Back to GetFilings.com

See accompanying notes to consolidated interim financial statements.
<Index>

3

See accompanying notes to consolidated interim financial statements.

<Index>

4

<Index>

5

<Index>

See accompanying notes to consolidated interim financial statements.























<Index>

7

1.   Basis of Financial Statement Presentation and Significant Accounting Policies
The accompanying consolidated financial statements of Capitol Federal Financial and subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2002 Annual Report on Form 10-K to the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.

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 allowances for losses on loans and real estate owned. While management believes that these allowances are adequate, future additions to the allowances may be necessary based on changes in economic conditions.

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

2.   Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. The provisions of this Statement are required to be applied starting in fiscal year 2003. The Company's adoption of SFAS No.142 did not have a significant impact on its consolidated financial statements.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for the Company's financial statements issued for fiscal year 2003. The Company's adoption of SFAS No. 143 did not have a significant impact on its consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for the Company's financial statements issued for fiscal year 2003. The Company's adoption of SFAS No. 144 did not have a significant impact on its consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. The Company's adoption of SFAS No. 146 did not have a significant impact on its consolidated financial statements.

In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions". This Statement provides guidance on the accounting for the acquisition of a financial institution and applies to all acquisitions except those between two or more mutual enterprises. Those transition provisions are effective on October 1, 2002. The scope of SFAS No. 144 is amended to include long-term customer-relationship intangible assets such as depositor-and borrower-relationship intangible assets and credit card-holder intangible assets. The Company's adoption of SFAS No. 147 did not have a significant impact on its consolidated financial statements.

On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Under the fair value based method, compensation cost for stock options is measured when options are issued. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statement of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for the Company's 2003 fiscal year, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial statement issued for the quarter ending March 31, 2003 and thereafter. The Company does not believe that the a doption of SFAS No. 148 will have a significant impact on its consolidated financial statements.

8

In November 2002, the FASB issued Financial Interpretation ("FIN") No. 45 "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other." FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition and measurement provisions are effective for guarantees made or modified after December 31, 2002. The disclosure provisions are effective for the Company's quarter ending after December 31, 2002. The Company will adopt the recognition and measurement provisions of FIN No. 45 as required in fiscal 2003 and does not expect a material impact on the consolidated financial statements.

On November 7, 2002, the Company declared a special year-end dividend of $1.22 per share or $22.9 million. The dividend was paid on December 6, 2002 to holders of record as of November 22, 2002. Capitol Federal Savings Bank MHC waived its right to this dividend.

During the quarter ending December 31, 2002, the Bank sold most of its conforming new originations and modifications of single-family fixed rate mortgage loans into the secondary market. The Bank recognized a gain of $17.2 million, pre-tax, on the sale of $544.0 million of these loans. As a result of these loan sales, the Bank recorded an increase of $4.9 million in its mortgage servicing rights.

9

5.   Earnings Per Share
Basic earnings per share for the quarter ended December 31, 2002 were $0.41 and diluted earnings per share for the same period were $0.40. The Company accounts for the 3,024,574 shares acquired by its ESOP in accordance with SOP 93-6 and the shares acquired for its Recognition and Retention Plan (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 (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 their filings with the Securities and Exchange Commission ("SEC").

Except for the historical information contained in this filing, the matters discussed may be deemed to be forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, competition, and other risks detailed from time to time in the Company's SEC reports. Actual strategies and results in future periods may differ materially from those currently expected. These forward-looking statements represent the Company's judgment as of the date of this filing. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

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.

The Company's critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of December 31, 2002, have remained unchanged from September 30, 2002. Our primary policies involving significant judgment and assumptions relates to the allowance for loan losses and the valuation of mortgage servicing rights. Disclosure on these critical accounting policies are incorporated by reference under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the Company's year ended September 30, 2002.

10

From September 30, 2002 to December 31, 2002, deposits decreased $67.8 million, primarily due to certificates of deposit maturing and not renewing in excess of the growth in all other deposit categories. Although the Bank continues to be competitive in its markets for the rates that it offers on these accounts, certificates are maturing at rates higher than are currently being offered. Some customers are, therefore, seeking higher yielding investments that are not backed by FDIC insurance. Equity decreased $12.7 million primarily due to the special year-end dividend paid in December 2002 of $1.22 per share and the repurchase of shares during the quarter. The decreases were funded with proceeds from the repayment on loans and mortgage-related securities and sales of loans during the quarter. The Bank continued to sell loans during the quarter but terminated the current loan sale program in December 2002. Proceeds from repayments and loan sales not used to fund the withdrawals of savings or to fund our equity transactions continued to shift toward securities and away from loans. Of the $49.5 million of loans classified as available-for-sale at December 31, 2002, $33.0 million were sold in January 2003 for a pre-tax gain of $606 thousand.

Assets.  Total assets of the Company decreased $93.1 million from $8.78 billion at September 30, 2002 to $8.69 billion at December 31, 2002. The composition of the assets of the Company changed as a result of the continued loan sales and the use of the proceeds from loan sales and repayments of loans and mortgage-related securities to purchase adjustable rate mortgage-related securities and short-term agency bonds.

• Cash and cash equivalents decreased $424.5 million, or 93.8%, to $27.9 million at December 31, 2002. The decrease in the balance was due primarily to the purchase of mortgage-related securities, the funding of withdrawals from savings and the funding of the special year-end dividend.
• Investment securities increased $309.2 million. The Company invested in short-term agency bonds as part of its strategy to maintain cashflows that are available for reinvestment in about a twelve month time frame. The proceeds to purchase these securities came from the sale of loans and repayments on loans and mortgage-related securities.
• Mortgage-related securities increased $614.0 million, or 23.9%, from $2.57 billion at September 30, 2002 to $3.19 billion at December 31, 2002. During the current quarter we purchased $1.26 billion of adjustable rate mortgage-backed securities, with an average yield of 4.34%. The purchase of adjustable rate securities is part of our continuing strategy to provide interest rate risk and earnings protection in a rising rate environment.
• The loan portfolio decreased $525.0 million, or 10.8%, from $4.87 billion at September 30, 2002 to $4.34 billion at December 31, 2002. During the quarter, the Bank originated loans totaling $422.9 million and purchased loans of $62.2 million. These amounts were offset by the sale of $544.0 million of new and modified single-family fixed rate mortgage loans into the secondary market and loan repayments of $418.4 million. The amount of originations and purchases excluding amounts refinanced was $322.8 million. The amount of loans modified during the quarter totaled $634.1 million. Adjustable rate products comprised 35.6% of total originations and purchases during the period, all of which were retained in the Bank's portfolio. The average yield on our loan portfolio decreased 21 basis points from 6.70% at September 30, 2002 to 6.49% at December 31, 2002.

11

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