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 financial performance 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 among the lowest in the industry;

• 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 policy 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;
• 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.

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 seven in-store banking offices. At September 30, 2003, we had total assets of $8.58 billion, deposits of $4.24 billion and total equity of $976.4 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 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. We may originate loans outside our market area on occasion, and we do purchase whole loans secured by properties located outside of these areas from correspondent lenders, to the extent such loans meet our underwriting criteria. While our primary business is the origination of one- to four-family residential mortgage loans funded through retail deposits, we purchase whole loans and invest in certain investment and mortgage-related securities funded through retail deposits and advances from the Federal Home Loan Bank of Topeka ("FHLB").

Our revenues are derived principally from interest on loans and mortgage-related and 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 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.

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 and a limited number of 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, 2003, our net loan portfolio totaled $4.31 billion, which constituted 50.2% of our total assets.

All originated loans are generated by our own employees or loan agents. Loans over $450,000 must be underwritten by two senior level underwriters. Any mortgage loan over $750,000 must be approved by the asset and liability management committee 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, 2003, the maximum amount which we could have loaned to any one borrower and the borrower's related entities was approximately $142.4 million. Our largest lending relationship to a single borrower or a group of related borrowers on that date consisted of 14 multi-family real estate projects, two one- to four-family real estate units and three commercial real estate projects located throughout Kansas, totaling $27.8 million. No single loan in this group exceeded $3.5 million at that date. 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, 2003.

The second largest lending relationship at September 30, 2003, consisted of four loans totaling $7.0 million. These four loans are secured by multi-family real estate units and a one- to four-family property. 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, 2003.

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, deferred fees and discounts and allowances for losses) as of the dates indicated.

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

The following schedule presents the contractual maturity of our loan portfolio at September 30, 2003. 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, 2004 which have predetermined interest rates is $3.07 billion, while the total amount of loans due after such date which have floating or adjustable interest rates is $1.23 billion.

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 loans generally throughout the Midwest. These purchases allow us to attain geographic diversification and manage credit concentration risks in the loan portfolio. At September 30, 2003, one- to four-family residential mortgage loans totaled $4.07 billion, or 93.4% 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 100% 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 require our borrowers to obtain title and hazard insurance and flood insurance, if necessary, in an amo unt not less than the value of the property and improvements. We require borrowers to maintain escrow accounts with the bank if their loan-to-value ratio exceeds 80%.

We currently 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 or five-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 the 2003 and 2002 fiscal years, we originated and refinanced $400.1 million and $280.7 million of one- to four-family ARM loans, respectively, and $1.07 billion of one- to four-family fixed rate mortgage loans each fiscal year.

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 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 and five 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, 2003, multi-family and commercial real estate loans totaled $46.3 million, or 1.1% of our total loan portfolio.

Our loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on 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. 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, 2003, we had $48.5 million in construction loans outstanding, representing 1.1% of our total loan portfolio. Construction loans are obtained principally through continued business with builders who have previously borrowed from us. 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 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, 2003, our consumer loan portfolio totaled $190.8 million, or 4.4% 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, 2003. 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 are insured against loss. 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 amount 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 fiscal year 2003, 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 2003, the Company experienced a continuing increase in the prepayment of principal on loans and mortgage-related securities compared to previous years as a result of interest rates decreasing during the majority of the fiscal year. The increase in prepayments was due primarily to borrowers refinancing existing loans to new loans with lower rates of interest.< BR>

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 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, significantly reduces the amount of time it takes for a borrower to obtain current market pricing and terms without having to refinance their loan. During fiscal year 2003, the Bank modified 14,647 loans with a principal balance of $1.95 billion.

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. These whole loan purchases also serve to reduce our risk of geographic concentration.

Purchased whole loans are originated by one lender who has a national presence. By contractual agreement, the loan product is originated for us to our specifications. Loans are generally underwritten in accordance with Fannie Mae's or Freddie Mac's underwriting systems, or by a third party underwriter who is under contract with us. Their underwriting standards are not significantly different from our own internal underwriting standards. We set prices for the loan product at least once each week. Mortgage servicing for the majority of purchased whole loans is retained by the originating lender.

The Bank sold, during fiscal year 2003, a total of $591.6 million in fixed rate single family loans originated at historically low interest rates. The intent of this strategy was to protect the Bank against long-term reduced earnings following an increase in interest rates. The proceeds from the sales of loans, along with the repayments on mortgage loans and mortgage-related securities and maturing securities were used to fund the purchase of adjustable rate mortgage-related securities and short-term agency bonds. The purchase of adjustable rate mortgage-related securities is part of our strategy to manage interest rate risk and provide earnings protection for a rising rate environment. The purchase of short-term agency bonds was to maintain cashflows that are available for reinvestment in approximately a twelve month time frame.

During the first quarter of fiscal year 2003, the Bank sold $544.0 million of fixed rate single family loans. The Bank stopped selling such a large volume of mortgage loans after the first quarter of fiscal year 2003 as the desired mix of adjustable and fixed rate interest-earning assets was achieved. During the next three quarters of fiscal year 2003, the Bank sold $47.6 million of fixed rate single family loans due to the favorable secondary market conditions. The Bank did not have any loans held for sale at September 30, 2003 due to the rise in interest rates during the last quarter of fiscal year 2003.

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 - Results of Operations" in the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K.

The following table shows our loan origination, loan purchases, purchase of mortgage related securities, loan sales and repayment activities for the periods indicated.

When a borrower fails to make a loan payment on or before the due date, a late charge notice is mailed 15 days after the due date if the payment has not been received and a late charge is assessed. When the loan is 30 days past due, we mail a delinquent notice to the borrower. All delinquent accounts are reviewed by a collection officer, who attempts to cause the delinquency to be cured by contacting the borrower. If the loan becomes 60 days delinquent, the collection officer will generally 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 officer will generally 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 acco unt current. During this 30 day period, the collection officer may accept a written repayment plan from the borrower which would bring the account current within the next 90 days. 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 officer as designated by our board of directors, will turn over the account to our legal counsel with instructions to initiate foreclosure.

Delinquent Loans. The following table sets forth our loans delinquent 30 - 89 days by type, number, amount and percentage of type at September 30, 2003.

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. Real estate owned includes assets acquired in settlement of loans and land acquired by the Bank not used for the purpose of a new branch site. The balance of one- to four- family real estate owned is represented by 42 properties totaling $3.8 million, or an average balance of less than $91,000 per property. The balance of real estate owned in construction and development represents a single property the Bank purchased for a potential branch site.

For the year ended September 30, 2003, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $150,000 . The amount that was included in interest income on these loans, before non-accruing status, was $175,000 for the year ended September 30, 2003.

Non-performing Loans. At September 30, 2003 we had $8.9 million in non-performing loans, which constituted 0.21% of our total loan portfolio. At that date, there were no non-performing loans to any one borrower or group of related borrowers that exceeded $1.0 million, either individually or in the aggregate. The increase in non-performing loans was primarily the result of an increase in loans entering foreclosure.

Other Loans of Concern. In addition to the non-performing assets set forth in the table above, as of September 30, 2003, there was also an aggregate of $4.6 million in net book value of loans with respect to which known information about 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 items in the non-performing asset categories. These loans are classified as "special mention" under applicable OTS regulations and have been included in management's determination of the adequacy of our allowance for loan losses.

In connection with the filing of our 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. On the basis of management's review of our assets, at September 30, 2003, we had classified $13.6 million of our assets as substandard, $2,000 as doubtful and less than $1,000 as loss. The $13.6 million of substandard loans include $8.9 million of non-accrual loans, $4.0 million of real estate owned and $700,000 of loans we consider the repayment of principal to not be certain even though the loans are not more than 90 days delinquent. The amount classified substandard represented 1.4% of stockholders' equity and 0.2% of our assets at September 30, 2003.

Provision for Loan Losses. We did not record a provision for loan losses in fiscal 2003, compared to $184,000 in fiscal 2002 and $75,000 in fiscal 2001. 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." There was no provision for loan losses recorded in fiscal 2003 as management's review of such factors indicated that the allowance for loan losses was adequate to cover losses inherent in the loan portfolio as of September 30, 2003.

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 judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors for loans on residential properties with greater than four units and loans on construction and development and commercial properties are computed based on an evaluation of inherent losses on these loans. 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 within each portfolio segment as loans become classified, delinquent, the foreclosure or repossession process begins or as economic conditions warrant.

The appropriateness of the allowance 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 includes, but is not limited to, changes to our underwriting standards due to competitive pressures, credit quality trends (including trends in nonperforming loans expected to result from existing 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. The Bank has relaxed, over the past several years, the debt-to-income ratio requirement and the loan-to-value ratio limits of its overall underwriting standards in order to better compete for loan originations in our market areas.

Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem loan or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such loan or portfolio segment. 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 this condition 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 allowance for loan losses is based on estimates of losses inherent in the loan portfolio. The amounts actually observed in respect of these losses can vary significantly from the estimated amounts. Our methodology as described 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 recent information that has become available.

At September 30, 2003, our allowance for loan losses was $4.6 million or 0.1% of the total loan portfolio and approximately 50.9% of total non-accruing loans. This compares with an allowance for loan losses of $4.8 million or 0.1% of the total loan portfolio and approximately 60.5% of total non-accruing loans as of September 30, 2002.

During fiscal year 2003, our net single-family residential loan portfolio decreased by $671.0 million from fiscal year 2002. Non-accruing single-family loans increased by $985,000, or 12.8%, to $8.7 million at September 30, 2003. 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 decreased on this portfolio of loans. The decrease was attributable to the inherent risks associated with a smaller pool of loans partially offset by an increase in the amount of non-accruing loans.

During 2003, our net multi-family and commercial loan portfolio decreased by approximately 9.2% to $46.4 million. Our provision for credit losses on these loans was approximately 0.6% of the portfolio. The portfolio of net construction and development loans decreased by approximately 16.1% to $22.4 million. The allowance decreased on these loans because of a decrease in the balances in these portfolios.

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, 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 single-family residential loan portfolio.

The following table sets forth an analysis of our allowance for loan losses.

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

The Chief Financial Officer has the basic responsibility for the management of our investment portfolio, subject to the direction and guidance of the asset and liability management committee. 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 new deposit inflows, volume of loan sales and the anticipated demand for funds via deposits, withdrawals and loan originations and purchases.

Our investment securities currently consist of U.S. Government and agency securities. During fiscal year 2003 we purchased $605.0 million of investment securities, which were mainly short-term agency bonds. 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. Our mortgage-related securities portfolio consists of securities issued by government-sponsored agencies. A portion of the 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. We do not purchase any residual interest bonds. See Notes 3 and 4 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. During fiscal year 2003 our portfolio of mortgage-related securities increased by $369.3 million. We purchased a total of $3.06 billion of these securities, of which $426.2 million were fixed rate mortgage-backed securities ("MBSs") with an estimated average life of 5.2 years and an average yield of 4.19%, the remainder, $2.63 billion, were variable rate MBSs with an average yield of 3.91% and had an average term of 3.3 years to their next repricing date as of September 30, 2003. See "Lending Activities - Loan Origination, Purchases, Sales and Repayments" for a discussion regarding the funding of these purchases.

Recently, we have had to pay a premium over the par value for the mortgage-related securities we purchase in order to acquire these securities at a yield equal to the market rate. 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.

At September 30, 2003, we held CMOs totaling $25.0 million, all of which were secured by underlying collateral issued under government agency-sponsored programs. All of our CMOs are currently classified as held to maturity. At September 30, 2003, none of our CMOs qualified as high risk mortgage securities as defined under OTS regulations.

While mortgage-related securities, such as CMOs and REMICs, carry a reduced credit risk as 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 mortgage loans and so affect both the prepayment speed, and value, of the securities. The Bank, on some transactions, pays a premium 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 at the dates indicated. Our investment securities portfolio at September 30, 2003, contained neither tax-exempt securities nor securities of any issuer with an aggregate book value in excess of 10% of our retained earnings, excluding those issued by the government or its agencies.