortgage market pricing.

24

The following tables summarize the activity in the loan portfolio for the periods indicated, excluding changes in loans in process, deferred fees and allowance for loan losses. The weighted average contractual life of our mortgage loan portfolio at September 30, 2006 and 2005 was 22.9 years. Included in the three months ended March 31, 2006 and the year ended September 30, 2006 are repayment amounts of $47.6 million which represent loans purchased during fiscal year 2005 that were repurchased by the seller.

		For the Three Months Ended
		September 30, 2006			June 30, 2006			March 31, 2006			December 31, 2005
		Amount	Rate		Amount	Rate		Amount	Rate		Amount	Rate
Loans receivable:		(Dollars in thousands)
	Beginning balance	$5,601,211	5.51	%	$5,554,691	5.45	%	$5,600,378	5.41	%	$5,494,387	5.39	%
	Originations and refinances	215,763	6.63		249,077	6.46		150,741	6.34		195,665	5.98
	Purchases	85,295	6.08		40,115	5.99		53,917	5.51		149,992	5.09
	Repayments	(240,209)			(242,449)			(249,837)			(240,559)
	Principal balance of loans related   to loan swap transaction	(404,819)	5.72		--	--		--	--		--	--
	Other	232			(223)			(508)			893
	Ending balance	$5,257,473	5.55	%	$5,601,211	5.51	%	$5,554,691	5.45	%	$5,600,378	5.41	%
		For the Year Ended September 30,
		2006			2005
		Amount	Rate		Amount	Rate
Loans receivable:		(Dollars in thousands)
	Beginning balance	$5,494,387	5.39	%	$4,794,442	5.38	%
	Originations and refinances	811,246	6.37		867,522	5.51
	Purchases	329,319	5.52		857,207	5.03
	Repayments	(973,054)			(1,026,175)
	Principal balance of loans related   to loan swap transaction	(404,819)	5.72		--	--
	Other	394			1,391
	Ending balance	$5,257,473	5.55	%	$5,494,387	5.39	%

25

Mortgage-Related Securities. The balance of mortgage-related securities decreased $60.5 million from $2.15 billion at September 30, 2005 to $2.08 billion at September 30, 2006. The decrease in the portfolio was primarily a result of $564.4 million in maturities which were not replaced in their entirety. The decrease was partially offset by the securities received in the loan swap transaction and $111.1 million of purchases during fiscal year 2006. The Bank received securities with a fair value of $395.8 million in the loan swap transaction. Management classified the securities as trading. As previously discussed, subsequent to September 30, 2006, the trading securities were sold at approximately book value.

The following tables provide a summary of the activity in our portfolio of mortgage-related securities for the periods presented. The yields and weighted average life (“WAL”) for purchases are presented as recorded at the time of purchase. The yields for the beginning and ending balances are as of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The increase in the yield at September 30, 2006 compared to September 30, 2005 was a result of existing adjustable-rate securities in the portfolio repricing upward, the addition of the trading securities, and the purchase of securities which had a net yield greater than that of the existing portfolio. Excluding the yield on the trading securities, the portfolio yield would have been 4.26% at September 30, 2006. The beginning and ending WAL is the estimated remaining maturity of the underlying collateral after projected prepayment speeds have been applied. The increase in the WAL at September 30, 2006 can be attributed primarily to the addition of the trading securities which had a net WAL greater than that of the portfolio. Excluding the WAL of the trading securities, the portfolio WAL would have been 3.74 years at September 30, 2006.

		For the Three Months Ended
		September 30, 2006				June 30, 2006				March 31, 2006				December 31, 2005
		Amount	Yield		WAL	Amount	Yield		WAL	Amount	Yield		WAL	Amount	Yield		WAL
Mortgage-related securities:		(Dollars in thousands)
	Beginning balance	$1,788,858	4.14	%	3.85	$1,839,593	4.01	%	3.30	$1,967,564	3.84	%	3.43	$2,145,254	3.71	%	3.38
	Maturities and repayments	(125,549)				(135,663)				(127,409)				(175,734)
	Net amortization of premiums/discounts	(1,222)				(1,709)				(1,662)				(2,439)
	Purchases:
	Fixed-rate	--	--		--	10,092	6.50		1.65	983	5.65		7.88	--	--		--
	Adjustable-rate	22,239	5.95		1.88	77,792	5.98		2.14	--	--		--	--	--		--
	Fair value of securities received in loan swap transaction	395,828	5.73		7.15	--	--		--	--	--		--	--	--		--
	Other-than-temporary impairment of AFS securities	(472)				--				--				--
	Change in valuation on securities:
	Trading	1,076				--				--				--
	Available-for-sale	4,028				(1,247)				117				483
	Ending balance	$2,084,786	4.54	%	4.39	$1,788,858	4.14	%	3.85	$1,839,593	4.01	%	3.30	$1,967,564	3.84	%	3.43

26

		For the Year Ended September 30,
		2006				2005
Mortgage-related securities:		Amount	Yield		WAL	Amount	Yield		WAL
		(Dollars in thousands)
	Beginning balance	$2,145,254	3.71	%	3.38	$2,648,708	3.57	%	3.35
	Maturities and repayments	(564,355)				(797,929)
	Net amortization of premiums/discounts	(7,032)				(12,153)
	Purchases:
	Fixed-rate	11,075	6.42		2.20	118,943	4.53		4.74
	Adjustable-rate	100,031	5.97		2.08	190,563	4.50		4.86
	Fair value of securities received in loan swap transaction	395,828	5.73		7.15	--	--		--
	Other-than-temporary impairment of AFS securities	(472)				--
	Change in valuation on securities:
	Trading	1,076				--
	Available-for-sale	3,381				(2,878)
	Ending balance	$2,084,786	4.54	%	4.39	$2,145,254	3.71	%	3.38

27

Investment Securities. Investment securities, which consist of agency bonds (primarily issued by Federal National Mortgage Association or FHLMC) and municipal investments, decreased slightly from $430.5 million at September 30, 2005 to $429.5 million at September 30, 2006. The following tables provide a summary of the activity of investment securities for the periods presented. The yields for the beginning and ending balances are as of the periods presented. The decrease in the yield at September 30, 2006 compared to September 30, 2005 was a result of securities maturing with yields greater than the portfolio, partially offset by security purchases with net yields greater than the overall portfolio yield but less than the yield of the maturing securities. The maturing securities were purchased in May 2001 and had a weighted average yield of approximately 5.51% at maturity. The beginning and ending WAL represent the estimated remaining maturity of the underlying collateral after projected call dates have been considered, based upon market rates at each date presented. The increase in the WAL at September 30, 2006 compared to September 30, 2005 was primarily due to maturities during fiscal year 2006 which was partially offset by purchases with a net WAL less than that of the portfolio.

		For the Three Months Ended
		September 30, 2006				June 30, 2006				March 31, 2006				December 31, 2005
		Amount	Yield		WAL	Amount	Yield		WAL	Amount	Yield		WAL	Amount	Yield		WAL
Investment securities:		(Dollars in thousands)
	Beginning balance	$382,128	4.35	%	3.09	$380,518	4.41	%	2.84	$430,517	4.54	%	2.73	$430,499	4.54	%	2.48
	Maturities and calls	(10,000)				(140,510)				(50,000)				--
	Net amortization of premiums/discounts	114				10				1				18
	Purchases - fixed	56,730	5.36		1.72	142,413	5.32		1.27	--				--
	Change in valuation on AFS securities	508				(303)				--				--
	Ending balance	$429,480	4.46	%	2.63	$382,128	4.35	%	3.09	$380,518	4.41	%	2.84	$430,517	4.54	%	2.73
		For the Year Ended September 30,
		2006				2005
		Amount	Yield		WAL	Amount	Yield		WAL
Investment securities:		(Dollars in thousands)
	Beginning balance	$430,499	4.54	%	2.48	$638,079	4.89	%	1.73
	Maturities and calls	(200,510)				(207,000)
	Net amortization of premiums/discounts	143				(580)
	Purchases - fixed	199,143	5.33		1.39	--	--		--
	Change in valuation on AFS securities	205				--
	Ending balance	$429,480	4.46	%	2.63	$430,499	4.54	%	2.48

28

Deferred Income Tax Asset. Under the Internal Revenue Code, the Bank is required to amortize the $236.1 million prepayment penalty associated with the FHLB advance refinancing during fiscal year 2004 over the term of the new advances as an original issue discount. Through September 30, 2010, the Bank will take annual deductions on its tax return for the amount of the original issue discount amortized in that year, as a yield adjustment to recorded FHLB advance expense. The Bank will take a deduction of $25.3 million on its fiscal year 2006 tax return related to the amortization of the original issue discount. The Bank recorded a deferred tax asset of $89.5 million associated with the FHLB advance refinancing, and had a remaining balance of $37.7 million at September 30, 2006, for the original issue discount that will be amortized in the future.

Liabilities. Liabilities decreased $208.8 million from $7.54 billion at September 30, 2005 to $7.34 billion at September 30, 2006. The decrease in liabilities was due primarily to the repayment of $200.0 million in FHLB advances, partially offset by a new advance of $46.0 million. The decrease in liabilities was also attributed to a decrease in deposits of $59.9 million, which was primarily a result of a decrease in the money market portfolio.

During fiscal year 2006, the Bank paid down $200.0 million of maturing FHLB advances rather than entering into new advances as the interest rate on the Bank’s short-term investment opportunities for those funds were less than or equal to what the rate would have been on the new advances as a result of the current inverted-to-flat yield curve. The weighted rate on the FHLB advances (including the impact of the interest rate swaps) increased 46 basis points from 4.42% at September 30, 2005 to 4.88% at September 30, 2006. The increase in the rate between periods was primarily a result of the interest rate swaps and to a lesser extent the FHLB advances that matured which had a weighted average rate of 3.60%.

Management will continue to monitor the Bank’s investment opportunities and balance those opportunities with the cost of FHLB advances or other funding sources. As previously discussed, management is considering paying off some portion of the maturing FHLB advances rather than renewing them during fiscal year 2007.

The $59.9 million decrease in the deposit portfolio was primarily a result of a $64.7 million decrease in the money market portfolio, offset by a $15.2 million increase in the certificate of deposit portfolio. The increase in the certificate of deposit portfolio was primarily a result of growth in public unit deposits. As previously discussed, during fiscal year 2006 the Bank experienced aggressive deposit pricing by other financial institutions in its local markets. Additionally, customers are selecting other investment products rather than the Bank’s money market and certificates of deposit products.

At September 30, 2006, $233.5 million of our $2.58 billion in certificates were brokered and public unit deposits, compared to $207.8 million in brokered and public unit deposits at September 30, 2005. The $25.7 million increase between September 30, 2005 and September 30, 2006 was primarily attributed to an increase in public unit deposits of $65.6 million, partially offset by a decrease in brokered deposits of $40.0 million. The decrease in brokered deposits was a result of maturities that were not retained because the Bank was not in the market for brokered deposits at the time of maturity for those deposits. Management will continue to monitor the wholesale deposit market.

29

The tables below present the Company’s deposit portfolio at the dates indicated.

	At					At					At
	June 30, 2006					March 31, 2006					December 31, 2005
		Average		% of			Average		% of			Average		% of
	Amount	Rate		Total		Amount	Rate		Total		Amount	Rate		Total
	(Dollars in thousands)
Checking	$  420,933	0.21	%	10.80	%	$  433,913	0.21	%	10.81	%	$  423,148	0.21	%	10.75	%
Passbook & passcard	113,018	0.65		2.90		118,582	0.65		2.95		115,075	0.65		2.92
Money market	834,419	3.15		21.42		854,350	2.53		21.28		869,398	2.32		22.08
Certificates	2,527,499	4.14		64.88		2,608,283	3.83		64.96		2,529,616	3.59		64.25
Total deposits	$3,895,869	3.40	%	100.00	%	$4,015,128	3.07	%	100.00	%	$3,937,237	2.86	%	100.00	%
	At					At
	September 30, 2006					September 30, 2005
		Average		% of			Average		% of
	Amount	Rate		Total		Amount	Rate		Total
	(Dollars in thousands)
Checking	$    402,898	0.21	%	10.33	%	$  398,490	0.21	%	10.06	%
Passbook & passcard	106,347	0.65		2.73		121,133	0.65		3.06
Money market	808,910	3.31		20.74		873,570	2.06		22.06
Certificates	2,582,276	4.35		66.20		2,567,104	3.35		64.82
Total deposits	$ 3,900,431	3.61	%	100.00	%	$3,960,297	2.67	%	100.00	%

30

Stockholders’ Equity. Total stockholders’ equity decreased $1.9 million from $865.1 million at September 30, 2005 to $863.2 million at September 30, 2006. The decrease was primarily a result of $46.9 million in dividend payments and partially a result of $16.7 million of stock repurchases. These decreases in stockholders’ equity were partially offset by $48.1 million in net income and a $7.4 million increase in additional paid-in capital primarily due to mark-to-market adjustments on shares allocated to the Employee Stock Ownership Plan (“ESOP”) and stock options exercised.

During fiscal year 2006, the Company repurchased 486,668 shares at an average price of $32.82, compared to 168,882 shares repurchased at an average price of $34.19 during fiscal year 2005. Excluded from the share repurchase numbers are shares that were surrendered in payment of the exercise price for the exercise of options, which totaled 21,883 and 77,548 for fiscal years ended September 30, 2006 and 2005, respectively. During the year, the board of directors approved a new stock repurchase program. Under the new plan, the Company intends to repurchase up to 500,000 shares from time to time, depending on market and other conditions, in open-market and other transactions. The shares would be held as treasury stock for general corporate use. The new plan has no expiration date and commenced in September 2006, after all shares from the previous program had been repurchased. See additional discussion in “Item 5. Market for the Registrant’s Common Stock, Related Security Holder Matters and Issuer Purchases of Equity Securities.”

Each quarter since the Company’s initial public offering, approximately 50,410 shares of Company stock have been allocated to the ESOP participants, decreasing the balance of ESOP unearned compensation by $504 thousand per quarter or $2.0 million each fiscal year. During fiscal year 2006, mark-to-market adjustments of $4.7 million were recorded in additional paid-in capital on the allocated shares in accordance with Statement of Position (“SOP”) 93-6“Employers' Accounting for Employee Stock Ownership Plans”.

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 dividends are needed to fund continuing operations. The following table shows the number of shares eligible to receive dividends because of the waiver of dividends by MHC at September 30, 2006. The unvested shares in ESOP receive dividends that are recorded through compensation expense.

Total voting shares outstanding at September 30, 2005	74,286,889
Treasury stock acquisitions	(508,551)
Recognition and Retention Plan (“RRP”) grants, net	22,500
Options exercised, net	231,092
Total voting shares outstanding at September 30, 2006	74,031,930
Unvested shares in ESOP	(1,411,470)
Shares held by MHC	(52,192,817)
Total shares eligible to receive dividends at September 30, 2006 (public shares)	20,427,643

31

Comparison of Results of Operations for the Years Ended September 30, 2006 and 2005

For fiscal year 2006, the Company recognized net income of $48.1 million compared to net income of $65.1 million in fiscal year 2005. The $17.0 million decrease in net income was primarily a result of a $28.9 million decrease in net interest and dividend income offset by a $9.7 million decrease in income tax expense.

Net interest and dividend income in the current fiscal year was $127.0 million compared to $155.9 million in the prior fiscal year. The $28.9 million decrease between the two periods was a result of a $39.7 million increase in interest expense, which was partially offset by a $10.8 million increase in interest and dividend income. The increase in interest expense was mainly attributable to higher rates on the certificate of deposit portfolio, money market portfolio and the interest rate swaps which are all generally priced based upon short-term interest rates (two year and shorter maturities).

Interest income on loans receivable in the current fiscal year was $303.8 million compared to $274.0 million in the prior fiscal year. The $29.8 million increase in loan interest income was primarily due to a $483.8 million increase in the average balance of the portfolio as a result of loan originations and purchases, and a slowdown in prepayment speeds during fiscal year 2006. The weighted average yield of the loan portfolio for the current fiscal year increased 6 basis points to 5.49%, compared to 5.43% for the same period one year ago. The increase in the yield was due to home equity and ARM loans repricing to higher rates and fixed- and adjustable-rate mortgage loans originated and purchased at rates generally higher than the average yield on the existing loan portfolio.

Interest income on mortgage-related securities in the current fiscal year was $75.8 million compared to $91.7 million in the prior fiscal year. The $15.9 million decrease in interest income was a result of a $615.7 million decrease in the average balance of the portfolio, which was partially offset by an increase in the weighted average yield of 34 basis points to 3.98% for the current fiscal year. The weighted average yield increased during the current fiscal year primarily due to purchases of mortgage-related securities with yields higher than that of the total portfolio and adjustable-rate securities in the portfolio repricing to a higher rate.

Interest income on investment securities in the current fiscal year was $18.0 million compared to $25.0 million in the prior fiscal year. The $7.0 million decrease in interest income was primarily a result of a $123.9 million decrease in the average balance of the portfolio and, to a lesser extent, a 28 basis point decrease in the weighted average yield to 4.45% for the current fiscal year. The decrease in the average balance was a result of the timing of called and maturing securities and the purchase of new securities. The decrease in the weighted average yield of the portfolio was attributed to called and maturing securities with weighted average yields higher than that of the remaining portfolio.

Interest expense on deposits in the current fiscal year was $122.5 million compared to $97.0 million in the prior fiscal year. The $25.5 million increase was primarily a result of an increase in the average rate on the certificate of deposit and money market portfolios which was slightly offset by a decrease in the average balance of the certificate of deposit, money market, and savings portfolios. The weighted average rate of the certificate of deposit portfolio for the current fiscal year was 3.86% compared to 3.00% for the prior fiscal year. The weighted average rate of the money market portfolio for the current fiscal year was 2.66% compared to 1.82% for the prior fiscal year. The Bank increased certain deposit rates in response to the general trend of increasing interest rates to remain competitive in its markets, which resulted in an increase in the weighted average rate of the certificate of deposit and money market portfolios.

Interest expense on FHLB advances in the current fiscal year was $157.2 million compared to $144.1 million in the prior fiscal year. The $13.1 million increase in interest expense was primarily a result of an increase in the paying rate on the interest rate swaps, partially offset by a decrease in the average FHLB advance balance. The weighted average paying rate on the variable-rate interest rate swaps was 7.22% for the current fiscal year compared to 5.26% for prior fiscal year. The 196 basis point increase was due to the increase in the one month LIBOR rate between the two periods. The average balance of FHLB advances decreased as a result of the repayment of $200.0 million of maturing FHLB advances during fiscal year 2006.

During the current fiscal year, the Bank recorded a provision for loan losses of $247 thousand compared to $215 thousand in the prior fiscal year. The increase in the provision for loan losses in the current fiscal year was a result of replacing amounts in the general valuation allowance for loans transferred to specific reserves, and also a result of the movement of loans between risk categories in the general valuation model.

Total other income increased $1.5 million to $24.8 million during the current fiscal year compared to $23.3 million for the prior fiscal year. The increase in other income was primarily due to a $1.1 million net gain on trading securities. Retail fees and charges increased $978 thousand as a result of increased debit card usage, an increase in overdraft protection fees, and a decrease in the amount of overdrawn account charge-offs between periods. After the conversion to the Bank’s new computer systems, the Bank will no longer charge a monthly fee or a transaction fee for internet banking or telephone payment services. The discontinuation of these fees is expected to reduce retail fees and charges by approximately $500 thousand on an annualized basis. Insurance commission income increased $464 thousand as a result of an increase in premiums written and an increase in commissions due to the lower level of claims experienced by the insurance companies with whom the Bank does business. These increases were partially offset by a $472 thousand other-than-temporary impairment on available-for-sale mortgage-related securities

32

at September 30, 2006 and decreases in loan fees and other income, net. Subsequent to September 30, 2006, the aforementioned available-for-sale securities were sold at approximately book value. Loan fees decreased $269 thousand primarily as a result of a reduction in service fees on sold loans. Other income, net decreased $297 thousand primarily as a result of a decrease in profits on sales of real estate owned and fewer properties sold.

Total other expenses decreased $763 thousand to $72.9 million during the current fiscal year compared to $73.6 million for the prior fiscal year. The decrease was due to a $1.3 million decrease in regulatory and other services, salaries and employee benefit expenses, and advertising expense, offset by an $869 thousand increase in other expense, net. The $624 thousand decrease in regulatory and other services was related to higher consulting and audit fees in fiscal year 2005 associated with the first year of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”). The $422 thousand decrease in salaries and employee benefits was primarily a result of a decrease in the costs associated with the short-term performance plan due to actual corporate performance targets exceeding minimum performance levels but falling below targeted performance levels and to the ESOP due to a decrease in the average market value of the Company’s stock compared to the prior year. The decrease in costs was partially offset by a $208 thousand increase in the cost associated with the RRP as a result of RRP grants during the current fiscal year. Advertising expense decreased $274 thousand due primarily to the timing of advertising campaigns and sponsorship programs. The increase in other, net was due to miscellaneous operational expenses which were individually insignificant.

Income tax expense for the current fiscal year was $30.6 million compared to $40.3 million for the prior fiscal year. The decrease was primarily a result of a decrease in earnings in the current fiscal year compared to the prior fiscal year. The effective tax rate for the current fiscal year was 38.9%, compared to 38.3% for the prior fiscal year. The increase in the effective tax rate was primarily a result of a change in the Company’s estimate of the impact of tax benefits associated with the ESOP.

The Company’s efficiency ratio for the current fiscal year was 48.03% compared to 41.19% for the prior fiscal year. The increase in the efficiency ratio was due largely to the decrease in net interest income. The efficiency ratio measures a financial institution’s total other expenses as a percent of its net interest income and other income. A lower value indicates that a financial institution is generating revenue with a lower level of expense. Another measure of a financial institution’s ability to operate efficiently is the ratio of other expenses to total average assets, the “operating expense ratio”. The Company’s operating expense ratio for the current fiscal year was 0.88%, compared to 0.87% for the prior fiscal year.

Comparison of Results of Operations for the Years Ended September 30, 2005 and 2004

 The Company recognized net income of $65.1 million for fiscal year 2005 compared to a net loss of $106.3 million for fiscal year 2004. Fiscal year 2004 net loss was primarily the result of a $146.6 million prepayment penalty, after tax, associated with refinancing $2.40 billion of FHLB advances in July of 2004. Management believes, in addition to its regular reporting requirements, it is important for comparability purposes to present selected financial results and performance ratios for fiscal year 2004 excluding the prepayment penalty on a non-GAAP basis. A non-GAAP Selected Financial Results and Ratio table is included after the discussion to provide a reconciliation of actual (GAAP) amounts and percentages to the adjusted (non-GAAP) amounts and percentages. Excluding the prepayment penalty and the related tax impact, net income for fiscal year 2004 was $40.3 million, as set forth in the non-GAAP Selected Financial Results and Ratios table. The $24.8 million increase in net income in fiscal year 2005 compared to fiscal year 2004, excluding the prepayment penalty, was primarily the result of an increase in net interest and dividend income, which was offset partially by an increase in income tax expense as a result of increased earnings.

Net interest and dividend income for fiscal year 2005 was $155.9 million compared to $116.2 million in fiscal year 2004. The $39.7 million increase primarily was a result of a $30.2 million decrease in interest expense on FHLB advances and a $26.6 million increase in interest income on loans receivable. The increases were partially offset by a $13.7 million decrease in interest income on mortgage-related securities and investment securities and a $4.1 million increase in interest expense on deposits.

Interest income on loans receivable for fiscal year 2005 was $274.0 million compared to $247.4 million in fiscal year 2004. The increase in interest income was due to a $619.6 million increase in the average balance of the loan portfolio as a result of mortgage loan purchases during fiscal year 2005. The increase was partially offset by a 16 basis point decrease in the average yield of the portfolio to 5.43% for fiscal year 2005. Generally, the rates on purchased mortgage loans were more favorable than the rates on mortgage-related securities that could have been purchased with the excess funds. During fiscal year 2005, the weighted average rate on purchased mortgage loans was 5.04% compared to a weighted average rate of 4.75% on new mortgage-related securities. Of the mortgage loans purchased during fiscal year 2005 and 2004, 85% and 71%, respectively, were adjustable-rate products which generally were at rates lower than fixed-rate products. The Bank primarily originates fixed-rate loan products in its market area. Fixed-rate loan originations during fiscal year 2005 were at a weighted average rate of 5.56% compared to 5.63% in fiscal year 2004.

33

Interest income on investment securities in fiscal year 2005 was $25.0 million compared to $36.0 million in fiscal year 2004. The $11.0 million decrease in interest income was due to a $287.6 million decrease in the average balance of the portfolio as a result of not replacing securities that matured or were called during fiscal year 2005. The decrease was offset by a 32 basis point increase in the average yield of the portfolio, to 4.73% for fiscal year 2005, as a result of lower yielding securities maturing during fiscal year 2004.

Interest income on mortgage-related securities in fiscal year 2005 was $91.7 million compared to $94.5 million in fiscal year 2004. The decrease in interest income on mortgage-related securities was due to a $307.3 million decrease in the average balance of the portfolio as a result of purchasing mortgage loans with excess funds rather than mortgage-related securities. The decrease was offset by a 30 basis point increase in the average yield of the portfolio, to 3.64% compared to an average 5.43% yield on the loan portfolio for fiscal year 2005, as a result of a slow down in prepayment speeds due to an increase in market interest rates during fiscal year 2005 compared to fiscal year 2004, purchasing securities during fiscal year 2005 at yields that were higher than the existing average portfolio yield and the impact of a full year of interest on securities purchased during fiscal year 2004 at yields generally higher than the existing average portfolio yield at September 30, 2004.

Interest expense on FHLB advances was $144.1 million in fiscal year 2005 compared to $174.3 million in fiscal year 2004. The refinancing of the FHLB advances reduced interest expense on the FHLB advances by $38.7 million compared to fiscal year 2004. The average rate on the FHLB advances decreased 138 basis points compared to fiscal year 2004 due to the refinancing. The reduction in interest expense on the FHLB advances was partially offset by an $8.4 million increase in interest expense on the variable-rate interest rate swaps as a result of an increase in the one month LIBOR rate between the two periods. The swapped FHLB advances had an average pay rate of 5.26% during fiscal year 2005 compared to 3.71% for fiscal year 2004.

Interest expense on deposits in fiscal year 2005 was $97.0 million compared to $92.9 million in fiscal year 2004. The $4.1 million increase in interest expense was a result of an increase in the average rate on the money market and certificate of deposit portfolios. This was partially offset by a decrease in the average balance of the money market and certificate of deposit portfolios. The Bank did not match the aggressive pricing by other financial institutions in the Bank’s local markets because of the likely adverse impact on earnings. During fiscal year 2005, the Bank increased certain deposit rates to remain competitive in the mid tier competitor market, thus resulting in an increase in the money market and certificate of deposit portfolio average rates. However, the result of not matching the top tier competitors’ rates has likely been the reason for the decrease in the money market and certificate of deposit portfolios during fiscal year 2005.

During fiscal year 2005, the Bank recorded a provision for loan losses of $215 thousand compared to $64 thousand in fiscal year 2004. The increase in the provision for loan losses in fiscal year 2005 was a result of an increase in the inherent risk of the loan portfolio due primarily to the increased size of the portfolio resulting from purchased mortgage loans.

Other expenses for fiscal year 2005 were $73.6 million compared to $309.0 million for fiscal year 2004. Included in other expenses in fiscal year 2004 was the $236.1 million prepayment penalty, pre-tax, associated with refinancing the FHLB advances. Excluding the prepayment penalty, other expenses in fiscal year 2005 increased $740 thousand from fiscal year 2004. Regulatory and other services increased $2.0 million as a result of additional consulting and audit fees incurred due to complying with the SOX 404. For the year ended September 30, 2005, regulatory and other services included consulting fees related to SOX 404 of $1.2 million and audit fees related to SOX 404 of $518 thousand. Other, net decreased $1.7 million due largely to a $571 thousand net recovery on the valuation of MSR in fiscal year 2005, compared to an $877 thousand net impairment on MSR in fiscal year 2004. This recovery was attributable to the reduction in prepayment activity during fiscal 2005 compared to fiscal year 2004. Salaries and employee benefits decreased $1.5 million compared to fiscal year 2004 as a result of a $3.1 million decrease in ESOP and RRP expenses. ESOP expense decreased $1.8 million due primarily to a decrease in dividends on unallocated ESOP shares as a result of fewer unallocated shares and a decrease in dividends paid during fiscal year 2005. RRP expense decreased $1.3 million due primarily to significant RRP grants fully vesting in fiscal year 2004. This was partially offset by a $1.7 million increase in the short-term performance plan expense accrued for fiscal year 2005. The Company did not accrue expenses for the short-term performance plan for the year ended September 30, 2004 and no short-term performance plan awards were paid for fiscal year 2004, resulting in the increase in fiscal year 2005 short-term performance plan expense over fiscal year 2004.

Income tax expense for fiscal year 2005 was $40.3 million compared to an income tax benefit of $63.1 million for fiscal year 2004. Excluding the prepayment penalty, income tax expense would have been $26.5 million for fiscal year 2004. The effective tax rate for fiscal year 2005 was 38.3%, a decrease of 141 basis points from fiscal year 2004, excluding the prepayment penalty. The decrease in the effective tax rate was primarily a result of the increased level of earnings of the Company, which reduced the impact of certain nondeductible expenses, and a change in the Company’s estimate of the impact of tax benefits associated with the ESOP. The increase in the amount of income tax expense was a direct result of an increase in earnings compared to fiscal year 2004.

34

The Company’s efficiency ratio for fiscal year 2005 was 41.19% compared to 52.35%, excluding the prepayment penalty, for fiscal year 2004 as set forth in the non-GAAP Selected Financial Results and Ratios table. The improvement in the efficiency ratio was due largely to the increase in net interest income, primarily a result of refinancing the FHLB advances. The Company’s operating expense ratio for fiscal year 2005 was 0.87%, compared to 0.86%, excluding the prepayment penalty, for fiscal year 2004 as set forth in the non-GAAP Selected Financial Results and Ratios table.

The following table presents selected financial results and performance ratios for the years ended September 30, 2005 and 2004. Because of the magnitude and non-recurring nature of the prepayment penalty associated with refinancing $2.40 billion in FHLB advances, management believes it is important for comparability purposes to present selected financial results and performance ratios excluding the prepayment penalty. The adjusted financial results and ratios are not presented in accordance with GAAP.

Non-GAAP Selected Financial Results and Ratios
	For the Year Ended
				September 30, 2004
	September 30,			Actual			Prepayment			Adjusted(1)
	2005			(GAAP)			Penalty			(Non-GAAP)
	(Dollars in thousands, except per share data)
Financial results and ratios:
Net income (loss)	$	65,059		$	(106,275	)	$	(146,565	)	$	40,290
Operating expenses		73,663			309,038			236,109			72,929
Average assets(2)		8,495,379			8,481,138			19,225			8,461,913
Average equity(3)		854,030			935,224			(33,823	)		969,047
Basic earnings (loss) per share		0.90			(1.48	)		(2.04	)		0.56
Diluted earnings (loss) per share(4)		0.89			(1.48	)		(2.03	)		0.55
Return on average assets		0.77	%		(1.25	)%		(1.73	)%		0.48	%
Return on average equity		7.62			(11.36	)		(15.52	)		4.16
Average equity to average assets		10.05			11.03			(0.42	)		11.45
Operating expense ratio		0.87			3.64			2.78			0.86
Efficiency ratio		41.19			221.83			169.48			52.35

(1) The adjusted financial results and ratios are not presented in accordance with GAAP as the amounts and ratios exclude the effect of the prepayment penalty.

(2) The adjusted average assets balance excludes the deferred tax asset associated with the refinancing.

(3) The adjusted average equity balance excludes the impact of the prepayment penalty on average equity.

(4) The prepayment penalty resulted in a net loss for fiscal year 2004. Due to the net loss, the RRP shares and stock options were not included in the computation of diluted earnings per share at September 30, 2004 as the effect on earnings per share would be anti-dilutive. Excluding the prepayment penalty results in net income for fiscal year 2004; therefore the RRP shares and stock options are included in the calculation of adjusted (non-GAAP) diluted earnings per share.

35

Liquidity and Capital Resources

Liquidity management is both a daily and long-term function of our business management. The Bank’s most available liquid assets, represented by cash and cash equivalents, available-for-sale mortgage-related and investment securities, and short-term investment securities, are a product of its operating, investing and financing activities. The Bank’s primary sources of funds are deposits, FHLB advances, repayments on and maturities of outstanding loans and mortgage-related securities, other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related securities and payments on short-term investments are relatively predictable sources of funds, deposit flows and prepayments on loans and mortgage-related securities are greatly influenced by general interest rates, economic conditions and competition and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its portfolios by the rates it offers customers. Sources of funds are used primarily to meet our ongoing operations, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. At September 30, 2006, approximately $1.66 billion of our $2.58 billion in certificates of deposit were scheduled to mature within one year. Based on past experience and our pricing strategy, we expect that a majority of these maturing deposits will renew, although no assurance can be given in this regard.

At September 30, 2006, cash and cash equivalents totaled $183.2 million. The cash balance in excess of short-term liquidity needs will be invested in short-duration assets in an effort to manage interest rate risk exposure by shortening the average term to maturity of our assets.

The Bank has used FHLB advances to provide funds for lending and investment activities. FHLB lending guidelines set borrowing limits as part of their underwriting standards. At September 30, 2006, the Bank’s ratio of the face amount of advances to total assets, as reported to the OTS, was 40.1%. Our advances are secured by a blanket pledge of our loan portfolio, as collateral, supported by quarterly reporting to FHLB Topeka. Advances in excess of 40% of total assets, but not exceeding 55% of total assets, may be approved by the president of FHLB Topeka based upon a review of documentation supporting the use of the advances. In July 2006, the president of FHLB Topeka approved a renewal of our request to increase the Bank’s borrowing limit to 45% of total assets for one year. Currently, the blanket pledge is sufficient collateral for the FHLB advances. It is possible that increases in our borrowings or decreases in our loan portfolio could require the Bank to pledge securities as collateral on the FHLB advances. The Bank’s policy allows borrowing from FHLB of up to 55% of total assets. In the past, the Bank has utilized other sources for liquidity, such as secondary market repurchase agreements, but in recent years it has relied primarily on the FHLB advances.

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

Even with the current challenging rate environment, it is management’s and the board of director’s intention to continue to pay regular quarterly dividends of $0.50 per share for the foreseeable future. At September 30, 2006, Capitol Federal Financial, at the holding company level, had $116.0 million in cash and certificates of deposit.

On December 28, 2005, the Bank entered into a series of agreements with third party entities in connection with the planned replacement of the Bank’s core information technology processing system. The agreements provide for the Bank’s purchase of hardware, purchase and licensing of software and receipt of maintenance, support and other services. The principal software maintenance agreement has an initial term of five and one-half years, renewable thereafter for successive terms of 33 months. Also in connection with the replacement of its core information technology processing system, the Bank entered into a license and service agreement with a third party for the use of the third party’s proprietary mortgage loan origination system software. Under this agreement, maintenance services are to be provided for an initial term of five years, renewable thereafter for additional one-year terms. At September 30, 2006, the Company estimated that the total cash outflows associated with the replacement of the Bank’s core information technology processing system would be approximately $7.2 million, most of which will be capitalized and depreciated over a period not greater than five years. Management is anticipating incurring approximately 75% of fiscal year 2005 consulting fees related to SOX 404 during fiscal year 2007 as a result of documenting and testing controls of the new core information technology processing system to comply with SOX 404.

36

Off Balance Sheet Arrangements, Commitments and Contractual Obligations

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

·   the origination, purchase or sale of loans;

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

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

·   terms and conditions of operating leases; and

·   funding withdrawals of savings accounts at maturity.

In addition to its commitments of the types described above, at September 30, 2006 the Company’s off balance sheet arrangements included its $1.6 million interest in the Trust, which in March 2004 issued $52.0 million of variable rate cumulative trust preferred securities. In connection therewith, the Company issued $53.6 million of Debentures to the Trust.

The following table summarizes our contractual obligations and other material commitments as of September 30, 2006. The actual maturity of the Debentures may differ from scheduled maturity as the Debentures are callable at any time, in whole or in part, after April 7, 2009.

	Maturity Range
				Less than			1 - 3			3 - 5			More than
	Total			1 year			years			years			5 years
	(Dollars in thousands)
Operating leases	$	6,139		$	924		$	1,292		$	841		$	3,082
FHLB Advances		3,296,000			750,000			1,745,000			801,000			--
Weighted average rate		4.48	%		3.52	%		4.24	%		5.87	%		--	%
Certificates of Deposit		2,582,276			1,659,138			839,283			82,201			1,654
Weighted average rate		4.35	%		4.36	%		4.35	%		4.26	%		4.37	%
Debentures		53,609			--			--			--			53,609
Weighted average rate		8.28	%		--	%		--	%		--	%		8.28	%
Commitments to originate and
purchase mortgage loans		89,901			89,901			--			--			--
Weighted average rate		6.17	%		6.17	%		--	%		--	%		--	%
Commitments to fund unused home
equity lines of credit		272,112			272,112			--			--			--
Weighted average rate		8.25	%		8.25	%		--	%		--	%		--	%
Unadvanced portion of
construction loans		22,605			22,605			--			--			--

We anticipate that we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

During 2003, management entered into interest rate swap agreements with a notional principal amount of $800.0 million. Management entered into the interest rate swap agreements to modify the Bank’s interest rate risk profile. The counterparties with whom we have entered into the interest rate swap agreements are rated as AA- or higher per our internal policies. Counterparties to the interest rate swaps require collateral for their exposure to the Bank’s net payable mark-to-market position under the terms of the interest rate swap agreements. The exposure is estimated daily by the counterparties calculating a market value for each swap on a net settlement basis. When the valuation indicates that the Bank has a net payable to the counterparty, the Bank may be required to post collateral sufficient to satisfy the counterparty’s exposure. When required, the collateral pledged to the counterparty would be restricted and not available-for-sale. Each counterparty has different collateralization requirements. At September 30, 2006, the Bank had posted available-for-sale mortgage-related securities with an estimated market value of $42.8 million. If the future obligation indicates that the Bank has a net receivable mark-to-market position from the counterparties, the Bank could have a certain level of exposure to the extent the counterparties are not able to satisfy their obligations to the Bank.

37

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 year ended September 30, 2006 or future periods.

Regulatory Capital

Consistent with management’s goals to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” status in accordance with regulatory standards. Total equity for the Bank was $783.1 million at September 30, 2006, or 9.6% of total assets on that date. As of September 30, 2006, the Bank exceeded all capital requirements of the OTS. The following table presents the Bank’s regulatory capital ratios at September 30, 2006 based upon regulatory guidelines.

		Regulatory
		Requirement
	Bank	For "Well
	Ratios	Capitalized” Status
Core capital	9.5%	5.0%
Tier I risk-based capital	22.6	6.0
Total risk-based capital	22.5	10.0

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. Under OTS safe harbor regulations, the Bank may distribute to the Company capital not exceeding net income for the current calendar year and the prior two calendar years. Due to the impact refinancing the FHLB advances had on earnings in 2004, the Bank cannot distribute capital to the Company unless it receives waivers of the safe harbor regulation from the OTS during the current waiver period. The Bank had previously reported that a waiver would be required for capital distributions through at least December 31, 2006. As a result of net interest margin compression, earnings may not be at the levels originally forecasted which would likely result in a waiver being required through December 31, 2007. Currently, the Bank has authorization from the OTS to distribute capital from the Bank to the Company through the quarter ending June 30, 2007. So long as the Bank continues to maintain excess capital, operate in a safe and sound manner, and comply with the interest rate risk management guidelines of the OTS, it is management’s belief that the Bank will continue to receive waivers allowing it to distribute the net income of the Bank to the Company, although no assurance can be given in this regard.

Quarterly Results

The following table presents summarized quarterly data for each of the years indicated for the Company.

Quarterly Financial Data (Unaudited)	First Quarter		Second Quarter			Third Quarter		FourthQuarter		Total
	(Dollars and counts in thousands, except per share amounts)
2006
Total interest and dividend income	$	101,860	$	101,958		$	102,427	$	104,683	$	410,928
Net interest and dividend income		33,856		33,815			30,764		28,588		127,023
Provision (Recovery) for loan losses		268		(138	)		40		77		247
Net income		13,313		13,587			11,306		9,911		48,117
Basic earnings per share		0.18		0.19			0.16		0.14		0.66
Diluted earnings per share		0.18		0.19			0.15		0.14		0.66
Dividends paid per public share		0.80		0.50			0.50		0.50		2.30
Average number of shares outstanding		72,650		72,647			72,525		72,558		72,595
2005
Total interest and dividend income	$	99,784	$	100,196		$	100,323	$	99,804	$	400,107
Net interest and dividend income		41,586		40,857			38,752		34,711		155,906
Provision for loan losses		--		--			--		215		215
Net income		18,573		17,482			16,160		12,844		65,059
Basic earnings per share		0.26		0.24			0.22		0.18		0.90
Diluted earnings per share		0.25		0.24			0.22		0.18		0.89
Dividends paid per public share		0.50		0.50			0.50		0.50		2.00
Average number of shares outstanding		72,227		72,473			72,661		72,665		72,506

38

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such terms are defined in Rule 13a-15(f) under the Act). The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or untimely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial reporting. Further, because of changes in conditions, the effectiveness of any system of internal control may vary over time. The design of any internal control system also factors in resource constraints and consideration for the benefit of the control relative to the cost of implementing the control. Because of these inherent limitations in any system of internal control, management cannot provide absolute assurance that all control issues and instances of fraud within the Company have been detected.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management has concluded that the Company maintained an effective system of internal control over financial reporting based on these criteria as of September 30, 2006.

The Company’s independent registered public accounting firm, Deloitte and Touche LLP, who audited the consolidated financial statements included in the Company’s annual report, has issued an audit report on management’s assessment of, and the effective operation of, the Company’s internal control over financial reporting as of September 30, 2006 and it is included herein.

 

John B. Dicus, President

   and Chief Executive Officer

 

Kent G. Townsend, Executive Vice President,

   Chief Financial Officer and Treasurer

39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Capitol Federal Financial and Subsidiary

Topeka, Kansas

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Capitol Federal Financial and Subsidiary (the “Company”) maintained effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

40

(CONTINUED)

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2006 of the Company and our report dated December 13, 2006 expressed an unqualified opinion on those financial statements.

Kansas City, Missouri

December 13, 2006

41

(This page intentionally left blank.)

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Capitol Federal Financial and Subsidiary

Topeka, Kansas

We have audited the accompanying consolidated balance sheets of Capitol Federal Financial and Subsidiary (the “Company”) as of September 30, 2006 and 2005, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 13, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Kansas City, Missouri

December 13, 2006

43

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND 2005 (in thousands)
ASSETS	2006		2005
CASH AND CASH EQUIVALENTS	$	183,242	$	58,566
INVESTMENT SECURITIES:
Available-for-sale, at market (amortized cost of $189,275)		189,480		--
Held-to-maturity, at cost (market value of $233,525 and $424,952)		240,000		430,499
MORTGAGE-RELATED SECURITIES:
Trading, at market value		396,904		--
Available-for-sale, at market value (amortized cost of $558,939
and $743,710)		556,248		737,638
Held-to-maturity, at cost (market value of $1,101,159 and $1,383,268)		1,131,634		1,407,616
LOANS RECEIVABLE HELD FOR SALE, at lower of amortized
cost or market		1,440		1,891
LOANS RECEIVABLE, net (less allowance for loan losses of
$4,433 and $4,598)		5,221,117		5,464,130
MORTGAGE SERVICING RIGHTS (“MSR”), net		6,917		2,869
CAPITAL STOCK OF FEDERAL HOME LOAN BANK (“FHLB”), at cost		165,130		182,259
ACCRUED INTEREST RECEIVABLE:
Loans receivable		23,018		21,710
Mortgage-related securities		9,663		9,382
Investment securities		5,351		5,808
PREMISES AND EQUIPMENT, net		26,500		22,963
REAL ESTATE OWNED, net		2,409		1,653
INCOME TAXES RECEIVABLE, net		5,359		44
DEFERRED INCOME TAXES, net		20,967		50,618
OTHER ASSETS		13,694		12,041
TOTAL ASSETS	$	8,199,073	$	8,409,687
.				(Continued	)

44

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND 2005 (in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS’ EQUITY	2006			2005
LIABILITIES:
Deposits	$	3,900,431		$	3,960,297
Advances from FHLB		3,268,705			3,426,465
Other borrowings		53,467			53,410
Advance payments by borrowers for taxes and insurance		48,353			45,437
Accounts payable and accrued expenses		64,898			59,015
Total liabilities		7,335,854			7,544,624
COMMITMENTS AND CONTINGENCIES (NOTE 16)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 50,000,000 shares authorized,
no shares issued or outstanding		--			--
Common stock, $.01 par value; 450,000,000 shares authorized,
91,512,287 shares issued as of September 30, 2006 and 2005		915			915
Additional paid-in capital		429,286			421,903
Unearned compensation - Employee Stock Ownership Plan (“ESOP”)		(14,784	)		(16,721	)
Unearned compensation - Recognition and Retention Plan (“RRP”)		(825	)		(539	)
Retained earnings		760,890			759,643
Accumulated other comprehensive loss		(1,543	)		(3,769	)
		1,173,939			1,161,432
Treasury stock, 17,480,357 and 17,225,398 shares as of
September 30, 2006 and 2005, at cost		(310,720	)		(296,369	)
Total stockholders’ equity		863,219			865,063
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	8,199,073		$	8,409,687
See notes to consolidated financial statements.					(Concluded	)

45

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 (in thousands, except per share amounts)
	2006			2005		2004
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	303,822		$	273,972	$	247,365
Mortgage-related securities		75,806			91,742		94,469
Investment securities		18,047			25,039		36,004
Capital stock of FHLB		9,913			8,134		6,104
Cash and cash equivalents		3,340			1,220		891
Total interest and dividend income		410,928			400,107		384,833
INTEREST EXPENSE:
Deposits		122,548			96,999		92,931
FHLB advances		157,197			144,110		174,276
Other borrowings		4,160			3,092		1,435
Total interest expense		283,905			244,201		268,642
NET INTEREST AND DIVIDEND INCOME		127,023			155,906		116,191
PROVISION FOR LOAN LOSSES		247			215		64
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION
FOR LOAN LOSSES		126,776			155,691		116,127
OTHER INCOME:
Retail fees and charges		17,007			16,029		15,119
Insurance commissions		2,329			1,865		2,114
Loan fees		1,776			2,045		2,395
Gain on trading securities, net		1,076			--		--
Other-than-temporary impairment of securities		(472	)		--		--
Other, net		3,079			3,376		3,919
Total other income		24,795			23,315		23,547
OTHER EXPENSES:
Salaries and employee benefits		40,026			40,448		41,909
Occupancy of premises		12,970			12,796		12,078
Regulatory and outside services		5,241			5,865		3,889
Deposit and loan transaction costs		4,332			4,346		3,685
Advertising		4,038			4,312		3,682
Office supplies and related expenses		2,203			2,367		2,390
Federal insurance premium		533			602		656
Prepayment penalty on FHLB advances		--			--		236,109
Other, net		3,525			2,895		4,602
Total other expenses		72,868			73,631		309,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)		78,703			105,375		(169,326	)
INCOME TAX EXPENSE (BENEFIT)		30,586			40,316		(63,051	)
NET INCOME (LOSS)	$	48,117		$	65,059	$	(106,275	)
Earnings (Loss) per share:
Basic	$	0.66		$	0.90	$	(1.48	)
Diluted	$	0.66		$	0.89	$	(1.48	)
Dividends declared per public share	$	2.30		$	2.00	$	2.81
See notes to consolidated financial statements.

46

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(in thousands, except share amounts)
							Accumulated
			Additional	Unearned	Unearned		Other			Total
	Common Stock		Paid-In	Compensation-	Compensation-	Retained	Comprehensive	Treasury Stock		Stockholders’
	Shares	Amount	Capital	ESOP	RRP	Earnings	Loss	Shares	Amount	Equity
Balance, October 1, 2003	91,512,287	$  915	$  401,745	$  (21,875)	$  (1,599)	$  896,015	$  (1,758)	18,203,228	$  (296,998)	$  976,445
Comprehensive loss:
Net loss for the year ended,
September 30, 2004						(106,275)				(106,275)
Other comprehensive loss -
Changes in unrealized gains/losses
on mortgage-related securities
available-for-sale, net of deferred
income taxes of $137							(225)			(225)
Total comprehensive loss										(106,500)
Tax benefit of market value change in vested
RRP shares			604			13				617
Common stock committed to be
released for allocation - ESOP			4,777	2,016						6,793
Acquisition of treasury stock								92,649	(3,355)	(3,355)
Treasury stock activity related to
RRP, net			133		(181)	(22)		(5,000)	48	(22)
Amortization of unearned compensation -
RRP					1,504					1,504
Dividends in excess of debt service cost
of the ESOP, net				(913)						(913)
Stock options exercised			4,867			2		(769,391)	7,403	12,272
Dividends on common stock to
stockholders ($2.81 per public share)						(54,427)				(54,427)
BALANCE, September 30, 2004	91,512,287	915	412,126	(20,772)	(276)	735,306	(1,983)	17,521,486	(292,902)	832,414
See notes to consolidated financial statements.										(Continued)

47

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(in thousands, except share amounts)
							Accumulated
			Additional	Unearned	Unearned		Other			Total
	Common Stock		Paid-In	Compensation-	Compensation-	Retained	Comprehensive	Treasury Stock		Stockholders’
	Shares	Amount	Capital	ESOP	RRP	Earnings	Loss	Shares	Amount	Equity
Comprehensive income:
Net income for the year ended,
September 30, 2005						65,059				65,059
Other comprehensive loss -
Changes in unrealized gains/losses
on mortgage-related securities
available-for-sale, net of deferred
income taxes of $1,092							(1,786)			(1,786)
Total comprehensive income										63,273
Tax benefit of market value change in vested
RRP shares			30							30
Common stock committed to be
released for allocation - ESOP			4,980	2,016						6,996
Acquisition of treasury stock								246,430	(8,609)	(8,609)
Treasury stock activity related to
RRP, net			370		(503)	(24)		(14,200)	136	(21)
Amortization of unearned compensation -
RRP					240					240
Dividends in excess of debt service cost
of the ESOP, net				2,035						2,035
Stock options exercised			4,397			24		(528,318)	5,006	9,427
Dividends on common stock to
stockholders ($2.00 per public share)						(40,722)				(40,722)
BALANCE, September 30, 2005	91,512,287	915	421,903	(16,721)	(539)	759,643	(3,769)	17,225,398	(296,369)	865,063
See notes to consolidated financial statements.										(Continued)

48

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(in thousands, except share amounts)
							Accumulated
			Additional	Unearned	Unearned		Other			Total
	Common Stock		Paid-In	Compensation-	Compensation-	Retained	Comprehensive	Treasury Stock		Stockholders’
	Shares	Amount	Capital	ESOP	RRP	Earnings	Loss	Shares	Amount	Equity
Comprehensive income:
Net income for the year ended,
September 30, 2006						48,117				48,117
Other comprehensive loss -
Changes in unrealized gains/losses
on securities available-for-sale
net of deferred income taxes
of $1,360							2,226			2,226
Total comprehensive income										50,343
Tax benefit of market value change in vested
RRP shares			25							25
Common stock committed to be
released for allocation - ESOP			4,741	2,016						6,757
Acquisition of treasury stock								508,551	(16,681)	(16,681)
Treasury stock activity related to
RRP, net			518		(737)			(22,500)	208	(11)
Amortization of unearned compensation -
RRP					451					451
Stock based compensation expense			375							375
Dividends in excess of debt service cost
of the ESOP, net				(79)						(79)
Stock options exercised			1,724					(231,092)	2,122	3,846
Dividends on common stock to
stockholders ($2.30 per public share)						(46,870)				(46,870)
BALANCE, September 30, 2006	91,512,287	$  915	$ 429,286	$ (14,784)	$ (825)	$ 760,890	$  (1,543)	17,480,357	$ (310,720)	$ 863,219
See notes to consolidated financial statements.										(Concluded)

49

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 (in thousands)
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	48,117		$	65,059		$	(106,275	)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
FHLB stock dividends		(9,913	)		(8,133	)		(6,104	)
Prepayment penalty on FHLB advances		--			--			236,109
Net loan origination fees capitalized		1,884			(5,192	)		6,083
Amortization of net deferred loan origination fees		(1,585	)		(2,747	)		(3,185	)
Provision for loan losses		247			215			64
Losses on sales of premises and equipment, net		62			55			84
Gains on sales of real estate owned, net		(623	)		(899	)		(1,058	)
Gains on sales of loans receivable held for sale, net		(48	)		(84	)		(107	)
Gains on trading securities, net		(1,076	)		--			--
Other-than-temporary impairment of securities		472			--			--
Originations of loans receivable held for sale		(4,408	)		(6,694	)		(9,798	)
Proceeds from sales of loans receivable held for sale		4,907			8,312			10,737
Amortization of MSR		761			1,042			1,383
Impairment of MSR		16			280			502
Valuation allowance for MSR		--			141			846
Recovery of valuation allowance on MSR		(137	)		(992	)		(471	)
Amortization and accretion of premiums and discounts on mortgage-
related securities and investment securities		6,889			12,733			25,850
Depreciation and amortization of premises and equipment		3,845			4,132			4,115
Provision for deferred income taxes		28,288			23,719			(83,500	)
Amortization of deferred debt issuance costs		57			62			274
Common stock committed to be released for allocation - ESOP		6,757			6,996			6,793
Stock based compensation - stock options and RRP		826			240			1,504
RRP shares sold, net of forfeitures		(11	)		(21	)		(22	)
Changes in:
Accrued interest receivable		(1,132	)		2,748			2,289
Other assets		532			4			(2,459	)
Income taxes receivable/payable		(5,287	)		(2,286	)		15,037
Accounts payable and accrued expenses		2,123			1,674			(9,491	)
Net cash provided by operating activities		81,563			100,364			89,200
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or calls of investment securities AFS		10,000			--			--
Purchases of investment securities AFS		(199,143	)		--			--
Proceeds from maturities or calls of investment securities HTM		190,510			207,000			530,205
Purchases of investment securities HTM		--			--			(150,000	)
Proceeds from the redemption of capital stock of FHLB		27,042			--			3,752
Purchases of capital stock of FHLB		--			--			(2,500	)
Principal collected on mortgage-related securities AFS		288,970			451,611			907,771
Purchases of mortgage-related securities AFS		(110,123	)		--			(1,050	)
Principal collected on mortgage-related securities HTM		275,385			346,318			252,400
Purchases of mortgage-related securities HTM		(983	)		(309,506	)		(885,739	)
Loan originations, net of principal collected		(94,347	)		(60,974	)		(36,745	)
Loan purchases, net of principal collected		(70,787	)		(652,407	)		(413,929	)
Purchases of premises and equipment, net		(7,444	)		(2,646	)		(2,194	)
Proceeds from sales of real estate owned		4,767			8,000			8,709
Net cash provided by (used in) investing activities		313,847			(12,604	)		210,680
(Continued)

50

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 (in thousands)
	2006			2005			2004
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(46,870	)		(40,722	)		(54,427	)
Dividends in excess of debt service cost of the ESOP, net		(79	)		2,035			(913	)
Deposits, net of withdrawals		(59,866	)		(167,477	)		(110,371	)
Proceeds from advances/line of credit from FHLB		675,100			719,900			494,891
Repayments of advances/line of credit from FHLB		(829,100	)		(719,900	)		(481,000	)
Proceeds from other borrowings		--			--			52,000
Capitalized debt issuance costs		--			--			(290	)
Repayments of other borrowings		--			--			(81,391	)
Change in advance payments by borrowers for taxes and insurance		2,916			4,608			1,894
Acquisitions of treasury stock		(16,681	)		(8,609	)		(3,355	)
Stock options exercised		2,279			5,065			7,278
Excess tax benefits from stock plans		1,567			4,380			5,412
Net cash used in financing activities		(270,734	)		(200,720	)		(170,272	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		124,676			(112,960	)		129,608
CASH AND CASH EQUIVALENTS:
Beginning of year		58,566			171,526			41,918
End of year	$	183,242		$	58,566		$	171,526
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments	$	6,020		$	14,522		$	--
Interest payments, net of interest credited to deposits of $112,386,
$87,283 and $82,292	$	170,317		$	155,443		$	190,250
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Loans transferred to real estate owned	$	4,996		$	4,505		$	7,934
Loan swap with Federal Home Loan Mortgage Corporation, net	$	402,701		$	--		$	--
Refinanced FHLB advances	$	--		$	--		$	2,400,000
Market value change related to fair value hedge -
Interest rate swaps hedging FHLB advances	$	3,760		$	22,964		$	571
See notes to consolidated financial statements.								(Concluded	)

51

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004                                                                                                                                                   ;                                                 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Capitol Federal Financial (the “Company”) provides a full range of retail banking services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the “Bank”) which has 29 traditional and 9 in-store banking offices serving primarily the entire metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the metropolitan area of greater Kansas City. The Bank emphasizes mortgage lending, primarily originating and purchasing one- to four-family mortgage loans and providing personal retail financial services. The Bank is subject to competition from other financial institutions and other companies that provide financial services. The Company is subject to the regulations of the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”) and undergoes periodic examinations by those regulatory authorities.

The Bank has an expense sharing agreement with the Company that covers the reimbursement of certain expenses that are allocable to the Company. These expenses include compensation, rent for leased office space and general overhead expenses.

The Company is organized as a mid-tier holding company chartered as a federal savings and loan holding company. The Company owns 100% of the stock of the Bank. The Company is majority owned by Capitol Federal Savings Bank MHC ("MHC"), a federally chartered mutual holding company. At September 30, 2006 MHC owned approximately 70% of the stock of the Company. The Company’s ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. The future dividend policy of the Company is subject to the discretion of the board of directors and will depend upon a number of factors, including the Company’s financial condition, results of operations, regulatory capital requirements of the Bank, other regulatory limitations on the Bank’s ability to make capital distributions to the Company and the continued waiver of dividends by MHC. Holders of common stock will be entitled to receive dividends as and when declared by the board of directors of the Company out of funds legally available for that purpose. Such payment, however, will be subject to the regulatory restrictions set forth by the OTS. In addition, the Federal Deposit Insurance Corporation Improvement Act provides that, as a general rule, a financial institution may not make a capital distribution if it would be undercapitalized after making the capital distribution.

Principles of Consolidation- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank has a wholly owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a wholly owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents- Cash and cash equivalents include cash on hand and amounts due from banks. The Bank has acknowledged informal agreements with other banks where it maintains deposits. Under these agreements, service fees charged to the Bank are waived provided certain average compensating balances are maintained throughout each month.

Securities - Securities include mortgage-related securities, United States Government agencies (including Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Government National Mortgage Association (“GNMA”)) and municipal bonds. Securities are classified as held-to-maturity, available-for-sale, or trading based on management’s intention on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase.

Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Such securities are adjusted for amortization of premiums and discounts which are recognized as adjustments to interest income over the life of the securities using the level-yield method.

Securities that management may sell if necessary for rare and unforeseen liquidity or asset management purposes are classified as available-for-sale and reported at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) within stockholders’ equity, net of deferred income taxes. Premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of available-for-sale securities are recognized using the specific identification method. Estimated fair values of available-for-sale securities are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar instruments.

52

Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in Gain on trading securities, net in the consolidated statements of income.

The Bank regularly monitors its security portfolio for impairment on a security by security basis. The Bank considers many factors in determining whether the impairment is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a market value less than the cost basis, the severity of the loss, the intent and ability of the Bank to hold the security for a period of time sufficient for a substantial recovery of its investment, recent events specific to the issuer or industry including the issuer’s financial condition and current ability to make future payments in a timely manner, external credit ratings and recent downgrades in such ratings. To the extent management determines a decline in value in a held-to-maturity or available-for-sale security to be other than temporary, the Bank will adjust the carrying value and include such expense in Other-than-temporary impairment of securities in the consolidated statements of income.

Loans Receivable Held for Sale - Upon commitment, the Bank’s management designates certain loans receivable as held for sale as management does not intend to hold such loans to maturity or payoff. Accordingly, such loans are carried at the lower of amortized cost (outstanding principal adjusted for unamortized deferred loan fees, net of certain direct loan origination costs) or market value. Market values for such loans are determined based on sales commitments or dealer quotations. Gains or losses on such sales are recognized utilizing the specific identification method. Interest is included in interest income on loans receivable.

Loans Receivable - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal less an allowance for loan losses, undisbursed loan funds and unearned discounts and loan fees, net of certain direct loan origination costs. Interest on loans is credited to income as earned and accrued only if deemed collectible. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. The accrual of interest is discontinued when principal or interest payments become doubtful. After the completion of the foreclosure process, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash may be applied as reductions to the principal balance, interest in arrears or recorded as income, depending on management’s assessment of the ultimate collectibility of the loan. Nonaccrual loans may be restored to accrual status when principal and interest become current and full payment of principal and interest is expected.

Net loan origination fees and costs and commitment fees are amortized as a yield adjustment to interest income using the level-yield method based upon estimated prepayment speeds of the related loans.

Allowance for Loan Losses- A loan is considered to be impaired when management believes it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan. If a loan is impaired, the Bank records an allowance equal to the excess of the loan’s carrying value over the present value of the estimated future cash flows discounted at the loan’s effective rate based on the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, and current economic conditions. One- to four-family residential loans and consumer loans are collectively evaluated for impairment. Loans on residential properties with greater than four units, loans on construction and development and commercial properties that are delinquent or the borrower’s total loan concentration balance is greater than $1.5 million are evaluated for impairment on a loan by loan basis at least annually. Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In the opinion of management, the allowance when taken as a whole, is adequate to absorb estimated loan losses inherent in the Bank’s loan portfolio.

Mortgage Servicing Rights - The right to service loans for others is recognized in conjunction with the sale of loans with servicing retained. Originated MSR are recorded at allocated cost at the time of the disposition. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. MSR are amortized in proportion to and over the estimated period of net servicing income. MSR are carried at amortized cost, and a temporary impairment, if any, is recognized through a valuation allowance. Impairment exists if the carrying value of MSR exceeds the estimated fair value of the MSR. MSR are stratified by the underlying loan term and by interest rate. Individual impairment allowances for each stratum are established when necessary and then adjusted in subsequent periods to reflect changes in the valuation of the stratum. The estimated fair value of each MSR stratum is determined through analysis of future cash flows incorporating numerous assumptions including: servicing income, servicing costs, market discount rates, prepayment speeds and other market driven data.

The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSR. Generally, as interest rates decline, prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, prepayments slow down, which generally results in an increase in the fair value of MSR. All

53

assumptions are reviewed on a quarterly basis and adjusted as necessary to reflect current and anticipated market conditions. Thus, any measurement of the fair value of MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.

Capital Stock of Federal Home Loan Bank - Capital Stock of FHLB Topeka is carried at cost. Dividends received on such stock are reflected as interest and dividend income in the consolidated statements of income.

Premises and Equipment - Land is carried at cost. Buildings and improvements and furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on straight-line or accelerated methods over the estimated useful lives of the related assets. The estimated useful lives of the assets are as follows:

Buildings and improvements	20-40 years
Furniture, fixtures and equipment	5-10 years
Software	3 years

Maintenance, repairs and minor improvements are charged to occupancy expense. Major renovations and improvements are capitalized. Gains and losses on dispositions are recorded as other income or other expense as incurred.

Real Estate Owned - Real estate owned represents foreclosed assets held for sale and is initially recorded at the lower of cost or fair value less estimated disposal costs. Adjustments for estimated losses are charged to operations when any decline reduces the fair value to less than the carrying value. Costs and expenses related to major additions and improvements are capitalized while maintenance and repairs which do not improve or extend the lives of the respective assets are expensed. Gains on the sale of real estate owned are recognized upon disposition of the property to the extent allowable considering the adequacy of the down payment and other requirements.

Income Taxes - The Company files a consolidated income tax return. The Company provides for income taxes using the asset/liability method of accounting for income taxes. Deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The provision for deferred income taxes represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain/(loss) on available-for-sale securities and changes in the market value of vested RRP shares.

Prior to the fiscal year ended September 30, 1997, the Bank was permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This addition differs from the bad debt expense used for financial accounting purposes. A deferred tax liability was required to be provided only to the extent the tax bad debt reserve exceeded the September 30, 1988 base year reserve. Retained earnings, as of September 30, 2006, includes approximately $97.1 million representing such bad debt reserve for which no deferred income taxes have been provided. The Small Business Job Protection Act of 1996 (the “Act”) required thrifts to recapture any reserves accumulated after 1987, but forgave taxes owed on reserves accumulated prior to 1988. The Bank began recapturing excess reserves beginning with the fiscal year ended September 30, 1999. In addition, under the Act, the Bank is required to use the specific charge-off method for tax purposes in accounting for bad debts beginning with the fiscal year ended September 30, 1997. The recapture of excess reserves is being accounted for as a reduction of the deferred tax liability relating to post-1987 reserves. As of September 30, 2004, the Bank had recaptured all of the excess reserves.

The Company will record a valuation allowance to reduce its deferred income tax assets when there is uncertainty regarding our ability to realize their benefit. As of September 30, 2006 and 2005, no valuation allowance has been recorded.

Revenue Recognition - Interest and dividend income, loan fees, retail fees and charges, insurance commissions and other ancillary income related to the Bank’s deposits and lending activities are accrued as earned.

Estimates - The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management 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 the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allowance for loan losses, security impairment, valuation of MSR, valuation of deferred income tax assets and the fair values of financial instruments. Actual results could differ from those estimates.

54

Derivative Instruments - The Bank uses derivative instruments as a means of managing interest rate risk. Interest rate swaps are the derivative instruments that the Bank uses as part of its interest rate risk management strategy. Interest rate swaps are contractual agreements between two parties to exchange interest payments, based on a common notional amount and maturity date.

Before entering into a derivative instrument, management formally documents its risk management objectives, strategy and the relationship between the hedging instruments and the hedged items. For those derivative instruments that are designated and qualify as hedging instruments, management designates the hedging instrument as either a fair value or cash flow hedge, based upon the exposure being hedged, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Both at the inception of the hedge and on an ongoing basis, management assesses the effectiveness of its hedging relationships in accordance with its risk management policy.

The interest rate swaps are designated and qualify as fair value hedges under SFAS No. 133. The Bank has assumed no ineffectiveness in the hedging relationship as all of the terms in the interest rate swap agreements match the terms of the FHLB advances. The Bank is accounting for the interest rate swap agreements using the shortcut method, whereby any gain or loss in the fair value of the interest rate swaps is offset by a gain or loss on the hedged FHLB advances. If at some point it is determined that the hedging instruments are not highly effective as a hedge, hedge accounting will be discontinued. If hedge accounting is discontinued, the derivative instrument will be carried at its fair value on the consolidated balance sheet with changes in its fair value recorded in current period earnings.

The Bank may enter into fixed commitments to originate and sell mortgage loans held for sale when the market conditions are appropriate or, for risk management purposes, the holding of loans would increase interest rate or credit risk to levels above which management believes are inappropriate for the Bank. Pursuant to clarifying guidance, such commitments are considered derivative instruments under SFAS No. 133. The standard requires the recognition of all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. As of September 30, 2006 and 2005, there were no loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans.

Significant Group Concentrations of Credit Risk - The majority of the Bank’s activities are with customers located within the metropolitan areas of central, south central and eastern Kansas and a portion of the metropolitan area of greater Kansas City. The Bank regularly purchases mortgage loans from nationwide lenders which reduces geographic concentration of credit risk.

Recent Accounting Pronouncements - In November 2005, the Financial Accounting Standards Board (“FASB”) issued staff position (“FSP”) No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," with references to existing authoritative literature concerning other-than-temporary impairment determinations (principally SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 59, "Accounting for Noncurrent Marketable Equity Securities"). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security's cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an other-than-temporary impairment loss be recorded when a decision to sell a security has been made and the fair value of the security is not expected to be fully recovered prior to the expected time of sale. FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005 with early adoption permitted. For the year ended September 30, 2006, the Bank recognized an other-than-temporary impairment as a result of management’s decision to sell securities with unrealized losses which were not expected to be fully recovered prior to the expected time of sale.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation, if the holder irrevocably elects to account for the whole instrument on a fair value basis, and clarifies various aspects of SFAS No. 133 and SFAS No. 140 relating to derivative financial instruments and qualifying special-purpose entities holding derivative financial instruments. SFAS No. 155 is effective for all financial instruments acquired or issued for fiscal years beginning after September 15, 2006, which for the Company is October 1, 2006. The Company has not yet completed its assessment of the impact of SFAS No. 155.

55

In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract as defined in the SFAS. It requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and allows an entity to choose between amortization or fair value measurement methods for each class of separately recognized servicing assets and servicing liabilities. It also permits a one-time reclassification of available-for-sale securities to trading without tainting the investment portfolio, provided the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006, which for the Company is October 1, 2006. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a process by which the likelihood of a tax position is gauged based upon the technical merits of the position, and then a subsequent measurement relates the maximum benefit and the degree of likelihood to determine the amount of benefit to recognize in the financial statements. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, which for the Company is October 1, 2007. The Company has not yet completed its assessment of the impact of FIN No. 48.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures regarding fair value measurements. The statement applies whenever other standards require or permit that assets or liabilities be measured at fair value. The statement does not require new fair value measurements, but rather provides a definition and framework for measuring fair value which will result in greater consistency and comparability among financial statements prepared under GAAP. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, which for the Company is October 1, 2008. The Company has not yet completed its assessment of the impact of SFAS No. 157.

In September 2006, the SEC issued SAB No. 108 “Correcting the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretation of the SEC’s views regarding the process of quantifying financial statement misstatements. SAB No. 108 requires registrants to quantify misstatements using a balance sheet and income statement approach and evaluate materiality as it pertains to relevant qualitative and quantitative factors. The SEC believes registrants must quantify the impact of correcting all misstatements on the current year financial statements. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006, which for the Company is September 30, 2007.

56

Earnings Per Share - The Company accounts for the shares acquired by its ESOP in accordance with Statement of Position (“SOP”) No. 93-6 and the shares acquired for its RRP in a manner similar to the ESOP shares. Shares acquired by the ESOP and the RRP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee’s individual account. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share calculations.

	2006(1)		2005(2)		2004(3)
	(Dollars in thousands, except per share amounts)
Net income (loss)	$	48,117	$	65,059	$	(106,275)
Average common shares outstanding		72,518,562		72,429,832		71,523,084
Average committed ESOP shares outstanding		76,236		76,236		76,166
Total basic average common shares outstanding		72,594,798		72,506,068		71,599,250
Effect of dilutive RRP shares		3,648		2,674		--
Effect of dilutive stock options		255,245		573,063		--
Total diluted average common shares outstanding		72,853,691		73,081,805		71,599,250
Net earnings (loss) per share
Basic	$	0.66	$	0.90	$	(1.48)
Diluted	$	0.66	$	0.89	$	(1.48)

(1) Options to purchase 247,000 shares of common stock at prices between $32.48 per share and $36.19 per share were outstanding as of September 30, 2006, but were not included in the computation of diluted EPS because they were anti-dilutive for the year ended September 30, 2006.

(2) Options to purchase 80,000 shares of common stock at prices between $35.34 per share and $36.19 per share were outstanding as of September 30, 2005, but were not included in the computation of diluted EPS because they were anti-dilutive for the year ended September 30, 2005.

(3) RRP shares totaling 130,286 and options totaling 1,056,276 which were outstanding at September 30, 2004 were not included in the computation of diluted earnings per share because they were anti-dilutive, due to the net loss at September 30, 2004.

57

2.INVESTMENT SECURITIES

The following tables reflect the amortized cost, estimated market value, and gross unrealized gains and losses of available-for-sale and held-to-maturity investment securities at September 30, 2006 and 2005.

	September 30, 2006
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(Dollars in thousands)
Available-for-sale:
FNMA	$	27,477	$	85	$	--	$	27,562
FHLMC		81,996		93		21		82,068
FHLB		78,601		37		4		78,634
Municipal bonds		1,201		15		--		1,216
	$	189,275	$	230	$	25	$	189,480
Held-to-maturity:
FNMA	$	150,000	$	--	$	4,816	$	145,184
FHLMC		65,000		--		1,275		63,725
FHLB		25,000		--		384		24,616
	$	240,000	$	--	$	6,475	$	233,525

	September 30, 2005
				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Market
		Cost		Gains		Losses		Value
	(Dollars in thousands)
Held-to-maturity:
FNMA	$	174,995	$	137	$	5,679	$	169,453
FHLMC		105,805		261		1,105		104,961
FHLB		149,699		1,020		181		150,538
	$	430,499	$	1,418	$	6,965	$	424,952

58

The following tables summarize the estimated market value and gross unrealized losses of those investment securities on which an unrealized loss at September 30, 2006 and 2005 was reported and the continuous unrealized loss position for the twelve months prior to September 30, 2006 and 2005 or for a shorter period of time.

	September 30, 2006
	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(Dollars in thousands)
Available-for-sale:
FNMA	$	--	$	--	$	--	$	--	$	--	$	--
FHLMC		50,186		21		--		--		50,186		21
FHLB		19,996		4		--		--		19,996		4
	$	70,182	$	25	$	--	$	--	$	70,182	$	25
Held-to-maturity:
FNMA	$	--	$	--	$	145,184	$	4,816	$	145,184	$	4,816
FHLMC		--		--		63,725		1,275		63,725		1,275
FHLB		--		--		24,616		384		24,616		384
	$	--	$	--	$	233,525	$	6,475	$	233,525	$	6,475

	September 30, 2005
	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(Dollars in thousands)
Held-to-maturity:
FNMA	$	--	$	--	$	144,320	$	5,679	$	144,320	$	5,679
FHLMC		24,837		163		39,058		942		63,895		1,105
FHLB		24,820		181		--		--		24,820		181
	$	49,657	$	344	$	183,378	$	6,621	$	233,035	$	6,965

The unrealized losses are primarily a result of an increase in interest rates from the time of purchase. These securities have not been classified as other-than-temporarily impaired as the scheduled principal and interest payments have been received, it is anticipated that the entire principal balance will be collected as scheduled and management has the intent and ability to hold these securities to recovery and/or maturity.

The amortized cost and estimated market value of the investment securities by remaining contractual maturity, without consideration of call features, as of September 30, 2006 are as follows:

	Available-for-Sale				Held-to-Maturity				Total
			Estimated				Estimated				Estimated
	Amortized		Market		Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value		Cost		Value
	(Dollars in thousands)
One year or less	$	45,202	$	45,213	$	--	$	--	$	45,202	$	45,213
One year through five years		142,872		143,051		190,000		184,261		332,872		327,312
Ten years and thereafter		1,201		1,216		50,000		49,264		51,201		50,480
	$	189,275	$	189,480	$	240,000	$	233,525	$	429,275	$	423,005

59

Issuers of certain securities have the right to call obligations with or without prepayment penalties. As of September 30, 2006, the amortized cost of the securities in our portfolio which are callable within one year totaled $393.1 million.

All dispositions of investment securities during 2006, 2005 and 2004 were the result of maturities or calls.

3. MORTGAGE-RELATED SECURITIES

The following tables reflect the amortized cost, estimated market value, and gross unrealized gains and losses of available-for-sale and held-to-maturity mortgage-related securities at September 30, 2006 and 2005. Mortgage-related securities of $396.9 million were classified as trading at September 30, 2006 and were excluded from the following tables.

	September 30, 2006
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(Dollars in thousands)
Available-for-sale (pass through certificates):
FNMA	$	353,222	$	1,129	$	3,477	$	350,874
FHLMC		195,848		802		1,234		195,416
Other mortgage-related securities		9,869		89		--		9,958
	$	558,939	$	2,020	$	4,711	$	556,248
Held-to-maturity (pass through certificates):
FNMA	$	507,032	$	224	$	12,976	$	494,280
FHLMC		619,064		213		18,076		601,201
GNMA		5,538		140		--		5,678
	$	1,131,634	$	577	$	31,052	$	1,101,159
	September 30, 2005
				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Market
		Cost		Gains		Losses		Value
	(Dollars in thousands)
Available-for-sale (pass through certificates):
FNMA	$	494,288	$	1,217	$	6,485	$	489,020
FHLMC		249,422		1,460		2,264		248,618
	$	743,710	$	2,677	$	8,749	$	737,638
Held-to-maturity (pass through certificates):
FNMA	$	647,243	$	591	$	11,826	$	636,008
FHLMC		750,348		167		13,619		736,896
GNMA		10,025		339		--		10,364
	$	1,407,616	$	1,097	$	25,445	$	1,383,268

60

The following tables summarize the estimated market value and gross unrealized losses of those securities on which an unrealized loss at September 30, 2006 and 2005 was reported and the continuous unrealized loss position for the twelve months prior to September 30, 2006 and 2005 or for a shorter period of time.

	September 30, 2006
	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(Dollars in thousands)
Available-for-sale:
FNMA	$	30,856	$	135	$	210,922	$	3,342	$	241,778	$	3,477
FHLMC		34,974		88		63,672		1,146		98,646		1,234
	$	65,830	$	223	$	274,594	$	4,488	$	340,424	$	4,711
Held-to-maturity:
FNMA	$	13,576	$	59	$	468,047	$	12,917	$	481,623	$	12,976
FHLMC		--		--		583,788		18,076		583,788		18,076
	$	13,576	$	59	$	1,051,835	$	30,993	$	1,065,411	$	31,052

	September 30, 2005
	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(Dollars in thousands)
Available-for-sale:
FNMA	$	38,283	$	421	$	363,390	$	6,064	$	401,673	$	6,485
FHLMC		45,118		347		119,407		1,917		164,525		2,264
	$	83,401	$	768	$	482,797	$	7,981	$	566,198	$	8,749
Held-to-maturity:
FNMA	$	448,609	$	7,620	$	143,215	$	4,206	$	591,824	$	11,826
FHLMC		349,148		3,876		364,380		9,743		713,528		13,619
	$	797,757	$	11,496	$	507,595	$	13,949	$	1,305,352	$	25,445

The unrealized losses are primarily a result of an increase in interest rates since the time of purchase. These securities have not been classified as other-than-temporarily impaired as the scheduled principal and interest payments have been received, it is anticipated that the entire principal balance will be collected as scheduled and management has the intent and ability to hold these securities to maturity or for a sufficient amount of time to recover the recorded principal.

During management’s review of the available-for-sale portfolio for the year ended September 30, 2006, securities were identified that management did not have the intent to hold until maturity or recovery of recorded principal primarily because their performance was below expectations set by the Bank’s Asset and Liability Committee. As a result of management’s decision to sell the securities, an other-than-temporary impairment of $472 thousand was recorded during the year ended September 30, 2006. Subsequent to September 30, 2006, the aforementioned securities were sold at approximately book value. The other-than-temporary impairment is included in Other Income under Other-than-temporary impairment of securities in the consolidated statements of income. There were no other-than-temporary impairments recorded for the years ended September 30, 2005 and 2004.

61

The amortized cost and estimated market value of mortgage-related securities, excluding trading securities, by remaining contractual maturity as of September 30, 2006 are as follows:

	Available-for-Sale				Held-to-Maturity				Total
			Estimated				Estimated				Estimated
	Amortized		Market		Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value		Cost		Value
	(Dollars in thousands)
One year or less	$	5	$	5	$	--	$	--	$	5	$	5
One year through five years		14,095		14,281		56,938		55,354		71,033		69,635
Five years through ten years		11,126		11,251		--		--		11,126		11,251
Ten years and thereafter		533,713		530,711		1,074,696		1,045,805		1,608,409		1,576,516
	$	558,939	$	556,248	$	1,131,634	$	1,101,159	$	1,690,573	$	1,657,407

Actual maturities of mortgage-related securities may differ from scheduled maturities as borrowers have the right to prepay certain obligations, sometimes without penalties. Maturities of mortgage-related securities depend on the repayment characteristics and experience of the underlying financial instruments.

As of September 30, 2006, the Bank had pledged mortgage-related securities available-for-sale and held-to-maturity as collateral with an amortized cost of $51.5 million and $326.4 million, respectively, and estimated market value of $50.4 million and $315.5 million, respectively, to the Federal Reserve Bank for treasury, public unit depositors of the Bank, tax and loan requirements and to the counterparties of the interest rate swaps.

All dispositions of mortgage-related securities during 2006, 2005 and 2004 were the result of principal repayments or maturities.

In September 2006, the Bank executed a loan swap transaction with the FHLMC. The Bank swapped $404.8 million of originated fixed-rate mortgage loans (“swapped loans”) for mortgage-related securities. The Bank will continue to service the swapped loans. The mortgage-related securities were classified as trading securities. There were no sales of trading securities during the year ended September 30, 2006. There were $2.8 million in gross gains and $1.7 million in gross losses included in Other Income under Gain on trading securities, net in the consolidated statements of income. Subsequent to September 30, 2006, the Bank sold the trading securities at approximately book value.

4. LOANS RECEIVABLE, Net

	2006		2005
	(Dollars in thousands)
Mortgage loans:
Residential - one- to four-units	$	4,931,505	$	5,189,006
Residential - five or more units		48,331		40,636
Construction and development		45,452		45,312
Commercial		8,443		8,927
		5,033,731		5,283,881
Other loans:
Home equity, auto and other		217,492		202,129
Deposits		6,250		8,377
		223,742		210,506
Less:
Undisbursed loan funds		22,605		14,803
Allowance for loan losses		4,433		4,598
Unearned loan fees and deferred costs		9,318		10,856
Loans receivable, net	$	5,221,117	$	5,464,130

The Bank originated $3.1 million, $5.0 million and $1.2 million of commercial real estate and business loans during the years ended September 30, 2006, 2005 and 2004, respectively.

62

The Bank is subject to numerous lending-related regulations. Under Financial Institutions Reform, Recovery, and Enforcement Act, the Bank may not make real estate loans to one borrower in excess of the greater of 15% of its unimpaired capital and surplus or $500 thousand. As of September 30, 2006, the Bank was in compliance with this limitation.

A summary of the activity in the allowance for loan losses is as follows:

	2006			2005			2004
	(Dollars in thousands)
Balance, beginning of year	$	4,598		$	4,495		$	4,550
Provision charged to expense		247			215			64
Losses charged against the allowance for loan losses		(132	)		(147	)		(161	)
Recoveries of loans previously charged against the
allowance for loan losses		1			35			42
Allowance on loans in the loan swap transaction		(281	)		--			--
Balance, end of year	$	4,433		$	4,598		$	4,495

The following is a summary of information pertaining to impaired loans:

	2006		2005
	(Dollars in thousands)
Impaired loans without a valuation allowance	$	2,868	$	8,217
Impaired loans with a valuation allowance		53		76
	$	2,921	$	8,293
Valuation allowance related to impaired loans	$	1	$	35

	2006		2005		2004
	(Dollars in thousands)
Average investment in impaired loans	$	5,398	$	4,703	$	5,103
Interest income recognized on impaired loans	$	44	$	54	$	70

No additional funds are committed to be advanced in connection with impaired loans.

As of September 30, 2006, 2005 and 2004, loans totaling approximately $5.6 million, $5.2 million and $6.1 million, respectively, were on nonaccrual status. Gross interest income would have increased by $105 thousand, $85 thousand, and $99 thousand for the years ended September 30, 2006, 2005 and 2004, respectively, if nonaccrual status loans were not classified as such.

The Bank did not engage in troubled debt restructurings in fiscal years 2006, 2005, and 2004.

Aggregate loans to executive officers, directors and their associates did not exceed 5% of stockholders’ equity as of September 30, 2006 and 2005. Such loans were made under terms and conditions substantially the same as loans made to parties not affiliated with the Bank.

As of September 30, 2006 and 2005, the Bank serviced loans for others aggregating approximately $776.1 million and $448.4 million, respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees. The Bank held borrowers’ escrow balances on loans serviced for others of $9.9 million and $6.2 million as of September 30, 2006 and 2005, respectively.

63

5.MORTGAGE SERVICING RIGHTS, Net

The activity of MSR for the periods indicated and the ending balances of MSR and the respective fair values at the periods ended are summarized as follows:

	2006			2005			2004
	(Dollars in thousands)
Beginning balance	$	2,869		$	3,340		$	5,600
MSR recorded as a result of the loan swap transaction		4,688			--			--
Amortization expense		(761	)		(1,042	)		(1,383	)
Balance before impairment loss and valuation allowance		6,796			2,298			4,217
Impairment loss		(16	)		(280	)		(502	)
Valuation allowance activity		137			851			(375	)
Ending balance	$	6,917		$	2,869		$	3,340
Fair value of MSR	$	7,875		$	3,128		$	3,523

The significant assumptions used in measuring the fair value of MSR as of September 30, 2006 are the weighted average prepayment speed (CPR) of 10.2 and the weighted average life of 6.1 years.

A summary of the activity in the valuation allowance for MSR for the periods indicated is as follows:

	2006			2005			2004
	(Dollars in thousands)
Beginning balance	$	137		$	988		$	613
Additions		--			141			846
Recoveries		(137	)		(992	)		(471	)
Ending balance	$	--		$	137		$	988

Estimated future MSR amortization, rounded to the nearest thousand, based upon prepayment assumptions utilized in the September 30, 2006 MSR valuation are as follows:

2007	$1,072
2008	782
2009	584
2010	443
2011	342

Actual results will vary depending upon the amount and timing of repayments on the loans currently serviced. The amortization expense, impairment loss and changes in the valuation allowance of MSR were included in Other Expenses under Other, net in the consolidated statements of income.

64

6. PREMISES AND EQUIPMENT, Net

	2006		2005
	(Dollars in thousands)
Land	$	7,159	$	7,152
Building and improvements		26,924		27,110
Furniture, fixtures and equipment		35,333		29,553
		69,416		63,815
Less accumulated depreciation		42,916		40,852
Premises and equipment, net	$	26,500	$	22,963

Depreciation and amortization expense for the years ended September 30, 2006, 2005 and 2004 was $3.8 million, $4.1 million and $4.1 million, respectively.

The Bank has entered into non-cancelable operating lease agreements with respect to banking premises and equipment. It is expected that many agreements will be renewed at expiration in the normal course of business. Rental expense was $1.0 million, $1.0 million and $865 thousand for the years ended September 30, 2006, 2005 and 2004, respectively. Future minimum rental commitments, rounded to the nearest thousand, required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:

2007	$ 924
2008	701
2009	591
2010	456
2011	385
Thereafter	3,082

65

7. DEPOSITS

	2006								2005
			Weighted								Weighted
			Average			% of					Average			% of
	Amount		Rate			Total			Amount		Rate			Total
	(Dollars in thousands)
Passbook and demand deposits:
Checking	$	402,898		0.21	%		10.33	%	$	398,490		0.21	%		10.06	%
Passbook and passcard		106,347		0.65			2.73			121,133		0.65			3.06
Money market		808,910		3.31			20.74			873,570		2.06			22.06
Total non-certificates		1,318,155		2.15			33.80			1,393,193		1.41			35.18
Certificates of deposit:
0.00 - 0.99%		125		0.59			--			123		0.60			--
1.00 - 1.99%		--		--			--			137,442		1.86			3.47
2.00 - 2.99%		215,891		2.85			5.53			863,948		2.58			21.82
3.00 - 3.99%		541,236		3.57			13.88			905,058		3.51			22.85
4.00 - 4.99%		1,323,434		4.59			33.93			600,367		4.24			15.16
5.00 - 5.99%		497,453		5.21			12.75			2,611		5.46			0.07
6.00 - 6.99%		4,137		6.61			0.11			57,555		6.61			1.45
Total certificates of deposit		2,582,276		4.35			66.20			2,567,104		3.35			64.82
Total deposits	$	3,900,431		3.61	%		100.00	%	$	3,960,297		2.67	%		100.00	%

As of September 30, 2006, certificates of deposit mature as follows, rounded to the nearest thousand:

2007	$ 1,659,138
2008	695,580
2009	143,703
2010	47,735
2011	34,466
Thereafter	1,654
	$   2,582,276

A summary of interest expense by deposit type is as follows:

	2006		2005		2004
	(Dollars in thousands)
Passbook and passcard	$	697	$	780	$	778
Checking and money market		23,300		17,559		12,917
Certificates of deposit		98,551		78,660		79,236
	$	122,548	$	96,999	$	92,931

The amount of noninterest-bearing deposits was $64.5 million and $62.0 million as of September 30, 2006 and 2005, respectively. Deposits in excess of $100 thousand may not be insured by the FDIC. Effective April 1, 2006, the FDIC increased the federal insurance coverage limit to $250 thousand for retirement accounts. IRA accounts in excess of $250 thousand may not be insured by the FDIC. The aggregate amount of deposit accounts in excess of $100 thousand and IRA accounts in excess of $250 thousand was approximately $828.1 million and $866.8 million as of September 30, 2006 and 2005, respectively. Certificates of deposit with a minimum denomination of $100 thousand were $614.3 million and $535.9 million as of September 30, 2006 and 2005, respectively. The aggregate amount of demand deposits that were reclassified as loans receivable was $187 thousand and $203 thousand as of September 30, 2006 and 2005, respectively.

66

8. ADVANCES FROM FEDERAL HOME LOAN BANK

FHLB advances at the periods ended are comprised of the following:

	2006			2005
	(Dollars in thousands)
Fixed-rate FHLB advances	$	3,296,000		$	3,450,000
Fair value of interest rate swaps		(27,295	)		(23,535	)
	$	3,268,705		$	3,426,465
Weighted average interest rate on FHLB advances		4.48	%		4.42	%

  As of September 30, 2006, FHLB advances mature as follows:

			Weighted
			Average
	Amount		Rate
	(Dollars in thousands)
2007	$	750,000		3.52	%
2008		1,125,000		4.23
2009		620,000		4.27
2010		775,000		5.90
2011		26,000		5.09
	$	3,296,000		4.48	%

Of the $750.0 million FHLB advances maturing in fiscal year 2007, $200.0 million is due in January 2007, $200.0 million is due in April 2007 and $350.0 million is due in July 2007.

During fiscal year 2004, the Bank refinanced $2.40 billion of its fixed-rate FHLB advances that were not hedged by the Bank. The Bank incurred a prepayment penalty of $236.1 million, pre-tax, to refinance the FHLB advances. The Bank entered into $2.65 billion of new fixed-rate, fixed-term FHLB advances that had no conversion features. The increase in the amount of advances was primarily to pay for the prepayment penalty associated with the refinancing.

The FHLB advances are secured by certain qualifying mortgage loans pursuant to a blanket collateral agreement with the FHLB and all of the capital stock of FHLB owned by the Bank.

Per the FHLB’s lending guidelines, total FHLB borrowings cannot exceed 40% of total Bank assets, unless approval is received from the FHLB president. In July 2006, the president of FHLB approved a renewal of an increase in the Bank’s borrowing limit to 45% of total assets for one year. At September 30, 2006, the Bank’s ratio of FHLB advances to total assets, as reported to the OTS, was 40.1%.

At September 30, 2006, the Company had access to a line of credit with the FHLB. In December 2006 the line of credit will be renewed automatically by the FHLB for a one year period. At September 30, 2006, there were no borrowings on the FHLB line of credit. Any borrowings on the line of credit would be included in total FHLB borrowings in calculating the ratio of FHLB borrowings to total Bank assets, which could not exceed 45% of total Bank assets at September 30, 2006.

9. INTEREST RATE SWAPS

During fiscal year 2004, the Bank entered into interest rate swap agreements with an aggregate notional amount of $800.0 million. The Bank utilizes the interest rate swaps to modify its interest rate risk profile. The Bank has agreed to receive interest from counterparties at a fixed-rate matching the amounts paid by the Bank on the hedged FHLB advances and to pay interest at a variable rate indexed to the one month LIBOR rate plus a

67

weighted average spread of 248 basis points during the term of the interest rate swaps and hedged FHLB advances. Net interest settlement with the counterparties is completed monthly. Currently, the Bank is in a net paying position on the interest rate swaps. Interest expense increased $8.6 million as a result of the interest rate swaps for the year ended September 30, 2006. The reduction in net interest expense as a result of the interest rate swaps totaled $7.3 million and $15.7 million for the years ended September 30, 2005 and 2004, respectively.

Counterparties to the interest rate swaps require collateral for their exposure to the Bank’s net payable mark-to-market position under the terms of the interest rate swap agreements. The exposure is estimated daily by the counterparties calculating a market value for each swap on a net settlement basis. When the valuation indicates that the Bank has a net payable to the counterparty, the Bank may be required to post collateral sufficient to satisfy the counterparty’s exposure. When required, the collateral pledged to the counterparty would be restricted and not available-for-sale. Each counterparty has different collateralization requirements. The Bank posted available-for-sale mortgage-related securities with an estimated market value of $42.8 million as collateral as of September 30, 2006. If the future obligation indicates that the Bank has a net receivable mark-to-market position from the counterparties, the Bank could have a certain level of exposure to the extent the counterparties are not able to satisfy their obligations to the Bank.

The aggregate fair value adjustment on the interest rate swaps represented a liability of $27.3 million and $23.5 million as of September 30, 2006 and 2005, respectively. As a result, the carrying amount of the FHLB advances as of September 30, 2006 and 2005 was reduced by $27.3 million and $23.5 million, respectively.

As of September 30, 2006, $225.0 million of the interest rate swap agreements mature in fiscal year 2008 and $575.0 million mature in fiscal year 2010.

10. OTHER BORROWINGS

The Company has established a Delaware statutory trust, Capitol Federal Financial Trust I (the “Trust”), of which the Company owns 100% of the common securities, or slightly more than 3% of the Trust (“Trust Common Securities”). Outside investors own 100% of the capital securities, or slightly less than 97% of the Trust. The Trust was formed for the purpose of issuing Company obligated mandatorily redeemable preferred securities (“Trust Preferred Securities”). The Trust issued $53.6 million of Trust Preferred Securities. The Company purchased $1.6 million of the Trust Common Securities which are reported in Other Assets in the September 30, 2006 and 2005 consolidated balance sheet. When the Trust Preferred and Trust Common Securities were issued, the Trust used the proceeds to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the “Debentures”) of the Company. The Debentures bear the same terms and interest rates as the Trust Preferred and Trust Common Securities. Interest is due quarterly in January, April, July and October until the maturity date of April 7, 2034. The interest rate, which resets at each interest payment, is based upon the three month LIBOR rate plus 275 basis points. Principal is due at maturity. The Debentures are callable, in part or whole, beginning on April 7, 2009, at par. Any such redemption of the Debentures by the Company will cause a redemption of a like amount of the Trust Preferred and Trust Common Securities by the Trust. The Company has guaranteed the obligations of the Trust. The Trust is not included in the consolidated financial statements of the Company in accordance with FIN No. 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The Debentures are the sole assets of the Trust. There are certain covenants of the Debentures that the Company is required to comply with. These covenants include a prohibition on cash dividends in the event of default or if the Company elects to defer the payment of interest on the Debentures, annual certifications to the Trust and other covenants related to the payment of interest and principal and maintenance of the Trust. The Company was in compliance with all covenants at September 30, 2006.

The following summarizes the components of other borrowings as of September 30, 2006 and 2005:

	2006						2005
				Average						Average
	Amount			Rate			Amount			Rate
	(Dollars in thousands)
Debentures to reprice in October, 2006	$	53,609			8.26	%	$	53,609			6.35	%
Capitalized debt issuance costs, net of amortization		(142	)					(199	)
	$	53,467			8.28	%	$	53,410			6.37	%

68

11.INCOME TAXES

Income tax expense (benefit) consists of the following:

	2006		2005		2004
	(Dollars in thousands)
Current	$	2,298	$	16,597	$	20,449
Deferred		28,288		23,719		(83,500	)
	$	30,586	$	40,316	$	(63,051	)

Income tax expense (benefit) has been provided at effective rates of 38.9%, 38.3% and (37.2)% for the years ended September 30, 2006, 2005 and 2004, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense result from the following:

	2006					2005					2004
	Amount		%			Amount		%			Amount			%
	(Dollars in thousands)
Federal income tax expense (benefit)
computed at statutory rate	$	27,546		35.0	%	$	36,881		35.0	%	$	(59,264	)		(35.0	)%
Increases (decreases) in
taxes resulting from:
State taxes, net of Federal
income tax expense (benefit)		2,335		3.0			3,027		2.9			(4,927	)		(2.9	)
Other		705		0.9			408		0.4			1,140			0.7
	$	30,586		38.9	%	$	40,316		38.3	%	$	(63,051	)		(37.2	)%

Deferred income tax expense (benefit) results from temporary differences in the recognition of revenue and expenses for tax and financial statement purposes. The sources of these differences and the tax effect of each were as follows:

	2006			2005			2004
	(Dollars in thousands)
FHLB prepayment penalty	$	25,261		$	21,847		$	(84,803	)
MSR		1,535			(179	)		(857	)
FHLB stock dividends		1,214			3,085			2,052
Gain on trading securities		408			--			--
Deferred compensation plans		115			280			334
Salaries and employee benefits		113			131			353
Allowance for loan losses		71			23			(1,871	)
Deferred loan fees and costs		--			--			18
Accrued interest on deposits		(38	)		(20	)		16
ESOP compensation		(42	)		(82	)		(119	)
Depreciation		(100	)		(1,109	)		(58	)
Other-than-temporary impairment of securities		(179	)		--			--
Other		(70	)		(257	)		1,435
	$	28,288		$	23,719		$	(83,500	)

69

The components of the net deferred income tax asset as of September 30, 2006 and 2005 are as follows:

	2006		2005
	(Dollars in thousands)
Deferred income tax assets:
FHLB prepayment penalty	$	37,695	$	62,956
ESOP compensation		1,024		982
Salaries and employee benefits		993		1,106
Unrealized loss on available-for-sale securities		943		2,303
Deferred compensation plans		420		535
Other-than-temporary impairment of securities		179		--
Accrued interest on deposits		151		113
Change in market value of vested RRP shares		1		4
Other		326		326
Gross deferred income tax assets		41,732		68,325
Deferred income tax liabilities:
FHLB stock dividends		16,837		15,623
MSR		2,623		1,088
Gain on trading securities		408		--
Depreciation		382		482
Allowance for loan losses		227		156
Prepaid expenses		157		174
Other		131		184
Gross deferred income tax liabilities		20,765		17,707
Net deferred income tax assets	$	20,967	$	50,618

The Company assesses the available positive and negative evidence surrounding the recoverability of the deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. The Company believes that no valuation allowance was required at September 30, 2006 and 2005.

The Company is currently undergoing a state tax audit for the years ended September 30, 2002, 2003 and 2004. Prior to September 30, 2006, the Company received notification from the state of a potential net tax liability of approximately $280 thousand for the years under audit. The Company did not accrue for the potential net tax liability at September 30, 2006 as management believes the tax position for the years under audit is defendable. The Company intends to pursue all opportunities available in defending the tax position taken on the tax returns under audit.

12. EMPLOYEE BENEFIT PLANS

The Company’s Thrift and Stock Ownership Plan (the “Plan”) has a profit sharing component and an ESOP component. The Plan covers all employees with a minimum of one year of service, at least age 21 and at least 1,000 hours of employment each year.

Profit Sharing - The profit sharing component of the Plan provides for two types of discretionary contributions. The first type is an optional Bank contribution, determined by the board of directors, between 0.0% and 5.0% of an eligible employee’s base compensation during the fiscal year. The second contribution may be between 0.5% and 10.0% of an eligible employee’s base compensation during the fiscal year if the employee matches 50.0% (on an after-tax basis) of the Bank’s second contribution. The plan shall continue to be designed to qualify as a thrift and profit sharing plan for purposes of Internal Revenue Codes 401(a), 402, 412, and 417. Total profit sharing contributions amounted to $153 thousand, $186 thousand and $82 thousand for the years ended September 30, 2006, 2005 and 2004, respectively.

ESOP - The ESOP Trust acquired 3,024,574 shares of common stock in the Company’s initial public offering with proceeds from a loan from the Company. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company.

The loan referenced above bears interest at a fixed-rate of 5.80% with interest payable annually and future principal and interest payable in seven remaining fixed installments, as of September 30, 2006, of $3.0 million. Payments of $3.0 million consisting of principal of $1.9 million, $1.8 million and $1.7 million and interest of $1.1 million, $1.2 million and $1.3 million were made on September 30, 2006, 2005 and 2004, respectively. The loan is secured by the shares of the stock purchased.

70

As the debt is repaid, 201,638 shares are released from collateral annually at September 30 and allocated to qualified employees based on the proportion of their compensation to total qualifying compensation. The Company accounts for its ESOP in accordance with Statement of Position No. 93-6. Accordingly, the shares pledged as collateral are reported as a reduction of stockholders’ equity in the consolidated balance sheet. As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Compensation expense related to the ESOP was $7.5 million, $7.6 million and $9.5 million for the years ended September 30, 2006, 2005 and 2004, respectively. Dividends on unallocated ESOP shares are recorded as a reduction of debt, up to a total of $3.0 million.

During the years ended September 30, 2006 and 2005, there were $719 thousand and $639 thousand, respectively, of dividends paid on unallocated ESOP shares in excess of the scheduled debt repayment and $3.0 million and $2.2 million, respectively, of dividends paid to participants on allocated ESOP shares. Participants that were fully vested were given the option to receive the dividends in cash or leave the dividend in the ESOP. During the year ended September 30, 2005, the Bank amended its ESOP to allow unvested participants the option to receive the dividends in cash or leave the dividends in the ESOP. Dividends are reinvested in Company stock for those participants who choose to leave their dividends in the ESOP or who do not make an election. The purchase of Company stock is made in the open market on or about the date of the disbursement to the participants who opt to take the dividends in cash. The fiscal year 2006 cash dividends will be disbursed during the first quarter of fiscal year 2007. The fiscal year 2005 cash dividends were disbursed during the first quarter of fiscal year 2006.

Shares may be withdrawn from the ESOP Trust due to retirement, termination or death of the participant. Following is a summary of shares held in the ESOP Trust as of September 30, 2006 and 2005:

	2006		2005
(Dollars in thousands, except share amounts)
Allocated ESOP shares		1,427,877		1,316,694
Unreleased ESOP shares		1,411,470		1,613,108
Total ESOP shares		2,839,347		2,929,802
Fair value of unreleased ESOP shares	$	50,192	$	55,201

13. STOCK BASED COMPENSATION

In December 2004, FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) amended SFAS No. 123, “Accounting for Stock-Based Compensation” and superseded Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” In March 2005, the SEC issued SAB No. 107 to provide its guidance on the valuation of share-based payments for public companies. SFAS No. 123(R) requires companies to recognize all share-based payments, which include stock options and restricted stock, in compensation expense over the service period of the share-based payment award. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. At September 30, 2006, the Company had a Stock Option and Incentive Plan (the “Option Plan”) and an RRP.

The Company adopted SFAS No. 123(R) on October 1, 2005 using the modified prospective method in which compensation cost is recognized over the service period for all awards granted subsequent to the Company’s adoption of SFAS No. 123(R) as well as for the unvested portion of awards outstanding as of the Company’s adoption of SFAS No. 123(R). In accordance with the modified prospective method, results for prior periods have not been restated.

Compensation expense related to the amortization of the RRP awards was recognized in the income statement prior to the implementation of SFAS No. 123(R). Compensation expense attributable to stock options and RRP awards during the year ended September 30, 2006 totaled $375 thousand ($229 thousand, net of tax) and $451 thousand ($275 thousand, net of tax), respectively.

71

Prior to the adoption of SFAS No. 123(R), the Company applied the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees” as allowed by SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” Accordingly, no stock based compensation was recognized in net income for stock options as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant and the related number of options granted were fixed at that point in time. The following table presents the pro forma impact on earnings and earnings per share for the years ended September 30, 2005 and 2004, respectively, if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148:

	2005		2004
	(Dollars in thousands)
Net income (loss)	$	65,059	$	(106,275	)
Add:  Stock-based compensation expense included in
reported net income (loss), net of related tax effects(1)		150		943
Deduct:  Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects(1)		318		1,432
Pro forma net income (loss)	$	64,891	$	(106,764	)
Net earnings (loss) per share
Basic-as reported	$	0.90	$	(1.48	)
Basic-pro forma	$	0.89	$	(1.49	)
Diluted-as reported	$	0.89	$	(1.48	)
Diluted-pro forma	$	0.89	$	(1.49	)

⁽¹⁾The amount includes compensation expense related to the RRP awards reported in net income.

The fair value of stock option grants are estimated on the date of the grant using the Black-Scholes option pricing model. The weighted average grant-date fair value of stock options granted during the fiscal years ended September 30, 2006, 2005 and 2004 was $3.98, $4.58 and $5.30 per share, respectively. The following weighted average assumptions were used for valuing stock option grants for the periods noted:

	2006	2005	2004
Risk-free interest rate	4.5%	4.1%	4.3%
Expected life (years)	8	8	7
Expected volatility	22%	23%	24%
Dividend yield	6.1%	5.7%	5.6%
Estimated forfeitures	0%	0%	0%

The risk-free interest rate was determined using the yield available on the option grant date for a zero-coupon U.S. Treasury security with a term equivalent to the expected life of the option. The expected life for options granted during the year ended September 30, 2006 represents the period the option is expected to be outstanding and was determined by applying the simplified method as allowed by SAB 107. The expected life for the stock options granted during the years ended September 30, 2005 and 2004 was based on the midpoint between the average vesting term and the average contractual term. The expected volatility was determined using historical volatilities based on historical stock prices. The dividend yield was determined based upon historical quarterly dividends and the Company’s stock price on the option grant date. Estimated forfeitures were determined based upon voluntary termination behavior and actual option forfeitures.

Stock Option Plan -Pursuant to the Option Plan, 3,780,718 shares of common stock were reserved for issuance by the Company upon exercise of stock options granted to officers, directors and employees of the Company and the Bank from time to time under the Option Plan. The Company may issue both incentive and nonqualified stock options under the Option Plan. The incentive stock options expire in ten years and the nonqualified stock options expire fifteen years from the date of grant. The date on which the options are first exercisable is determined by the Stock Benefits Committee (“sub-committee”), a sub-committee of the

72

Compensation Committee (“committee”) of the board of directors. The vesting period of the options generally ranges from three to five years. The option price is equal to the market value at the date of the grant as defined by the Option Plan. The purpose of the Option Plan is to provide additional incentive to certain officers, directors and key employees by facilitating their purchase of a stock interest in the Company. At September 30, 2006, the Company had 382,718 shares available for future grants under the Option Plan.

The Option Plan is administered by the sub-committee, which selects the employees and non-employee directors to whom options are to be granted and the number of shares to be granted. The exercise price may be paid in cash, shares of the common stock, or a combination of both. The option price may not be less than 100% of the fair market value of the shares on the date of the grant. In the case of any employee who is granted an incentive stock option who owns more than 10% of the outstanding common stock at the time the option is granted, the option price may not be less than 110% of the fair market value of the shares on the date of the grant, and the option shall not be exercisable after the expiration of five years from the grant date. Historically, the Company generally has issued shares held in treasury upon the exercise of stock options.

A summary of option activity for the years ended September 30, 2006, 2005 and 2004 follows:

	2006					2005					2004
				Weighted					Weighted					Weighted
				Average					Average					Average
	Number			Exercise		Number			Exercise		Number			Exercise
	of Options			Price		of Options			Price		of Options			Price
Options outstanding
at beginning of year:		789,749		$	15.61		1,212,067		$	11.21		1,961,358		$	10.20
Granted		112,000			32.69		114,000			34.81		25,000			36.19
Forfeited		(2,200	)		22.57		(8,000	)		20.08		(4,900	)		12.81
Exercised		(231,092	)		9.87		(528,318	)		9.59		(769,391	)		9.46
Options outstanding
at end of year		668,457		$	20.43		789,749		$	15.61		1,212,067		$	11.21

During the year ended September 30, 2006, the total pretax intrinsic value of stock options exercised was $5.3 million and the tax benefits realized from the exercise of stock options was $1.6 million. The fair value of stock options vested during the year ended September 30, 2006 was $326 thousand.

The following summarizes information about the stock options outstanding and exercisable as of September 30, 2006:

	Options Outstanding								Options Exercisable
			Weighted		Weighted						Weighted
			Average		Average						Average
	Number		Remaining		Exercise		Aggregate		Number		Exercise		Aggregate
Exercise	of Options		Contractual		Price per		Intrinsic		of Options		Price per		Intrinsic
Price	Outstanding		Life (in years)		Share		Value		Exercisable		Share		Value
	(Dollars in thousands, except per share amounts)
$9.22		333,257		7.57	$	9.22	$	8,778		333,257	$	9.22	$	8,778
14.03 - 19.68		22,400		4.41		16.25		433		22,400		16.25		433
25.66 - 28.78		39,200		8.11		25.99		375		27,000		25.88		261
30.19 - 36.19		273,600		11.59		33.63		551		96,433		33.67		195
		668,457		9.14	$	20.43	$	10,137		479,090	$	15.41	$	9,667

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $35.56 as of September 30, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of September 30, 2006 was 444,090.

As of September 30, 2006, the total future compensation cost related to non-vested stock options not yet recognized in the consolidated statements of income was $640 thousand and the weighted average period over which these awards are expected to be recognized was 2.8 years.

73

Recognition and Retention Plan -The objective of the RRP is to enable the Company and the Bank to retain personnel of experience and ability in key positions of responsibility. Employees and directors of the Bank are eligible to receive benefits under the RRP at the sole discretion of the sub-committee. The total number of shares originally eligible to be granted under the RRP was 1,512,287.

Following is a summary of RRP shares granted since inception:

		Fair Market
	Number of	Value of
Grant Date	Shares	Shares	Vesting Period
		(Dollars in thousands)
April 18, 2000	1,280,000	$ 11,480	April 18, 2000 - April 18, 2004
October 24, 2000	10,000	141	October 24, 2000 - October 24, 2004
June 18, 2002	3,000	77	April 18, 2005 - April 18, 2007
September 23, 2003	5,000	151	September 23, 2003 - September 23, 2007
December 18, 2003	5,000	181	December 18, 2003 - December 18, 2007
January 25, 2005	1,200	43	January 25, 2005 - January 25, 2007
January 27, 2005	10,000	358	January 27, 2005 - January 27, 2009
August 23, 2005	3,000	102	August 23, 2006 - August 23, 2010
October 25, 2005	2,500	86	October 25, 2005 - October 25, 2009
January 25, 2006	20,000	651	January 25, 2006 - January 25, 2010
Total RRP shares granted	1,339,700

Compensation expense in the amount of the fair market value of the common stock at the date of the grant, as defined by the RRP, to the employee is recognized over the period during which the shares vest. Compensation expense attributable to the vesting of RRP shares amounted to $451 thousand, $240 thousand and $1.5 million for fiscal years 2006, 2005 and 2004, respectively. A recipient of such restricted stock will be entitled to all voting and other stockholder rights (including the right to receive dividends on vested and non-vested shares), except that the shares, while restricted, may not be sold, pledged or otherwise disposed of and are required to be held in escrow by the Company. If a holder of such restricted stock terminates employment for reasons other than death or disability, the employee forfeits all rights to the non-vested shares under restriction. If the participant’s service terminates as a result of death, disability, or if a change in control of the Bank occurs, all restrictions expire and all non-vested shares become unrestricted. A summary of RRP share activity for the years September 30, 2006, 2005 and 2004 follows:

	2006					2005					2004
				Weighted					Weighted					Weighted
	Number			Average		Number			Average		Number			Average
	of RRP			Exercise		of RRP			Exercise		of RRP			Exercise
	Shares			Price		Shares			Price		Shares			Price
Non-vested RRP shares at beginning of period		18,800		$	33.88		12,000		$	28.39		265,400		$	9.82
Granted		22,500			32.73		14,200			35.38		5,000			36.20
Vested		(10,500	)		32.91		(7,400	)		27.84		(258,400	)		9.47
Non-vested RRP shares at end of period		30,800		$	33.37		18,800		$	33.88		12,000		$	28.39

The estimated forfeiture rate for the RRP shares granted during the year ended September 30, 2006 was 0% based upon voluntary termination behavior and actual forfeitures. The fair value of RRP shares that vested during the year ended September 30, 2006, 2005 and 2004 totaled $346 thousand, $206 thousand and $2.4 million, respectively. As of September 30, 2006, there was $825 thousand of unrecognized compensation cost related to non-vested RRP compensation to be recognized over a weighted average period of 2.9 years.

74

14. PERFORMANCE BASED COMPENSATION

The Company and the Bank have a short-term performance plan and a deferred incentive bonus plan. The short-term performance plan has a component tied to Company performance and a component tied to individual participant performance. Individual performance criteria are established by executive management for eligible non-executive employees of the Bank; individual performances of executive officers are reviewed by the committee. Company performance criteria are approved by the committee. Short-term performance plan awards are granted based upon a performance review by the committee. The committee may exercise its discretion and not grant awards. The deferred incentive bonus plan is intended to operate in conjunction with the short-term performance plan. A participant of the deferred incentive bonus plan can elect to defer into an account, with a portion of the earnings on the deferral tied to the performance of the Company’s stock and a portion that is a cash percentage match of the amount deferred, between $2 thousand and 50% of the short-term performance plan award up to but not exceeding $100 thousand. The deferral period is three years. The total amount of short-term performance plan awards provided for the years ended September 30, 2006, 2005 and 2004, amounted to $1.1 million, $1.7 million and $0 respectively, of which $169 thousand, $301 thousand and $0 respectively, was deferred under the deferred incentive bonus plan. During fiscal years 2006, 2005 and 2004 the amount expensed in conjunction with the earnings on the deferred amounts was $110 thousand, $239 thousand and $616 thousand, respectively. The deferrals and returns on the deferrals will be paid in 2009 and 2010, respectively. There will not be a payout in 2008 as there were no deferred amounts under the deferred incentive bonus plan for the year ended September 30, 2004.

15. DEFERRED COMPENSATION

The Bank has deferred compensation agreements with certain officers and retired officers whereby stipulated amounts will be paid to them over a period of 20 years upon their retirement or termination. Amounts accrued under these agreements aggregate $608 thousand and $713 thousand as of September 30, 2006 and 2005, respectively, and are accrued over the period of active employment and either have been or will be funded by life insurance contracts.

16. COMMITMENTS AND CONTINGENCIES

The Bank had commitments outstanding to originate and purchase first and second mortgage loans as of September 30, 2006 and 2005 as follows:

	2006		2005
	(Dollars in thousands)
Fixed-rate (interest rates ranging from 5.13% to 8.50% and
4.75% to 8.00%, respectively, at September 30, 2006 and 2005)	$	63,333	$	91,247
Variable rate		26,568		142,366
	$	89,901	$	233,613

As of September 30, 2006 and 2005, there were no loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans.

As of September 30, 2006, the Bank had commitments to originate non-mortgage loans approximating $1.5 million of which approximately $92 thousand were fixed-rate (interest rates ranging from 5.44% to 14.0%) and $1.4 million were variable rate commitments. As of September 30, 2005, the Bank had commitments to originate non-mortgage loans approximating $2.0 million of which approximately $69 thousand were fixed-rate (interest rates ranging from 5.99% to 7.75%) and $2.0 million were variable rate commitments.

Commitments to originate mortgage and non-mortgage loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Some of the commitments are expected to expire without being fully drawn upon; therefore the amount of total commitments disclosed above does not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the customer.

As of September 30, 2006 and 2005, the Bank had approved, but unused, home equity lines of credit of $272.1 million and $271.9 million, respectively. Approval of lines of credit is based upon underwriting standards that do not allow total borrowings, including existing mortgages and lines of credit, to exceed 100% of the estimated market value of the customer’s home.

75

17. REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

Quantitative measures that have been established by regulation to ensure capital adequacy require the Bank to maintain minimum capital amounts and ratios (set forth in the table below). The Bank’s primary regulatory agency, the OTS, requires that the Bank maintain minimum ratios of tangible capital (as defined in the regulations) of 1.5%, core capital (as defined) of 4%, and total risk-based capital (as defined) of 8%. The Bank also is subject to prompt corrective action capital requirement regulations set forth by the FDIC. The FDIC requires the Bank to maintain a minimum of Tier 1 total and core capital (as defined) to risk-weighted assets (as defined), and of core capital (as defined) to adjusted tangible assets (as defined). Management believes, as of September 30, 2006, that the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 2006 and 2005, the most recent guidelines from the OTS categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

											To Be Well
											Capitalized
											Under Prompt
						For Capital					Corrective Action
	Actual					Adequacy Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of September 30, 2006:
Total capital (to risk weighted assets)	$	781,356		22.5	%	$	277,791		8.0	%	$	347,238		10.0	%
Core capital (to adjusted tangible assets)		783,562		9.5			328,893		4.0			411,117		5.0
Tangible capital (to tangible assets)		783,562		9.5			123,335		1.5			N/A		N/A
Tier I capital (to risk weighted assets)		783,562		22.6			N/A		N/A			208,343		6.0
As of September 30, 2005:
Total capital (to risk weighted assets)	$	762,432		21.3	%	$	286,960		8.0	%	$	358,700		10.0	%
Core capital (to adjusted tangible assets)		764,847		9.1			337,761		4.0			422,201		5.0
Tangible capital (to tangible assets)		764,847		9.1			126,660		1.5			N/A		N/A
Tier I capital (to risk weighted assets)		764,847		21.3			N/A		N/A			215,220		6.0

A reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as of September 30, 2006 and 2005 is as follows:

	2006			2005
	(Dollars in thousands)
Total equity as reported under GAAP	$	783,144		$	762,657
Unrealized losses on available-for-sale securities		1,543			3,769
Other		(1,125	)		(1,579	)
Total tangible and core capital		783,562			764,847
Allowance for loan losses		4,422			4,598
Equity investments		(6,628	)		(7,013	)
Total risk based capital	$	781,356		$	762,432

Under OTS regulations, there are limitations on the amount of capital the Bank may distribute to the Company. Generally, this is limited to the earnings of the previous two calendar years and current year-to-date earnings. Currently, the Bank operates under an OTS-granted waiver to these regulations because of capital distributions from the Bank to the Company during the current and prior two calendar years. Because the Bank complies with OTS regulations regarding interest rate risk, capital ratios and operates in a safe and sound manner, it is management's opinion that the Bank will continue to receive waivers until the time period constraints have lapsed, which should occur on December 31, 2007. Currently, the Bank's waiver allows it to move all earnings of the Bank to the Company through June 30, 2007.

76

18. FAIR VALUE OF FINANCIAL INSTRUMENTS

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 estimated fair values of the Company’s financial instruments as of September 30, 2006 and 2005 are as follows:

	2006						2005
				Estimated						Estimated
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
				(Dollars in thousands)
Assets:
Cash and cash equivalents	$	183,242		$	183,242		$	58,566		$	58,566
Investment securities:
Available-for-sale		189,480			189,480			--			--
Held-to-maturity		240,000			233,525			430,499			424,952
Mortgage-related securities:
Trading		396,904			396,904			--			--
Available-for-sale		556,248			556,248			737,638			737,638
Held-to-maturity		1,131,634			1,101,159			1,407,616			1,383,268
Loans receivable held-for-sale		1,440			1,440			1,891			1,891
Loans receivable		5,221,117			5,081,826			5,464,130			5,404,906
Capital stock of FHLB		165,130			165,130			182,259			182,259
Liabilities:
Deposits		3,900,431			3,897,736			3,960,297			3,965,425
Advances from FHLB		3,296,000			3,295,055			3,450,000			3,475,157
Other borrowings		53,467			54,726			53,410			55,087
Interest rate swaps		(27,295	)		(27,295	)		(23,535	)		(23,535	)

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 reasonable estimates of their fair value.

Investment Securities and Mortgage-Related Securities - Estimated fair values of investment securities and mortgage-related securities are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar instruments.

Loans Receivable Held-for-Sale - Estimated fair values of loans receivable held for sale are determined based on sales commitments or dealer quotations.

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 variable interest rate categories. Future cash flows of fixed-rate mortgage loans are discounted using the current yield curve at a margin above treasury rates, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity. Future cash flows for adjustable-rate mortgage loans are discounted using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.

Capital Stock of FHLB - The carrying value of capital stock of FHLB approximates its fair value.

Deposits - The estimated fair value of demand deposits and savings 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 the rates currently offered by the Bank for certificates of similar remaining maturities.

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

77

Other Borrowings - The other borrowings have a variable rate structure. The Company can prepay the other borrowings at a premium until April 2009, at which point the borrowings can be pre-paid at par.

Interest Rate Swaps - The fair value of the interest rate swaps are estimated by discounting anticipated cash flows associated with the receive-fixed rate component of the swap and the pay-variable rate component of the swap over the remaining contractual terms of each swap. The pay-variable rate component cash flows are estimated using forward interest rate curves for the one month LIBOR.

Loan-related Commitments - The estimated fair value of commitments to originate loans is based on the fees currently charged to enter into similar agreements and the difference between current levels of interest rates and the committed rates. The estimated fair value of commitments to purchase or sell loans held for sale is based on the change in the market price of the pass-through rate from the commitment closing date to the reporting date. At September 30, 2006 and 2005, commitments to originate and purchase first and second mortgage loans totaled $89.9 million and $233.6 million, respectively. At September 30, 2006 and 2005, commitments to originate non-mortgage loans totaled $1.5 million and $2.0 million, respectively. The fair market value of loan-related commitments approximated the contractual amounts.

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2006 and 2005. 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 that date. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.

19. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)

The Company serves as the holding company for the Bank (see Note 1). The Company’s (parent company only) balance sheets as of September 30, 2006 and 2005, and the related statements of income and cash flows for each of the three years in the period ended September 30, 2006 are as follows:

BALANCE SHEETS
SEPTEMBER 30, 2006 and 2005
(in thousands, except share amounts)
	2006			2005
ASSETS
Cash and cash equivalents	$	55,988		$	79,607
Investment in the Bank		783,145			762,657
Investment in certificates of deposit at the Bank		60,000			60,000
Note receivable - ESOP		16,815			18,720
Other assets		1,672			1,654
Income tax receivable		123			170
TOTAL ASSETS	$	917,743		$	922,808
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Accounts payable and accrued expenses	$	1,057		$	4,335
Other borrowings		53,467			53,410
Total liabilities		54,524			57,745
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 50,000,000 shares authorized,
no shares issued or outstanding		--			--
Common stock, $.01 par value; 450,000,000 shares authorized,
91,512,287 shares issued as of September 30, 2006 and 2005		915			915
Additional paid-in capital		429,286			421,903
Unearned compensation - ESOP		(14,784	)		(16,721	)
Unearned compensation - RRP		(825	)		(539	)
Retained earnings		760,890			759,643
Accumulated other comprehensive loss		(1,543	)		(3,769	)
		1,173,939			1,161,432
Treasury stock 17,480,357 and 17,225,398 shares as of
September 30, 2006 and 2005, at cost		(310,720	)		(296,369	)
Total stockholders’ equity		863,219			865,063
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	917,743		$	922,808

78

STATEMENTS OF INCOME
YEARS ENDED September 30, 2006, 2005 and 2004
(in thousands)
	2006			2005			2004
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank	$	38,414		$	62,010		$	106,562
Interest income from other investments		5,174			3,998			2,866
Total interest and dividend income		43,588			66,008			109,428
INTEREST EXPENSE		4,160			3,092			1,435
NET INTEREST AND DIVIDEND INCOME		39,428			62,916			107,993
OTHER INCOME		123			91			35
OTHER EXPENSES:
Salaries and employee benefits		960			937			1,153
Other, net		512			507			470
Total other expenses		1,472			1,444			1,623
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY		38,079			61,563			106,405
INCOME TAX BENEFIT		(123	)		(170	)		(63	)
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY		38,202			61,733			106,468
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY		9,915			3,326			(212,743	)
NET INCOME (LOSS)	$	48,117		$	65,059		$	(106,275	)

79

STATEMENTS OF CASH FLOWS
YEARS ENDED September 30, 2006, 2005 and 2004
(in thousands)
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	48,117		$	65,059		$	(106,275	)
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in (undistributed earnings)/excess of distribution over
earnings of subsidiary		(9,915	)		(3,326	)		212,743
Amortization of deferred debt issuance costs		57			62			274
RRP shares sold, net of forfeitures		(11	)		(21	)		(22	)
Changes in:
Other assets		(18	)		(11	)		119
Income taxes receivable/payable		47			(3,133	)		927
Accounts payable and accrued expenses		(3,278	)		3,773			52
Net cash flows provided by operating activities		34,999			62,403			107,818
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable from ESOP		1,905			1,800			1,702
Purchase of certificates of deposit		--			--			(60,000	)
Net cash flows provided by (used in) investing activities		1,905			1,800			(58,298	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment from subsidiary for sale of treasury stock related to
RRP shares		749			524			201
Dividends paid		(46,870	)		(40,722	)		(54,427	)
Acquisition of treasury stock		(16,681	)		(8,609	)		(3,355	)
Stock options exercised		2,279			5,065			7,278
Proceeds from other borrowings		--			--			52,000
Capitalized debt issuance costs		--			--			(290	)
Repayments of other borrowings		--			--			(81,391	)
Net cash flows used in financing activities		(60,523	)		(43,742	)		(79,984	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(23,619	)		20,461			(30,464	)
CASH AND CASH EQUIVALENTS:
Beginning of year		79,607			59,146			89,610
End of year	$	55,988		$	79,607		$	59,146
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments	$	3,915		$	1,722		$	1,388

80

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

			State of
		Percentage	Incorporation
		of	or
Parent	Subsidiary	Ownership	Organization
Capitol Federal	Capitol Federal Savings	100%	Federal
Financial	Bank
Capitol Federal	Capitol Funds, Inc.	100%	Kansas
Savings Bank
Capitol Funds,	Capitol Federal	100%	Vermont
Inc.	Mortgage Reinsurance
	Company

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-35452 on Form S-8 of our reports dated December 13, 2006, relating to the consolidated financial statements of Capitol Federal Financial and Subsidiary and management's report on the effectiveness of internal control over financial reporting incorporated by reference in this Annual Report on Form 10-K for the year ended September 30, 2006.

Kansas City, Missouri

December 13, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, John B. Dicus, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Capitol Federal Financial;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-l5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 14, 2006	By:	/s/ John B. Dicus
		John B. Dicus
		President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Kent G. Townsend, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Capitol Federal Financial;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-l5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 14, 2006	By:	/s/ Kent G. Townsend
		Kent G. Townsend
		Executive Vice President, Chief Financial Officer and Treasurer

EX-32

EXHIBIT 32

CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Capitol Federal Financial (the “Company”) on Form 10-K for the fiscal year ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John B. Dicus, Chief Executive Officer of the Company, and I, Kent G. Townsend, Chief Financial Officer and Treasurer of the Company, certify, in my capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of the dates and for the periods presented in the financial statements included in such Report.

Date:   December 14, 2006                                    By:   /s/ John B. Dicus                                         

                                                                                     John B. Dicus, President and

                                                                                     Chief Executive Officer

Date:   December 14, 2006                                   By:   /s/ Kent G. Townsend                                 

                                                                                     Kent G. Townsend, Executive Vice President,

                                                                                     Chief Financial Officer and Treasurer