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;

• 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 Federal Reserve Board;

• 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.

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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 serve primarily the entire metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the metropolitan area of greater Kansas City through 28 traditional and eight in-store banking offices. At September 30, 2004, we had total assets of $8.54 billion, deposits of $4.13 billion and total equity of $832.4 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 residential mortgage loans funded through retail deposits, we also purchase mortgage loans from nationwide lenders and correspondent lenders located within our Kansas City and Wichita market areas, and invest in certain investment and mortgage-related securities funded through retail deposits and advances from the Federal Home Loa n 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.

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 deposit accounts, NOW and non-interest bearing checking accounts and certificates of deposit with varied 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.

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 Securities and Exchange Commission ("SEC"). These reports are also available on the SEC's website at http://www.sec.gov.

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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 board approval, management is responsible for presenting to the board 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, 2004, the maximum amount which we could have loaned to any one borrower and the borrower's related entities was approximately $112.4 million. Our largest lending relationship to a single borrower or a group of related borrowers on that date consisted of 12 multi-family real estate projects, one single-family home and three commercial real estate projects located throughout Kansas, totaling $29.7 million. No single loan in this group exceeded $3.8 million at that date. With our largest lending relationship, the Bank had additional commitments outstanding at September 30, 2004 to originate loans of $1.0 million for a single-family home, $2.5 million for a multi-family real estate project and $6.0 million for a commercial 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, 2004.

The second largest lending relationship at September 30, 2004, consisted of five loans totaling $7.6 million. Three loans are secured by multi-family real estate units and two 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 was current and performing in accordance with its terms at September 30, 2004.
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Our 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.

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

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The following schedule presents the contractual maturity of our loan portfolio at September 30, 2004. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

⁽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 total amount of loans due after September 30, 2005 which have predetermined interest rates is $3.18 billion, while the total amount of loans due after such date which have floating or adjustable interest rates is $1.55 billion.

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One- to Four-Family Residential Real Estate Lending. Residential loan originations are generated by referrals from real estate brokers and builders, our marketing efforts and existing and walk-in customers. We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied one- to four-family residences in our market areas. In order to generate additional lending volume, we purchase whole residential loans secured by properties located generally throughout the Midwest. These purchases allow us to attain geographic diversification and manage credit concentration risks in the loan portfolio. At September 30, 2004, one- to four-family residential mortgage loans totaled $4.49 billion, or 93.7% 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 residential loans. 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 and 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. 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. Adjustable-rate mortgage ("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. During June of fiscal year 2004, the Bank expanded its portfolio of loan products by offering adjustable-rate mortgage loans that do not require principal payments during the initial term. Loan repayment schedules are determined at the repricing date for the remaining term of the loan.

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 residential loan in our portfolio considerably. Our one- to four-family 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 residential 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 is our cost of funds. Our ARM loans are not automatically convertible into fixed-rate loans. We do allow borrowers to pay a modification fee to convert an ARM loan to a fixed-rate loan.

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 ARMs.

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, 2004, multi-family and commercial real estate loans totaled $44.1 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 adjustable-rate 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.

We do not generally 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.

Construction and Development Lending. At September 30, 2004, we had $54.8 million in construction and development loans outstanding, representing 1.1% of our total loan portfolio. We originate construction loans primarily secured by one- to four-family residential real estate. Presently, all of these loans are secured by property located within our market areas. At September 30, 2004, we had $49.8 million of these loans outstanding. None of these loans were made to builders for speculative purposes. Construction loans are obtained principally by homeowners whose mortgage loan on the property begins 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.

Development lending involves additional risks that are not inherent in one-to four-family residential permanent mortgage loans. At September 30, 2004, we had $5.0 million of development loans on commercial properties with builders with whom we have had a long-term relationship. Our development loans are based upon estimates of costs to construct and the value associated with the completed project, and these estimates may be inaccurate. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell the property, rather than the ability of the borrower or guarantor to repay principal and interest. Delays in completi ng the project may arise from labor problems, material shortages and other unpredictable contingencies. If the estimate of the cost of construction is inaccurate, we may be required to advance additional funds to complete the project. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of the project.

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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 residential 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, 2004, our consumer loan portfolio totaled $203.0 million, or 4.2% 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 approximately 4.0% of our total loan portfolio at September 30, 2004. 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 15 years. Home equity lines of credit have no stated term to maturity and require the payment of 1 1/2% of the outstanding loan balance per month, which may be reborrowed at any time. Other consumer loan terms vary according to the type of collateral and the length of contract. The majority of our consumer loan portfolio is comprised of home equity lines of credit, which have interest rates that 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 residential mortgage loans, particularly in the case of consumer loans which 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 local demand, competition and the interest rate environment. During the 2004 and 2003 fiscal years, we originated and refinanced $248.0 million and $400.1 million of one- to four-family ARM loans and $491.0 million and $1.07 billion of one- to four-family fixed-rate mortgage loans, respectively. During fiscal year 2004, our dollar volume of fixed-rate, one- to four-family loans exceeded the dollar volume of the same type of adjustable-rate loans, consistent with the prior fiscal year. During fiscal year 2004, the Company experienced a decrease in the prepayment of principal on loans and mortgage-related securities compared to the previous year due to an increase in market rates of interest compared to the previous year. 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.

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 requires the existing borrower to pay a minimum fee of $700 up to a maximum of 1% of their loan balance, capped at $975. 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.

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While our primary business is the origination of one- to four-family mortgage loans, competition from other lenders in our market areas, to a certain extent, limits the volume of loans we have been able to originate and place in our portfolio. As a result we have purchased mortgage loans and investment and mortgage-related securities to supplement our loan portfolios.

Our purchased whole loans are originated by nationwide lenders and correspondent lenders located within our Kansas City and Wichita market areas. Our correspondent lending is by contractual agreement to purchase an approved loan 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 and adjustable-rate loans. We set prices for loan products at least once each week. The underwriting is generally provided by a third party underwriter who is under contract with us to use our internal underwriting standards which are generally in accordance with Fannie Mae and Freddie Mac's underwriting guidelines.

During the second quarter of fiscal year 2004, the Bank began purchasing pools of fixed and adjustable-rate mortgage loans from nationwide lenders with servicing rights retained by the seller. Before committing to purchase a pool of loans, the Chief Lending Officer 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 lender for acceptance and pricing. If the pricing is accepted by our Chief Financial Officer, we will commit to purchase the pool of loans. Before the pool is funded, an approved purchase 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.

Loan purchases serve to reduce our risk of geographic concentration and balance our portfolio with adjustable-rate loans that are not considered as attractive as fixed-rate loans in our local market areas. During the third quarter of fiscal year 2004, the Bank increased its purchases of adjustable-rate loans and decreased its purchases of mortgage-related securities. 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. The emphasis of purchasing mortgage loans is expected to continue, to the extent the supply is available, as rates on mortgage loans are more favorable than rates on mortgage-related securities.

In periods of economic uncertainty, the ability of financial institutions, including us, to originate or purchase large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income. 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.

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