CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Dollars in thousands, except per share data and amounts)

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars and share counts in thousands, except per share amounts)

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

(Continued)

6

(Concluded)

See accompanying notes to consolidated interim financial statements

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In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the valuation of mortgage servicing rights, derivative instruments and allowances for losses on loans. While management believes that these allowances are adequate, future additions to the allowances may be necessary based on changes in economic conditions and other factors. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - - "Critical Accounting Policies."

The Company is the sole shareholder of Capitol Federal Savings Bank (the "Bank"). The Company's majority shareholder is Capitol Federal Savings Bank MHC ("MHC"), a federally chartered mutual holding company.

All dollar amounts are in thousands except per share data, unless otherwise indicated.

In December, 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123(R), "Share-Based Payment". SFAS 123(R) amends SFAS 123, "Accounting for Stock-Based Compensation" and superseded Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123(R) requires companies to recognize all share-based payments, which include stock options and restricted stock, in compensation expense over the requisite service period of the share-based payment award. The fair value of a share-based payment award will be computed on the grant date and cannot be remeasured in future periods. Additionally, forfeitures will need to be estimated on the grant date and subsequent revisions to forfeitures should be reported as a cumulative effect of a change in accounting estimate in the period in which the revision occurs. Modified share-based payment awards will be treated as an exchange of the original award for a new award. The incremental fair value of the modified award will be recorded as compensation expense on the date of the modification or over the remaining requisite service period. SFAS 123(R) also requires significant additional disclosures for share-based payment awards. SFAS 123(R) is effective for share-based payment awards granted, modified or settled after the first reporting period beginning after June 15, 2005. The Company has not completed the process of evaluating the impact of SFAS 123(R) on its consolidated financial statements.

The Company applies the recognition and measurement principles of APB Opinion No. 25, as allowed by SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," and related interpretations in accounting for our stock-based compensation plans.

For purposes of the pro forma disclosures required by SFAS No. 148, the estimated fair value of the options is amortized to expense on a straight-line method over the options' vesting period. If the fair value provisions under SFAS No. 123 would have been adopted, salary and employee benefit expense would have been $10.2 million for the three months ended December 31, 2004 and $12.0 million for the same period last year.

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The following table presents the pro forma impact on earnings and earnings per share.

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For the quarter ended December 31, 2004, basic earnings per share were $0.26 and diluted earnings per share were $0.25. The Company accounts for the 3,024,574 shares acquired by its ESOP in accordance with Statement of Position ("SOP") 93-6 and the shares acquired for its RRP in a manner similar to the ESOP shares; shares acquired by the ESOP and the RRP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations.

Capitol Federal Financial, and its wholly-owned subsidiary, Capitol Federal Savings 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 Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

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• 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 consumers, including the features, pricing and quality compared to competitors' products and services;

• the willingness of consumers 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.

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

All dollar amounts are in thousands except per share data, unless otherwise indicated.

Our principal business consists of attracting deposits from the general public and investing those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also originate consumer loans, loans secured by first mortgages on nonowner-occupied one- to four-family residences, permanent and construction loans secured by 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 whole loans and invest in certain investment and mortgage-related securities using FHLB advances as a funding source.

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

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

The spread between long-term and short-term interest rates have a direct impact on our net interest margin. Long-term interest rates were slightly higher at December 31, 2004 than at September 30, 2004. Short-term interest rates (one year and shorter maturities) increased during the quarter due to the 50 basis point increase in the Federal Funds rate by the Federal Reserve Board. The spread between the two and five year treasuries continued to narrow during the quarter. The narrowing of the spread between short-term and long-term interest rates resulted in a flattening of the yield curve. There is a timing lag between the change in market interest rates and when we change the pricing of our products and the timing of the cash flows of our interest-earning assets and interest-bearing liabilities. This lag may allow our net interest margin to improve for a period of time even when the yield curve is flattening. See additional discussion in "Item 3. Quantitative and Qualitative Disclosure About Market Risk."

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Changes in interest rates affect the prepayment activity on our mortgage-related assets, which has a direct impact on the yields of our interest-earning assets. Generally, prepayments increase during periods of decreasing long-term interest rates and decrease during periods of increasing long-term interest rates. When prepayments increase, the yield earned on our mortgage-related assets decrease as prepayments received are reinvested at the then current lower market interest rates and there is generally an increase in net premium amortization. During fiscal year 2004 and continuing into fiscal year 2005, prepayment activity slowed compared to fiscal year 2003 due to the general increase in long-term interest rates. This generally had a positive impact on our net interest margin. During the current quarter, the Bank purchased $195.0 million of mortgage-related securities, classified as held-to-maturity, and $170.2 million of mortgage loans.

Unlike the previous two quarters, the Bank purchased more mortgage-related securities than mortgage loans during the current quarter. The nationwide lender that had been the Bank's primary supplier of mortgage loans was acquired by another company during the current quarter, resulting in a decrease in the volume of mortgage loans purchased by the Bank. Management intends to continue to purchase mortgage loans in future periods, but the volume is dependent upon the pricing and quality of the loans supplied by other lenders.

During July 2004, the Bank refinanced its outstanding FHLB advances that were not hedged by interest rate swaps. The average rate on the new FHLB advances is 3.78%. By refinancing the advances, the Bank lowered the interest expense on FHLB advances by $12.4 million during the quarter ended December 31, 2004 compared to the same quarter in the prior year. The Bank is utilizing interest rate swaps on certain FHLB advances ("swapped FHLB advances") with a notional amount of $800.0 million to modify its interest rate risk profile and reduce interest expense. The Bank receives interest from counterparties at a fixed rate, matching the amounts paid by the Bank on the swapped FHLB advances, and pays interest at a variable rate indexed to the one month LIBOR rate plus an average spread of 248 basis points.

We expect to grow our balance sheet in future periods primarily through the origination and purchase of mortgage loans and purchasing investment and mortgage-related securities as a supplement to our mortgage loan activity. The primary funding of our growth is expected to come through deposits by continuing to offer products at competitive rates. In November 2004, management implemented a more competitive pricing strategy for certain certificates of deposit and money market tiers. The increased rates offered on these certificates of deposit and our money market product is in part an effort to reverse the trend in the loss of certificates experienced in the past two years when rates were falling. Our growth will be dependent primarily on the level of our offered savings rates compared to those of our competitors, as well as the willingness of both new and existing customers to invest in our savings products compared to alternative investments. We expect that our competitors will also increase rates, though not necessarily to compete directly with us, but in response to the general increase in short term rates experienced since the Federal Reserve began increasing the Federal Funds rate. Management reviews deposit flows, loan demand, cash levels and changes in all market rates to assess all pricing strategies on a weekly basis.

We opened a new traditional branch in October 2004 in Manhattan, Kansas, increasing the total number of branches to 37 at December 31, 2004 We will continue to explore branch expansion opportunities in the future.

Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of mortgage servicing rights and our policy regarding derivative instruments are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could cause reported results to differ materially. These critical accounting policies and their application are reviewed at least annually with our Audit Committee and Board of Directors. Following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.

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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 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.

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. One- to four-family residential loans and consumer loans are collectively evaluated for impairment. Loans on residential properties with greater than four units, loans on construction and development and commercial properties that are delinquent or the borrower's total loan concentration balance is greater than $1.5 million are evaluated for impairment on a loan by loan basis. 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 s egment, the greater the loss factor. Loss factors increase within each portfolio segment as loans become classified, delinquent, the foreclosure 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 include, but are not limited to, changes to our underwriting standards, credit quality trends (including changes in 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 in discussions with our senior credit officers. 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.

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.

Valuation of Mortgage Servicing Rights ("MSR"). The Bank records MSR as a result of retaining the servicing on loans that are sold. Impairment exists if the carrying value of MSR exceeds the estimated fair value of the MSR. MSR are stratified by the underlying loan term and by interest rate. Individual impairment allowances for each stratum are established when necessary and then adjusted in subsequent periods to reflect changes in the measurement of impairment. The estimated fair value of each MSR stratum is determined through analysis of future cash flows incorporating numerous assumptions including: servicing income, servicing costs, market discount rates, prepayment speeds and other market driven data.

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

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Derivative Instruments. The Bank has entered into interest rate swap agreements to hedge certain FHLB advances. The Bank pays a variable rate of interest tied to the one month LIBOR and receives a fixed-rate of interest matching the hedged FHLB advances. When the Bank entered into the interest rate swap agreements, they were designated as fair value hedges. All terms in the interest rate swap agreements relating to the pay-fixed rate components and timing of cash flows match the terms of the hedged FHLB advances. Therefore, the Bank has assumed no ineffectiveness in the hedging relationship and accounts for the interest rate swaps using the shortcut method, under which any gain or loss in the fair value of the interest rate swaps is offset by a gain or loss on the hedged FHLB advances.

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

Deferred Income Tax Assets. Management assesses the available positive and negative evidence surrounding the recoverability of deferred income tax assets on a quarterly basis. A valuation allowance will be recorded to reduce deferred income tax assets when uncertainty regarding their realizability exists. Management believes no valuation allowance is required at December 31, 2004.

Our strategy is to operate a retail oriented financial institution dedicated to serving the needs of retail customers in our market areas. Our commitment is to provide the broadest possible access to home ownership through our residential lending programs and to offer a complete set of personal financial products and services. The primary components of our strategy include:

• Portfolio Lending. We are one of the largest originators of one- to four-family residential mortgage loans in the State of Kansas. We have primarily originated these loans for our own portfolio, rather than for sale, and we generally service the loans we originate. We provide retail customers with alternatives for their borrowing needs by offering both fixed- and adjustable-rate products with various terms to maturity and pricing alternatives. We utilize underwriting standards for our lending products that are designed to limit our exposure to credit risk which has resulted in minimal levels of delinquent and non-performing loans. We offer special programs to individuals who may be first time home buyers, have low or moderate incomes or may have certain credit risk concerns in order to maximize our ability to deliver home ownership opportunities. We attract customers through our strong relationships with real estate agents, loan agents, reputation, pricing, existing and walk-in customers and custo mers that apply on the Internet. We also purchase one- to four-family residential mortgage loans from nationwide lenders and correspondent lenders located within our Kansas City and Wichita market areas.
• Retail Financial Services. We offer a wide array of deposit products and retail services for our customers. These products include checking, savings, money market accounts, certificates of deposit and retirement accounts. These are provided through a branch network of 37 locations, offering traditional branch locations and locations in retail stores, our call center which operates on extended hours, telephone bill payment services and internet based transaction services.
• Commitment to Cost Control. We are generally very effective at controlling our costs of operations outside of the expense portion of our employee benefit plans that are tied to our stock price. Our technology plan and infrastructure supports the operations of the Bank, allowing us to increase productivity and centralize our lending and deposit support functions for efficient processing. Our retail orientation allows us to serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch at December 31, 2004 was over $143.1 million. This helps to control costs. Our one- to four-family residential lending strategy, through effective management of credit risk, allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans.

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• Strong Capital Position. Our policy has always been to protect the safety and soundness of Capitol Federal Savings Bank through conservative credit and operational risk management, balance sheet strength, consistent earnings and sound operations. The end result of these activities is a capital ratio that is in excess of the well-capitalized standards set by the Office of Thrift Supervision ("OTS"). We believe that by maintaining a strong capital position we can best safeguard the long-term interests of the Bank, the Company and our shareholders.
• Excellent Asset Quality. As a result of our commitment to one- to four-family lending, we have minimal delinquencies and, in management's view, very little credit risk. At December 31, 2004, our ratio of non-performing assets to total assets was 0.1%.
• Shareholder Value. We strive to enhance shareholder value while maintaining a strong capital position. We continue to provide returns to shareholders through our dividend payments. On January 25, 2005, the Board approved a dividend of $0.50 per public share which will be paid on February 18, 2005 to holders of record on February 4, 2005. Also on January 25, 2005, the Board approved an enhanced dividend policy. In December of each year, the Company will pay a special dividend equal to 25% of the excess of the prior fiscal year reported net income over the amount required to meet the Company's current dividend policy of $2.00 per public share each fiscal year. If the fiscal year reported net income does not exceed the amount required to meet the Company's current dividend policy, it is the Board's intent to continue to pay dividends at the current level. Our cash dividend payout policy is continually reviewed by management and the Board of Directors, and our ability to pay dividends under the policy depends upon a number of factors, including capital requirements, regulatory limitations, the Company's financial condition, results of operations and the Bank's ability to pay dividends to the Company.
• Risk Management. Changes in interest rates are our primary risk as our consolidated balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact on not only our net income but also on the cash flows from those assets and liabilities and the market value of our assets and liabilities. To manage interest rate risk, our Asset and Liability Committee ("ALCO") meets weekly to discuss and monitor the current interest rate environment compared to interest rates offered on our loan and deposit products. Additionally, ALCO meets once a month to review reports that present the effects that changes in interest rates will have on our earnings, the market value of our portfolio equity and cash flows. The members of ALCO are the Chairman, the Chief Executive Officer, the Chief Financial Officer (chair of ALCO), the Executive Vice President for Corporate Services, the Chief Lending Officer, the Exe cutive Vice President for Retail Operations and the Controller.

To meet each of these strategies, the Bank must manage its daily cash flows and the cost of those cash flows. Cash flow management is done through:

• the setting of interest rates on loan and deposit products;
• the investment of cash flows into purchased mortgage loans;
• purchasing investments that meet the long term objectives of earnings and liquidity management;
• borrowing money if cash flows are not sufficient to meet local loan demand or to leverage excess capital.

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

During the first quarter of fiscal year 2005, total assets increased $8.5 million to $8.55 billion at December 31, 2004. The increase in assets was mainly attributed to the increase in loans receivable of $147.6 million, offset by a decrease in cash and cash equivalents of $60.5 million, a decrease in investment securities of $50.3 million and a decrease in mortgage-related securities of $15.8 million. The increase in loans is primarily due to the purchase of $170.2 million of mortgage loans during the quarter of which 54% were adjustable rate mortgages ("ARMs"). At September 30, 2004, the Bank had cash set aside to fund commitments to purchase mortgage loans from its then primary nationwide lender. The nationwide lender was acquired by another company and was not able to fulfill its commitments to the Bank. The Bank used the cash to purchase mortgage-related securities during the current quarter. The $195.0 million of mortgage-related securities purchased during the quarter did not offset the $209.2 million of maturities and repayments of mortgage-related securities resulting in a decrease in the balance of mortgage-related securities. The decrease in the balance of investment securities was due to called securities.

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Total liabilities decreased $5.9 million to $7.70 billion at December 31, 2004. The decrease was primarily due to a decrease of $27.9 million in advance payments by borrowers for taxes and insurance due to the timing of escrow payments. The decrease was offset by an increase of $23.1 million in deposits. The increase was in the demand deposit category and is primarily due to the timing of payroll deposits.

Stockholders' equity increased $14.4 million to $846.8 million at December 31, 2004. The increase was primarily due to net income of $18.6 million for the quarter and partially due to the distribution of excess dividends of $2.6 million in the ESOP. See additional information provided under "- Stockholders' Equity." The increase was offset by $10.0 million in dividend payments.

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

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Loans that are refinanced represent pre-existing Bank loans that have been paid off with a new loan recorded. This process requires the complete underwriting of the new loan. Refinanced loans totaled $45.3 million for the current quarter, a decrease of $1.6 million, or 3.5%, from the same period one year ago.

The Bank offers a loan modification program which allows the customer to pay a fee to obtain current market rates without having to process a complete new loan application. Modifications totaled $45.9 million for the three month period ended December 31, 2004, an increase of $6.3 million, or 16.0%, from the same period one year ago. The average rate on loans modified during the current quarter decreased 74 basis points from 5.99% to 5.25%. Loan modification totals are not included in the table below.

Generally, during the three month period ended December 31, 2004, the Bank's 30 year fixed-rate loans, with no points paid by the borrower, were priced at approximately 153 basis points above the average 10 year Treasury rate, while our 15 year fixed-rate loans were priced approximately 91 basis points above the average 10 year Treasury rate.

The following table summarizes the activity in the loan portfolio for the periods indicated, excluding changes in loans in process, deferred fees and allowance for loan losses.

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

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The balance of non-performing loans continued to be low during the quarter ended December 31, 2004. Non-performing loans include loans primarily 90 days or more delinquent or in the process of foreclosure. At December 31, 2004, our ratio of non-performing loans to total loans was 0.11%, down from 0.13% at September 30, 2004. The balance of real estate owned is represented by 40 properties with an average balance of approximately $85 thousand at December 31, 2004. Loans 30 to 89 days delinquent, which are not included in non-performing loans, decreased approximately 1.8% from September 30, 2004 to December 31, 2004.

The risk that the balance of our non-performing loans may increase is primarily driven by the state of the local economies in which we lend. In most of our market areas, the economy has continued to be generally stable. Other risks to our loan portfolio remained largely unchanged from September 30, 2004, as property values have generally maintained or increased.

The following table presents the Company's 30-89 day delinquent loans, non-performing loans and real estate owned, at the dates indicated. The ratios of non-performing loans to total loans and non-performing assets to total assets do not include loans that are 30-89 days delinquent. Non-performing assets includes non-performing loans and real estate owned.

The allowance for loan losses as a percentage of non-performing loans was 86.14% at December 31, 2004, compared to 74.04% at September 30, 2004. The increase in the ratio of allowance for loan losses to non-performing loans primarily resulted from a decrease in non-performing loans. Non-performing loans decreased $878 thousand, or 14.5% from September 30, 2004. Net charge-offs year-to-date of $22 thousand represent 0.23% of average non-performing assets and less than 0.01% of the average outstanding balance of loans receivable.

The following table presents the Company's activity for the allowance for loan losses and related ratios at the dates and for the periods indicated.

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The adjustable-rate securities purchased had an average of 4.87 years until their first repricing opportunity. If market interest rates increase prior to the time the adjustable-rate securities reprice, they will generally reprice upward and provide a higher yield than realized during their initial period.

The following table provides a summary of the activity in our portfolio of mortgage-related securities for the periods presented. The yields and weighted average life ("WAL") for purchases are presented as recorded at the time of purchase. The yields for the beginning and ending balances are as of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL is the estimated remaining maturity of the underlying collateral after projected prepayment speeds have been applied.

The increase in the yield at December 31, 2004 from September 30, 2004 was due primarily to a decrease in prepayment activity as a result of an increase in long-term interest rates between the two time periods.

The change in the valuation on available-for-sale ("AFS") securities for the current quarter is less than the change in the September 30, 2004 quarter due to an increase in the yield on the AFS portfolio during the current quarter. The yield on the AFS portfolio at December 31, 2004 is closer to market rates than at September 30, 2004 resulting in a smaller change in the valuation on AFS securities in the current quarter compared to the September 30, 2004 quarter.

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The yields and WAL for purchases are presented as recorded at the time of purchase. The yields for the beginning and ending balances are as of the period presented. The beginning and ending WAL is the estimated remaining maturity of the underlying collateral after projected prepayment speeds have been applied.

The following table provides a summary of the activity of investment securities for the periods presented.

21

From September 30, 2004 to December 31, 2004, deposits increased $23.1 million to $4.15 billion. The increase was in demand deposit accounts due to the timing of payroll deposits, partially offset by a decrease in all other deposit categories. During the current quarter, public unit deposits and brokered certificates, which are included in the certificates category, increased $44.0 million which helped offset the total decrease in certificates.

As previously discussed, management implemented a more competitive pricing strategy for certain certificates of deposit and money market tiers during the current quarter. While we experienced a slight run-off in all deposit categories, we believe that the run-off would have been greater if the rates offered on these certificates and our money market accounts had not been increased.

The table below presents the Company's deposit portfolio at the dates indicated.