Capitol Federal Financial 10K 2005 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended September 30, 2005 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					(I.R.S. Employer Identification No.)
			or organization)
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:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)

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. YESXNO ___.

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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [ ] NO [X]

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 National Market as of March 31, 2005, was $770.6 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 2, 2005, there were issued and outstanding 74,290,789 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, 2005.
Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting of Stockholders for the year ended September 30, 2005.



			Page No.
PART I	Item 1.	Business	4

	Item 2.	Properties	37

	Item 3.	Legal Proceedings	37

	Item 4.	Submission of Matters to a Vote of Security Holders	37


PART II	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	38

	Item 6.	Selected Financial Data	38

	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38

	Item 8.	Financial Statements and Supplementary Data	38

	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	38

	Item 9A.	Controls and Procedures	39

	Item 9B.	Other Information	39


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

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;
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.

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 NASDAQ National 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 eight in-store banking offices. At September 30, 2005, we had total assets of $8.41 billion, deposits of $3.96 billion and total equity of $865.1 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 a limited amount of loans secured by first mortgages on nonowner-occupied one- to four-family residences, consumer loans, permanent and construction loans secured by commercial real estate 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 re tail deposits and advances from the Federal Home Loan Bank of 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 statement 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 37 branches located in 7 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.

Johnson County, Kansas is located in the south central area of the Kansas City metropolitan area. According to the U.S. Census Bureau, Johnson County's estimated population was expected to increase approximately 10% from 2000 to 2004. The County's economy is well diversified. The 2004 inflation-adjusted local median household income in Johnson County was estimated to be $62,155 compared to the estimated national average of $44,684 and the estimated Kansas average of $41,638 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 13.2% market share based on the FDIC "Summary of Deposits - Market Share Report" dated June 30, 2005. The Bank's market share percentage in Johnson County has been decreasing over the past 5 years, but we have conti nued 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. 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. The Bank ranked seventh in deposit market share in Wichita, with 7.0% market share based on the FDIC "Summary of Deposits - Market Share Report" dated June 30, 2005. 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. Since September 11, 2001, there has been a downturn in the U.S. general aviation market. 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.

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 seven 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 35.3% market share based on the FDIC "Summary of Deposits - Market Share Report" dated June 30, 2005. 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.

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 generally within our Kansas City and Wichita market areas. Purchasing loans from nationwide lenders provides geographic diversification, reducing our exposure to concentrations of credit risk. At September 30, 2005 all of such purchased loans were secured by properties located in 48 states other than Kansas. The states where we had a greater than 5% concentration of our total purchased loans held in our portfolio at September 30, 2005 were comprised of: Illinois 12.9%; Florida 7.0%; Arizona 6.6%; Virginia 5.4%; Texas 5.1%; and Colorado 5.0%.

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, 2005, our net loan portfolio totaled $5.46 billion, which constituted 65.0% 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 1 0-K.

All originated loans are generated by our own employees or loan agents. Loans over $450 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, 2005, the maximum amount which we could have loaned to any one borrower and the borrower's related entities was approximately $115.4 million. Our largest lending relationship to a single borrower or a group of related borrowers on that date consisted of 13 multi-family real estate projects, three single-family homes and four commercial real estate projects located in Kansas and Texas, totaling $32.3 million. No single loan in this group exceeded $3.7 million at that date. With our largest lending relationship, the Bank had an additional commitment outstanding at September 30, 2005 to originate a loan of $3.5 million for a multi-family real estate project. Most of the multi-family real estate loans qualify for the low income housing tax credit program. We have over 20 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, 2005.

The second largest lending relationship at September 30, 2005, consisted of six loans totaling $8.7 million. Three loans are secured by multi-family real estate units and three are secured by single-family homes. We have over 20 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 its terms at September 30, 2005.

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,
	2005			2004			2003			2002			2001
	Amount	Percent		Amount	Percent		Amount	Percent		Amount	Percent		Amount	Percent
	(Dollars in thousands)
Real Estate Loans:
One- to four-family	$5,189,006	94.44	%	$4,492,205	93.70	%	$4,069,197	93.43	%	$4,612,543	93.94	%	$5,166,660	94.66	%
Multi-family	40,636	0.74		35,421	0.74		38,464	0.88		45,985	0.94		48,991	0.90
Commercial	8,927	0.16		8,698	0.18		7,881	0.18		5,514	0.11		7,966	0.15
Construction and development⁽¹⁾	45,312	0.83		54,782	1.14		48,537	1.11		48,023	0.98		44,712	0.82
Total real estate loans	5,283,881	96.17		4,591,106	95.76		4,164,079	95.60		4,712,065	95.97		5,268,329	96.53

Other Loans:
Consumer Loans:
Savings	8,377	0.15		9,141	0.19		10,963	0.25		11,931	0.24		14,466	0.26
Automobile	2,555	0.05		2,274	0.05		3,798	0.09		6,913	0.14		10,346	0.19
Home equity	197,626	3.60		189,861	3.96		173,656	3.99		175,551	3.58		161,239	2.95
Other	1,878	0.03		1,931	0.04		2,484	0.07		3,474	0.07		3,773	0.07
Total consumer loans	210,436	3.83		203,207	4.24		190,901	4.40		197,869	4.03		189,824	3.47
Commercial business loans	70	--		129	--		201	--		151	--		25	--
Total other loans	210,506	3.83		203,336	4.24		191,102	4.40		198,020	4.03		189,849	3.47
Total loans receivable	5,494,387	100.00	%	4,794,442	100.00	%	4,355,181	100.00	%	4,910,085	100.00	%	5,458,178	100.00	%

Less:
Loans in process	14,803			23,623			27,039			21,764			20,057
Net deferred fees and discounts	10,856			18,794			15,896			15,678			16,652
Allowance for losses	4,598			4,495			4,550			4,825			4,837
Total loans receivable, net	$5,464,130			$4,747,530			$4,307,696			$4,867,818			$5,416,632

(1) AtSeptember 30, 2005, there were no development loans in the loan portfolio.

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

	September 30,
	2005			2004			2003			2002			2001
	Amount	Percent		Amount	Percent		Amount	Percent		Amount	Percent		Amount	Percent
	(Dollars in thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family	$3,273,627	59.58	%	$3,118,912	65.06	%	$3,005,475	69.01	%	$3,418,360	69.62	%	$3,325,203	60.92	%
Multi-family	40,100	0.73		34,828	0.73		37,819	0.87		44,494	0.91		47,411	0.87
Commercial	8,887	0.16		8,654	0.18		7,834	0.18		4,996	0.10		5,146	0.10
Construction and development⁽¹⁾	26,418	0.49		38,058	0.79		36,588	0.84		31,944	0.65		30,936	0.57
Total real estate loans	3,349,032	60.96		3,200,452	66.76		3,087,716	70.90		3,499,794	71.28		3,408,696	62.46

Consumer	39,617	0.72		26,439	0.55		26,817	0.62		38,828	0.79		46,971	0.85
Commercial business	70	--		129	--		201	--		151	--		25	--
Total fixed-rate loans	3,388,719	61.68		3,227,020	67.31		3,114,734	71.52		3,538,773	72.07		3,455,692	63.31

Adjustable-Rate Loans:
Real estate:
One- to four-family	1,915,379	34.86		1,373,293	28.64		1,063,722	24.42		1,194,183	24.32		1,841,457	33.74
Multi-family	536	0.01		593	0.01		645	0.01		1,491	0.03		1,580	0.03
Commercial	40	--		44	--		47	--		518	0.01		2,820	0.05
Construction and development⁽¹⁾	18,894	0.34		16,724	0.35		11,949	0.28		16,079	0.33		13,776	0.25
Total real estate loans	1,934,849	35.21		1,390,654	29.00		1,076,363	24.71		1,212,271	24.69		1,859,633	34.07

Consumer	170,819	3.11		176,768	3.69		164,084	3.77		159,041	3.24		142,853	2.62
Total adjustable-rate loans	2,105,668	38.32		1,567,422	32.69		1,240,447	28.48		1,371,312	27.93		2,002,486	36.69
Total loans	5,494,387	100.00	%	4,794,442	100.00	%	4,355,181	100.00	%	4,910,085	100.00	%	5,458,178	100.00	%

Less:
Loans in process	14,803			23,623			27,039			21,764			20,057
Net deferred fees and discounts	10,856			18,794			15,896			15,678			16,652
Allowance for loan losses	4,598			4,495			4,550			4,825			4,837
Total loans receivable, net	$5,464,130			$4,747,530			$4,307,696			$4,867,818			$5,416,632

(1)At September 30, 2005, there were no development loans in the loan portfolio.

The following table presents the contractual maturity of our loan portfolio at September 30, 2005, 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⁾	$ 1,546	5.57	%	$ 91	6.25	%	$28,985	5.09	%	$ 6,061	5.11	%	$ --	--	%	$ 36,683	5.12	%

After one year:
One through five years	27,600	6.25		745	7.50		1,524	5.23		8,878	7.09		--	--		38,747	6.43
After five years	5,159,860	5.29		48,727	6.48		--	--		195,497	7.57		70	6.73		5,404,154	5.38
Total due after one year	5,187,460	5.30		49,472	6.50		1,524	5.23		204,375	7.55		70	6.73		5,442,901	5.39

Totals loans	$5,189,006	5.30	%	$49,563	6.49	%	$30,509	5.10	%	$210,436	7.48	%	$ 70	6.73	%	5,479,584	5.39	%

Less:
Deferred loan fees																10,856
Allowance for loan losses																4,598
Total loans receivable, net																$5,464,130

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

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

The following table presents, as of September 30, 2005, the amount of loans due after September 30, 2006, and whether these loans have fixed or adjustable interest rates.

	Maturing After September 30, 2006
	Fixed	Adjustable	Total
Real Estate Loans:
One- to four-family	$3,272,184	$1,915,276	$5,187,460
Multi-family and Commercial	48,896	576	49,472
Construction	1,187	337	1,524
Consumer	34,716	169,659	204,375
Commercial Business	70	--	70
Total	$3,357,053	$2,085,848	$5,442,901

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, 2005, one- to four-family mortgage loans totaled $5.19 billion, or 94.4% 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, 2005, 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, 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, 2005, our fixed-rate one- to four-family mortgage loan portfolio totaled $3.27 billion, or 59.6% of our total loan portfolio. At that date the ARM loan portfolio totaled $1.92 billion, or 34.9% of our total loan portfolio.

Our pricing strategy for mortgage loans includes setting interest rates that are competitive with Fannie Mae and Freddie Mac 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, with a lifetime cap and floor, a periodic adjustment on the interest rate over the rate in effect on the date of origination 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, 2005, 8.1% of our loan portfolio consisted of interest-only ARM loans. At September 30, 2005, approximately 90% 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 borr owers to pay a modification fee to convert an ARM loan to a fixed-rate loan. See "Loan Originations, Purchases, Sales and Repayments."

In order to remain competitive in our market areas, we currently originate ARM loans at initial rates below the fully indexed rate. We qualify borrowers based on this initial discounted rate for our three, five and seven year ARM loans.

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 located in our market areas. At September 30, 2005, multi-family and commercial real estate loans totaled $49.6 million, or 0.9% 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 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, 2005, we had $45.3 million in construction permanent loans outstanding, representing 0.8% 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, 2005, our consumer loan portfolio totaled $210.4 million, or 3.8% 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 offer 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 3.6% of our total loan portfolio, or $197.6 million at September 30, 2005. 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. In order to minimize risk of loss, home equity loans in excess of 80% of the value of the property require private mortgage insurance. The term-to-maturity on 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 a t 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.

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 2005 and 2004 fiscal years, we originated and refinanced $194.8 million and $248.0 million of one- to four-family ARM loans, and $514.0 million and $491.0 million of one- to four-family fixed-rate mortgage loans, respectively.

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. 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.

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, 2005, our purchased loan portfolio from nationwide lenders totaled $1.20 billion, or 21.8% of our total loan portfolio. Management intends to continue purchasing one- to four-family mortgage loans in fiscal year 2006, to the extent necessary, with the majority of these purchased loans being ARM loans. If ARM loans are not available, we may purchase adjustable-rate mortgage-related securities.

Before committing to purchase a pool of loans from a nationwide lender, the Chief Lending Officer or Secondary Marketing Manager reviews specific criteria of each loan in the pool. The specific criteria includes such items as loan amount, credit scores, loan-to-value ratio, debt ratios, liquid assets, property type and loan purpose. If the specific criteria do not meet our underwriting standards, then the loan may be removed from the pool, depending on compensating factors. Once the review of the specific criteria is complete and loans not meeting our standards are removed from the pool, changes are sent back to the seller for acceptance and pricing. If the pricing is accepted by our Chief Financial Officer or Chief Lending Officer, we will commit to purchase the pool of loans. Before the pool is funded, an approved loan underwriter reviews 25% of the loan files in the pool. If a loan does not meet our underwriting standards for these loans, it is removed from the pool prior to funding.

During the 2005 and 2004 fiscal years, we purchased $671.4 million and $363.3 million of one- to four-family ARM loans and $75.7 million and $146.3 million of one- to four-family fixed-rate loans, respectively, from nationwide lenders. Included in the fiscal year 2005 ARM loan volume is $397.0 million of interest-only loans. These loans do not typically require principal payments during their initial term. Of the interest-only loans purchased during fiscal year 2005, approximately 43% of these loans do not require principal payments for five years and the other 57% 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 greater than 733 and an average loan-to-value ratio of less t han 80% at the time of purchase.

We also purchase one- to four-family mortgage loans through local correspondent lenders under contractual agreement. 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 Fannie Mae and Freddie Mac's underwriting guidelines. During the 2005 and 2004 fiscal years, we purchased $56.6 million and $19.3 million of one- to four-family ARM loans and $53.5 million and $8.1 million of one- to four-family fixed-rate mortgage loans, respectively, from local 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.

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

	Year Ended September 30,
	2005	2004	2003
	(Dollars in thousands)
Originations by type:
Adjustable-rate:
Real estate - one- to four-family	$ 194,802	$ 248,024	$ 400,055
- multi-family	--	--	--
- commercial	--	--	--
Non-real estate - consumer	119,527	131,639	143,175
- commercial business	--	--	45
Total adjustable-rate loans originated	314,329	379,663	543,275
Fixed-rate:
Real estate - one- to four-family	514,023	490,963	1,069,101
- multi-family	4,418	4,233	1,349
- commercial	4,950	1,200	5,773
Non-real estate - consumer	29,802	17,761	16,211
- commercial business	--	12	47
Total fixed-rate loans originated	553,193	514,169	1,092,481
Total loans originated	867,522	893,832	1,635,756

Purchases:
Real estate - one- to four-family	857,207	537,065	182,017
- multi-family	--	--	--
- commercial	--	--	--
Non-real estate - consumer	--	--	--
Total loans purchased	857,207	537,065	182,017
Mortgage-related securities available for
sale (excluding REMICs and CMOs)	--	1,050	2,340,718
Mortgage-related securities held to
maturity (excluding REMICs and CMOs)	309,506	885,739	717,558
REMICs and CMOs	--	--	--
Total loans and mortgage-related
securities purchased	1,166,713	1,423,854	3,240,293

Sales and Repayments:
Real estate - one- to four-family	--	--	591,562
Total sales	--	--	591,562
Principal repayments	1,824,104	2,152,596	4,527,687
Total reductions	1,824,104	2,152,596	5,119,249

(Decrease) increase in other items, net	(3,015)	20,722	(52,372)

Net increase (decrease)	$ 213,146	$ 144,368	$ (190,828)

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 app roved 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, 2005, the asset quality of our portfolio of loans purchased from nationwide lenders is 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
	2005		2004		2003
	Number	Amount	Number	Amount	Number	Amount
	(Dollars in thousands)
Real Estate Loans:
One- to four-family	267	$25,111	310	$22,252	303	$25,627
Multi-family	--	--	--	--	--	--
Commercial	--	--	--	--	--	--
Construction and development⁽¹⁾	--	--	--	--	--	--
Consumer	35	407	49	349	52	396
Commercial business	--	--	--	--	--	--

Total	302	$25,518	359	$22,601	355	$26,023

Loans 30-89 days delinquent to total loans		0.47%		0.48%		0.60%

(1) At September 30, 2005 there were no development loans in the loan portfolio.

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 31 properties totaling $1.6 million, or an average balance of less than $53 thousand per property.

	September 30,
	2005		2004		2003		2002		2001
	(Dollars in thousands)

Non-accruing loans:
One- to four-family	$5,034		$5,761		$8,686		$7,701		$6,384
Multi-family	--		--		--		--		--
Commercial real estate	--		--		--		--		--
Construction and development⁽¹⁾	--		--		--		--		--
Consumer	124		310		258		273		276
Commercial business	--		--		--		--		--
Total non-accruing loans	5,158		6,071		8,944		7,974		6,660

Real estate owned:
One- to four-family	1,613		3,976		3,773		2,886		1,031
Multi-family	--		--		--		--		--
Commercial real estate	--		--		--		--		--
Construction and development⁽¹⁾	--		273		273		--		--
Consumer	40		--		--		--		--
Commercial business	--		--		--		--		--
Total real estate owned	1,653		4,249		4,046		2,886		1,031

Total non-performing assets	$6,811		$10,320		$12,990		$10,860		$7,691
Non-performing assets as a percentage of total assets	0.08	%	0.12	%	0.15	%	0.12	%	0.09	%
Non-performing loans as a percentage of total loans	0.09	%	0.13	%	0.21	%	0.16	%	0.12	%

(1) At September 30, 2005 there were no development loans in the loan portfolio.

At September 30, 2005, we had $5.2 million in non-accruing loans (these loans also may be referred to as "non-performing"), which constituted 0.09% 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, 2005, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $85 thousand. The amount that was included in interest income on these loans, before non-accruing status, was $72 thousand for the year ended September 30, 2005.

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 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 amount of our assets, exclusive of general valuation allowances, classified as special mention, substandard or doubtful at September 30, 2005. At September 30, 2005, we classified nine loans affected by Hurricane Katrina as special mention. The carrying amount of these loans at September 30, 2005 was $4.5 million. We may not collect all amounts due according to the contractual terms of the loan agreements, however, based upon management's analysis at September 30, 2005, the underlying collateral of these loans was in excess of the carrying amounts. As such, no specific valuation allowance was recognized at September 30, 2005. There were $9 thousand of assets classified as loss at Sep tember 30, 2005, with specific reserves of $9 thousand.

	Special Mention		Substandard		Doubtful
	Number	Amount	Number	Amount	Number	Amount
	(Dollars in thousands)
Real Estate:
One- to four-family	15	$4,986	82	$5,266	--	$--
Multi-family	--	--	--	--	--	--
Commercial	--	--	--	--	--	--
Construction	--	--	--	--	--	--
Consumer	--	--	15	124	--	--
Commercial business	--	--	--	--	--	--

Total loans	15	4,986	97	5,390	--	--

Real estate owned	--	--	32	1,653	--	--

Total classified assets	15	$4,986	129	$7,043	--	$--

Provision for Loan Losses. We recorded a provision for loan losses in fiscal years 2005 and 2004 of $215 thousand and $64 thousand, respectively. We did not record a provision for loan losses in fiscal year 2003. 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 2005 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, 2005.

Allowance for Loan Losses. We maintain an allowance for loan losses to absorb losses known and inherent in the loan portfolio based upon ongoing, quarterly assessments of the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include a formula allowance, specific allowances for identified problem loans and portfolio segments and 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 114 and 118 are collectively evaluated for impairment using a formula allowance as permitted by SFAS 5, "Accounting for Contingencies". Loans on residential properties with greater than four units, loans on construction properties 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. 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 such loans or 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 judg ment, 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.

The appropriateness of the allowance for loan losses is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas. Other conditions that management considers in determining the appropriateness of the allowance include, but are not limited to, changes to 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 that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of those 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. 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 unallocated 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 in 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.

At September 30, 2005, our allowance for loan losses was $4.6 million or 0.08% of the total loan portfolio and approximately 89% of total non-accruing loans. This compares with an allowance for loan losses of $4.5 million or 0.09% of the total loan portfolio and approximately 74% of total non-accruing loans as of September 30, 2004.

During fiscal year 2005, our net one- to four-family loan portfolio increased by $706.9 million from fiscal year 2004. Non-accruing one- to four-family loans decreased by $727 thousand, or 12.6%, to $5.0 million at September 30, 2005. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K. The allowance increased on this portfolio of loans as a result of an increase in the inherent risks of this loan portfolio due primarily to the increased size of the portfolio resulting from purchased mortgage loans.

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 or changes in the market value of collateral securing loans that may be susceptible to significant change. 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.

Based upon the foregoing analysis of our reserving methodology, it is management's belief that the current balance provided by the formula allowance provides adequate reserves for the estimated losses inherent in the portfolio. 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 sets forth an analysis of our allowance for loan losses.

	Year Ended September 30,
	2005		2004		2003		2002		2001
	(Dollars in thousands)

Balance at beginning of period	$4,495		$4,550		$4,825		$4,837		$4,596

Charge-offs:
One- to four-family	91		84		153		114		49
Multi-family	--		--		--		--		--
Commercial real estate	--		--		--		--		--
Construction and development¹	--		--		--		--		--
Consumer	56		77		144		85		42
Commercial business	--		--		--		--		--
Total charge-offs	147		161		297		199		91
Recoveries	35		42		22		3		257
Net charge-offs (recoveries)	112		119		275		196		(166)
Provisions charged to operations	215		64		--		184		75
Balance at end of period	$4,598		$4,495		$4,550		$4,825		$4,837

Ratio of net charge-offs (recoveries) during the period
to average loans outstanding during the period	--	%	--	%	--	%	--	%	--	%

Ratio of net charge-offs (recoveries) during the period
to average non-performing assets	1.31	%	1.02	%	2.31	%	2.11	%	(2.71)	%

Allowance as a percentage of non-accruing loans	89.14	%	74.04	%	50.87	%	60.51	%	72.63	%

Allowance as a percentage of total loans
(end of period)	0.08	%	0.09	%	0.11	%	0.10	%	0.09	%

At September 30, 2005 there were no development loans in the loan portfolio.

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

	September 30,
	2005			2004			2003			2002			2001
		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	$3,866	94.78	%	$3,561	94.19	%	$3,468	93.99	%	$3,792	94.13	%	$3,970	95.00	%
Multi-family	203	0.74		177	0.74		272	0.89		322	0.91		267	0.90
Commercial real estate	67	0.16		65	0.18		59	0.18		38	0.11		36	0.14
Construction and
development⁽¹⁾	129	0.47		197	0.60		143	0.52		177	0.53		319	0.46
Consumer	333	3.85		488	4.29		412	4.42		467	4.32		223	3.50
Commercial business	--	--		7	--		11	--		8	--		--	--
Unallocated	--	--		--	--		185	--		21	--		22	--
Total	$4,598	100.00	%	$4,495	100.00	%	$4,550	100.00	%	$4,825	100.00	%	$4,837	100.00	%

(1) At September 30, 2005 there were no development loans in the loan portfolio.

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, 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 deposits, withdrawals and 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 credit risk, reinvestment risk, liquidity risk and interest rate 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. We currently have no securities classified as trading. Available-for-sale securities are reported at fair market value. 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 Fannie Mae and Freddie Mac. At September 30, 2005, our investment securities portfolio totaled $430.5 million. The entire portfolio is classified as held to maturity. 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 of securities issued by government-sponsored enterprises. At September 30, 2005, our mortgage-related securities portfolio totaled $2.15 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, 2005, we held CMOs totaling $3.4 million, all of which were secured by underlying collateral issued under government-sponsored enterprises. All of our CMOs are currently classified as held to maturity. At September 30, 2005, none of our CMOs qualified as high risk mo rtgage securities as defined under OTS regulations. We do not purchase any residual interest bonds.

During fiscal year 2005, our portfolio of mortgage-related securities decreased $503.5 million which was primarily a result of management's emphasis on purchasing mortgage loans rather than mortgage-related securities. Maturities and repayments totaled $797.9 million during fiscal year 2005 which were partially offset by $309.5 million of securities purchased. Of the securities purchased, $118.9 million were fixed-rate with a weighted average life of 4.74 years and a weighted average yield of 4.53% and $190.6 million were adjustable-rate with a weighted average yield of 4.50% and an average of 4.86 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 cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-related securities are 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 Fannie Mae or Freddie Mac 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.

We generally pay a premium over par value for the mortgage-related securities we purchase. 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.

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, 2005 contained neither tax-exempt securities nor 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, 2005, 2004 and 2003, the carrying value of FHLB stock was $182.3 million, $174.1 million and $169.3 million, respectively, which was in excess of 10% of our stockholders' equity.

	September 30,
	2005				2004				2003
	Carrying	% of		Fair	Carrying	% of		Fair	Carrying	% of		Fair
	Value	Total		Value	Value	Total		Value	Value	Total		Value
	(Dollars in thousands)

Securities available-for-sale:
Mortgage-related securities	$ 737,638	100.00	%	$ 737,638	$1,201,800	100.00	%	$1,201,800	$2,128,721	100.00	%	$2,128,721
Total securities available-for-sale	$ 737,638	100.00	%	$ 737,638	$1,201,800	100.00	%	$1,201,800	$2,128,721	100.00	%	$2,128,721

Securities held-to-maturity:
Mortgage-related securities	$1,407,616	76.58	%	$1,383,268	$1,446,908	69.40	%	$1,443,168	$ 815,453	44.37	%	$ 821,603
U.S. government and agency securities	430,499	23.42		424,952	638,079	30.60		645,601	1,022,412	55.63		1,046,693
Total securities held-to-maturity	$1,838,115	100.00	%	$1,808,220	$2,084,987	100.00	%	$2,088,769	$1,837,865	100.00	%	$1,868,296

Total securities	$2,575,753			$2,545,858	$3,286,787			$3,290,569	$3,966,586			$3,997,017

The composition and maturities of the investment and mortgage-related securities portfolio, excluding FHLB stock, are indicated in the following table.

	September 30, 2005
	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)
Securities available-for-sale:
Mortgage-related securities	$ 9	8.50	%	$ 23,776	6.39	%	$ --	--	%	$ 713,853	4.53	%	$ 737,638	4.59	%	$ 737,638
Total securities available-for-sale	9	8.50		23,776	6.39		--	--		713,853	4.53		737,638	4.59		737,638

Securities held-to-maturity:
Mortgage-related securities	--	--		72,403	3.50		--	--		1,335,213	4.21		1,407,616	4.17		1,383,268
U.S. government and agency securities	190,499	5.49		190,000	3.23		--	--		50,000	5.83		430,499	4.53		424,952
Total securities held-to-maturity	190,499	5.49		262,403	3.30		--	--		1,385,213	4.27		1,838,115	4.26		1,808,220

Total securities	$190,508	5.49	%	$286,179	3.56	%	$ --	--	%	$2,099,066	4.36	%	$2,575,753	4.35	%	$2,545,858

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 accounts, 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 be competitive in obtaining 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 relatively 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. See "Management 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.

The following table sets forth our deposit flows during the periods indicated. Included in the table are brokered and public unit deposits which totaled $213.6 million, $194.6 million and $130.0 million at September 30, 2005, 2004 and 2003, respectively. The growth in non-retail deposits from September 30, 2003 to September 30, 2005 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 a result of the Bank not matching top competitors' rates because of the likely adverse impact on earnings.

	Year Ended September 30,
	2005		2004		2003
	(Dollars in thousands)
Opening balance	$4,127,774		$4,238,145		$4,392,123
Deposits	6,935,934		6,507,746		6,315,243
Withdrawals	7,190,694		6,700,409		6,578,828
Interest credited	87,283		82,292		109,607

Ending balance	$3,960,297		$4,127,774		$4,238,145

Net decrease	$ (167,477)		$ (110,371)		$ (153,978)

Percent decrease	(4.06)	%	(2.60)	%	(3.51)	%

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,
	2005			2004			2003
		Percent			Percent			Percent
	Amount	of Total		Amount	of Total		Amount	of Total
	(Dollars in thousands)
Transactions and Savings
Deposits:
Demand deposits	$ 398,490	10.06	%	$ 380,765	9.22	%	$ 374,762	8.84	%
Passbook and Passcard	121,133	3.06		125,992	3.05		119,532	2.82
Money market	873,570	22.06		929,862	22.53		928,260	21.90

Total non-certificates	1,393,193	35.18		1,436,619	34.80		1,422,554	33.56

Certificates (by rate):
0.00 - 0.99%	123	---		5,109	0.12		104	---
1.00 - 1.99%	137,442	3.47		636,282	15.41		709,092	16.73
2.00 - 2.99%	863,948	21.82		1,236,086	29.95		708,644	16.72
3.00 - 3.99%	905,058	22.85		449,464	10.89		747,269	17.64
4.00 - 4.99%	600,367	15.16		228,475	5.54		251,367	5.93
5.00 - 5.99%	2,611	0.07		22,221	0.54		216,106	5.10
6.00 - 6.99%	57,555	1.45		113,518	2.75		183,009	4.32

Total certificates	2,567,104	64.82		2,691,155	65.20		2,815,591	66.44

Total deposits	$3,960,297	100.00	%	$4,127,774	100.00	%	$4,238,145	100.00	%

The following table sets forth the rate and maturity information for our certificate of deposit portfolio as of September 30, 2005.

	Amount	Rate
Certificates maturing:	(Dollars in thousands)
Within three months	$ 495,367	3.04	%
Over three to six months	398,471	3.15
Over six months to one year	604,548	3.19
Over one to two years	681,637	3.74
Over two to three years	243,987	3.48
Over three to four years	107,628	3.48
Over four to five years	31,374	4.07
Thereafter	4,092	3.79
	$2,567,104	3.35	%

The following table sets forth the maturity periods of our certificates of deposit in amounts of $100 thousand or more at September 30, 2005.

	Amount	Rate
	(Dollars in thousands)
Certificates maturing:
Three months or less	$174,155	3.47	%
Over three months through six months	80,340	3.52
Over six months through twelve months	107,893	3.35
Over twelve months	173,518	3.73

	$535,906	3.54	%

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. All fees to the brokers are paid by the depositor. 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 have historically been the same rates offered on our retail deposits. At September 30, 2005 and 2004, the balance of brokered deposits was $44.3 million and $82.3 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. The Bank is required by the State of Kansas to offer, at a minimum, the weekly rate published by the State of Kansas, as defined in Kansas statutes. 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, 2005 and 2004, the balance of public unit deposits was $169.3 million and $112.3 million, respectively. The Bank intends to continue to maintain or grow the balance of public unit deposits as long as the rates published by the State of Kansas and competitors rates are within an acceptable range.

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, 2005, 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, 2005, the net negative fair value adjustment on the interest rate swaps was an unrealized loss of $23.5 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 and convertible features, if any. At September 30, 2005, we had $3.45 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 poi nts. 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. 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, 2005.

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 $168.2 million at September 30, 2005, 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, 2005, the Bank had one subsidiary, Capitol Funds, Inc. As of September 30, 2005, our total investment in this subsidiary was $2.6 million. Capitol Funds, Inc. has a wholly owned subsidiary, Capitol Federal Mortgage Reinsurance Corporation ("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 2005, Capitol Funds, Inc. reported net income of $425 thousand which consisted of interest funded from loan proc eeds and net income of $322 thousand from CFMRC.

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 not 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.

The OTS regularly examines the Bank and prepares reports for the consideration of the Bank's board of directors on any deficiencies that it may find in the Bank's operations. The FDIC also has the authority to examine the Bank in its role as the administrator of the Savings Association Insurance Fund ("SAIF"). The Bank's relationship with its depositors and borrowers also is 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 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 OTS examination and supervision 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 a subsidiary savings 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 the subsidiary savings institution or institutions have their home offices;
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 OTS 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

Pursuant to regulations of the OTS and the terms of the Company's federal stock charter, 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 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 September 30, 2004. 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, 2005 was $1.2 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 the greater of $500 thousand or 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, 2005, the Bank's lending limit under this restriction was $115.4 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 loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee 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 SAIF, 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 SAIF or the Bank Insurance Fund ("BIF"). 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's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.

The FDIC is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC.

The premium schedule for BIF and SAIF insured institutions ranges from 0 to 27 basis points. However, SAIF insured institutions and BIF insured institutions are required to pay a Financing Corporation ("FICO") assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. The amount of the FICO premium is included in the total deposit insurance premium paid by the Bank. For the first quarter of fiscal year 2006, this amount will be 1.34 basis points for each $100 in domestic deposits for SAIF and BIF insured institutions. These assessments, which may be revised based upon the level of BIF and SAIF 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.

On September 30, 2005, the Bank had core capital of $764.8 million, total risk-based capital of $762.4 million and risk-weighted assets of $3.59 billion. It had a core capital ratio of 9.1%, a core capital to risk-weighted assets ratio of 21.3% and a total risk weighted capital ratio of 21.3%. These ratios exceed the ratios required to be well capitalized.

The OTS capital regulations require tangible capital of at least 1.5% of adjusted total assets, as defined by regulation. Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of mortgage servicing rights, must be deducted from tangible capital for calculating compliance with the requirement. At September 30, 2005, the Bank had tangible capital of $764.8 million, or 9.1% of adjusted total assets, which is approximately $638.2 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date.

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.

Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. At September 30, 2005, the Bank had no intangibles which were subject to these tests.

Total capital consists of core capital, as defined above, and supplementary capital. 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, 2005, the Bank had $4.6 million of loan loss allowances, which was less than 1.25% of risk-weighted assets.

In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be 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 insurer approved by Fannie Mae or Freddie Mac.

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 an "undercapitalized institution," which is an institution with less than a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio. 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 is authorized to impose the additional restrictions that are applicable 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.

Any savings institution that fails to comply with its capital plan or has Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital 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 capital 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. Any undercapitalized institution is also subject to the general enforcement authority of the OTS and the FDIC, inclu ding the appointment of a conservator or a receiver.

The OTS also 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 safe harbor regulations that the Bank remains 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 do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS app roval prior to making such distribution. See "Regulatory Capital Requirements."

After refinancing the FHLB advances in July 2004 and incurring a prepayment penalty that resulted in a net loss for fiscal year 2004, the Bank will be required to obtain waivers from the OTS for capital distributions to the Company at least through December 31, 2006. The Bank cannot distribute capital to the Company unless it continues to receive waivers from the OTS during the current waiver period. Currently, the Bank has authorization from the OTS to distribute capital from the Bank to the Company through the quarter ending June 30, 2006. 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 financia l 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 shelled banks and compliance with record keeping obligations with respect to correspondent accounts of foreign banks.

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 before they can disclose such information, subject to certain exceptions.

The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the Gramm-Leach-Bliley Act. 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 insure 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 institutions, 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 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 assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets consist primarily of residential housing related loans and investments. At September 30, 2005, the Bank met the test and has always met the test.

Any savings institution 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 an institution does not requalify and converts to a national bank charter, it must remain SAIF insured until the FDIC permits it to transfer to the BIF. 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. The 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 of 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 "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 CRA requires the OTS, in connection with its examination of a federally chartered savings bank, to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

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 all institutions to make public disclosure of their CRA ratings. The Bank has received a "satisfactory" rating in its most recent CRA examination. The federal banking agencies adopted regulations implementing the requirements under the Gramm-Leach-Bliley Act that insured depository institutions publicly disclose certain agreements that are in fulfillment of the CRA. The Bank has no such agreements in place at this time.

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 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, 2005 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, 2005, 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 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 of 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, 2005, the Bank had an average outstanding balance of $177.1 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 3.92% and averaged 4.59% for fiscal year 2005. For the year ended September 30, 2005, stock dividends paid by FHLB to the Bank totaled $8.1 million.

Under federal law FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. 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 as of the close of business on December 15, 2004 by the IRS through its fiscal year ended September 30, 2001.

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 is 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. 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, 2005, the State of Kansas is auditing the Company's 2002, 2003 and 2004 consolidated Kansas privilege tax returns.

Employees

At September 30, 2005, we had a total of 761 employees, including 159 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 72 years. Mr. Dicus is Chairman of the Board of Directors. He has served in this capacity with the Bank since 1989 and with the Company since its inception in March 1999. He has served the Bank in various capacities since 1959. He also served as Chief Executive Officer of the Bank and the Company until January 2003 and President of the Bank from 1969 until 1996. He is the father of Mr. John B. Dicus.

John B. Dicus. Age 44 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 56 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.

Neil F.M. McKay. Age 64 years. Mr. McKay serves as Executive Vice President assisting with investments and corporate strategy, having assumed this position effective September 1, 2005 in anticipation of his retirement from the Company on March 31, 2006. Mr. McKay previously served as the Chief Financial Officer and Treasurer of the Bank and the Company since joining the Bank in 1994 and the Company since its inception in March 1999. Prior to that, he served as the Chief Operating Officer and Chief Financial Officer of another savings institution for five years.

Larry K. Brubaker. Age 58 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 58 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 44 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 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 32 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 2.Properties

At September 30, 2005, we had 29 traditional offices and eight in-store offices. The Bank owns the office building in which its home office and executive offices are located. At September 30, 2005, the Bank owned 24 of its other branch offices and the remaining 12 branch offices, including eight 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, 2005.

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, 2005.

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, 2005 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, 2005 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, 2005 and additional information regarding our share repurchase program. There were 1,211 shares purchased during the month of August that were received in exchange for the exercise of options. The additional 67,712 shares purchased during the month of August were purchased in the open market. The average price paid represents the shares purchased in the open market. Our current repurchase plan of 1,536,102 shares was announced on November 7, 2002. The plan has no expiration date.

	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, 2005 through
July 31, 2005	1,700	$34.39	1,700	615,105
August 1, 2005 through
August 31, 2005	68,923	34.19	68,923	546,182
September 1, 2005 through
September 30, 2005	37,970	34.34	37,970	508,212
Total	108,593	$34.25	108,593	508,212

⁽¹⁾Average price based upon shares purchased in the open market.

Item 6.Selected Financial Data

The section entitled "Selected Consolidated Financial Data" of the attached Annual Report to Stockholders for year ended September 30, 2005 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 year ended September 30, 2005 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 year ended September 30, 2005 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 year ended September 30, 2005 is incorporated herein by reference.

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

None.

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, 2005. Based upon their evaluation, they have concluded that as of September 30, 2005, such disclosure controls and procedures were sufficiently effective to ensure that information required to be disclosed by the Company in the reports it files under the Act was 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, 2005 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, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B. Other Information

On December 12, 2005, the Compensation Committee of the Company's Board of Directors approved a new short-term performance cash bonus plan. The new plan is essentially a continuation of the Company's existing short-term performance plan, which will expire following the payment of bonuses earned for fiscal 2005. The new plan will expire following the payment of bonuses for fiscal 2011. Under the new plan, bonuses will be determined and calculated in the same manner as under the expiring plan. A copy of the new short-term performance plan is attached to this Form 10-K as Exhibit 10.10.

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. A portion of any bonus awarded under the short-term performance plan (from $2,000 to as much as 50% of the award, up to a maximum of $100,000) to an officer eligible to participate in the Company's Deferred Incentive Bonus Plan (the "DFIB") may be deferred under the DFIB for a three-year period. The total of the amount deferred, 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.

As under the expiring short-term performance plan, the corporate performance criteria under the new 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. On December 12, 2005, the Compensation Committee established the targets for fiscal 2006 for each of the performance criteria.

Under the new short-term performance plan, as under the expiring 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 2006 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; M. Jack Huey II, Executive Vice President and Chief Lending Officer, 40% of base salary; and Richard J. Aleshire, Executive Vice President for Retail Operations, 40% of base salary.

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 2006, 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.

Audit Committee Financial Expert

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 2006, 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 2006, 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 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 2006, 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, 2005 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	789,749	$15.61	695,605⁽¹⁾
Equity compensation plans not approved
by stockholders	N/A	N/A	N/A
Total	789,749	$15.61	695,605

(1) This amount includes 203,087 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 2006,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 2006, a copy of which will be filed not later than 120 days after the close of the fiscal year.

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, 2005 and 2004.
3.    Consolidated Statements of Income for the Years Ended September 30, 2005, 2004 and 2003.
             4.    Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2005, 2004 and 2003.
5.    Consolidated Statements of Cash Flows for the Years Ended September 30, 2005, 2004 and 2003.
6.    Notes to Consolidated Financial Statements for the Years Ended September 30, 2005, 2004 and 2003.

(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.

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, 2005	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, 2005
	(Principal Executive Officer)
	Date: December 14, 2005

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, 2005		Date: December 14, 2005


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, 2005
	(Principal Financial Officer)
	Date: December 14, 2005

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, 2005		and Reporting Director
			(Principal Accounting Officer)
By:	/s/ Jeffrey M. Johnson		Date: December 14, 2005
	Jeffrey M. Johnson, Director
	Date: December 14, 2005

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
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		Deferred Incentive Bonus Plan filed on December 31, 2001 as Exhibit 10.4 to the Annual Report
		on Form 10K.
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 August 4, 2005 as Exhibit 10.9 to the June 30,
		2005 Form 10-Q
10.10		Short-term Performance Plan
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
32.1		Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chief Executive Officer, and Kent G. Townsend, Chief Financial Officer and Treasurer.

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

**No statement is provided because the computation of per share earnings on both a basic and fully diluted basis can be clearly determined from the Financial Statements included in the 2005 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.

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Capitol Federal Financial Inactive 10-K2005 FY Annual report

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