KB HOME - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended May 31, 2004.


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

For the transition period from [ ] to [ ].

Commission File No. 1-9195

KB HOME

(Exact name of registrant as specified in its charter)


Delaware (State of incorporation)		95-3666267 (IRS employer identification number)

10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

(Address and telephone number of principal executive offices)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

Yes [ X ] No [ ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).

Yes [ X ] No [ ]

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF MAY 31, 2004.

Common stock, par value $1.00 per share, 46,306,074 shares outstanding, including 7,408,420 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 8,448,100 shares held in treasury.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts - Unaudited)


	Six Months Ended May 31,						Three Months Ended May 31,
	2004			2003			2004			2003
Total revenues	$	2,923,795		$	2,535,054		$	1,570,386		$	1,440,104

Construction:
Revenues	$	2,899,971		$	2,502,312		$	1,558,092		$	1,420,886
Construction and land costs		(2,233,372	)		(1,958,916	)		(1,190,304	)		(1,110,887	)
Selling, general and administrative expenses		(380,303	)		(334,413	)		(200,971	)		(187,737	)

Operating income		286,296			208,983			166,817			122,262
Interest income		2,196			1,473			1,007			715
Interest expense, net of amounts capitalized		(10,806	)		(15,998	)		(6,285	)		(5,552	)
Minority interests		(22,639	)		(8,695	)		(13,933	)		(6,620	)
Equity in pretax income of unconsolidated joint ventures		3,664			689			2,427			521

Construction pretax income		258,711			186,452			150,033			111,326

Mortgage banking:
Revenues:
Interest income		4,995			8,063			2,430			3,608
Other		18,829			24,679			9,864			15,610

		23,824			32,742			12,294			19,218
Expenses:
Interest		(1,965	)		(3,838	)		(902	)		(1,668	)
General and administrative		(17,356	)		(15,043	)		(8,919	)		(7,402	)

Mortgage banking pretax income		4,503			13,861			2,473			10,148

Total pretax income		263,214			200,313			152,506			121,474
Income taxes		(86,900	)		(66,100	)		(50,400	)		(40,100	)

Net income	$	176,314		$	134,213		$	102,106		$	81,374

Basic earnings per share	$	4.48		$	3.36		$	2.59		$	2.05

Diluted earnings per share	$	4.15		$	3.19		$	2.40		$	1.94

Basic average shares outstanding		39,322			39,896			39,484			39,622

Diluted average shares outstanding		42,443			42,139			42,578			41,979

Cash dividends per common share	$	.50		$	.150		$	.25		$	.075

See accompanying notes.

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands - Unaudited)


	May 31,			November 30,
	2004			2003
ASSETS
Construction:
Cash and cash equivalents	$	65,611		$	116,555
Trade and other receivables		429,169			430,266
Inventories		3,553,784			2,883,482
Investments in unconsolidated joint ventures		85,055			32,797
Deferred income taxes		152,254			165,896
Goodwill		236,835			228,999
Other assets		146,448			124,751

		4,669,156			3,982,746

Mortgage banking:
Cash and cash equivalents		28,270			21,564
Receivables:
First mortgages and mortgage-backed securities		5,978			7,707
First mortgages held under commitments of sale and other receivables		179,372			211,825
Other assets		12,511			12,017

		226,131			253,113

Total assets	$	4,895,287		$	4,235,859

LIABILITIES AND STOCKHOLDERS’ EQUITY
Construction:
Accounts payable	$	593,173		$	554,387
Accrued expenses and other liabilities		563,374			574,527
Mortgages and notes payable		1,766,304			1,253,932

		2,922,851			2,382,846

Mortgage banking:
Accounts payable and accrued expenses		38,838			31,858
Notes payable		105,301			132,225
Collateralized mortgage obligations secured by mortgage-backed securities		5,829			6,848

		149,968			170,931

Minority interests in consolidated subsidiaries and joint ventures		105,636			89,231

Common stock		54,754			54,077
Paid-in capital		562,250			538,241
Retained earnings		1,618,998			1,462,342
Accumulated other comprehensive income		42,195			38,488
Deferred compensation		(6,779	)		(7,512	)
Grantor stock ownership trust, at cost		(161,008	)		(165,332	)
Treasury stock, at cost		(393,578	)		(327,453	)

Total stockholders’ equity		1,716,832			1,592,851

Total liabilities and stockholders’ equity	$	4,895,287		$	4,235,859

See accompanying notes.

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)


	Six Months Ended May 31,
	2004			2003
Cash flows from operating activities:
Net income	$	176,314		$	134,213
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Equity in pretax income of unconsolidated joint ventures		(3,664	)		(689	)
Minority interests		22,639			8,695
Amortization of discounts and issuance costs		868			856
Depreciation and amortization		10,448			10,439
Provision for deferred income taxes		13,642			17,878
Change in assets and liabilities, net of effects from acquisitions:
Receivables		46,144			239,608
Inventories		(525,253	)		(340,014	)
Accounts payable, accrued expenses and other liabilities		(13,324	)		61,156
Other, net		(13,166	)		21,211

Net cash provided (used) by operating activities		(285,352	)		153,353

Cash flows from investing activities:
Acquisitions, net of cash acquired		(56,527	)		(72,752	)
Investments in unconsolidated joint ventures		(48,594	)		(8,093	)
Net sales of mortgages held for long-term investment		204			5,913
Payments received on first mortgages and mortgage-backed securities		1,525			3,838
Purchases of property and equipment, net		(10,507	)		(9,524	)

Net cash used by investing activities		(113,899	)		(80,618	)

Cash flows from financing activities:
Net proceeds from (payments on) credit agreements and other short- term borrowings		180,563			(369,771	)
Proceeds from issuance of senior subordinated notes					295,332
Proceeds from issuance of senior notes		248,685
Redemption of senior subordinated notes					(129,016	)
Payments on collateralized mortgage obligations		(1,019	)		(3,521	)
Payments on mortgages, land contracts and other loans		(9,381	)		(68,914	)
Issuance of common stock under employee stock plans		29,010			19,308
Payments to minority interests		(7,062	)		(574	)
Payments of cash dividends		(19,658	)		(5,984	)
Repurchases of common stock		(66,125	)		(59,620	)

Net cash provided (used) by financing activities		355,013			(322,760	)

Net decrease in cash and cash equivalents		(44,238	)		(250,025	)
Cash and cash equivalents at beginning of period		138,119			329,985

Cash and cash equivalents at end of period	$	93,881		$	79,960

Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	4,288		$	11,784

Income taxes paid	$	69,289		$	39,553

Supplemental disclosures of noncash activities:
Cost of inventories acquired through seller financing	$	38,376		$	23,806

Inventory of consolidated variable interest entities	$	19,440		$

See accompanying notes.

KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of May 31, 2004, the results of its consolidated operations for the six months and three months ended May 31, 2004 and 2003, and its consolidated cash flows for the six months ended May 31, 2004 and 2003. The results of operations for the six months and three months ended May 31, 2004 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at November 30, 2003 has been taken from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2003 contained in the Company’s 2003 Annual Report to Stockholders.

Segment information

The Company has identified two reportable segments: construction and mortgage banking. Information for the Company’s reportable segments is presented in its consolidated statements of income and consolidated balance sheets included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Management evaluates a segment’s performance based upon a number of factors including pretax results.

Stock-based compensation

The Company has elected to account for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and, therefore, recorded no compensation expense in the determination of net income during the six-month and three-month periods ended May 31, 2004 and 2003. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in the six-month and three-month periods ended May 31, 2004 and 2003 (in thousands, except per share amounts):


	Six Months Ended May 31,						Three Months Ended May 31,
	2004			2003			2004			2003
Net income-as reported	$	176,314		$	134,213		$	102,106		$	81,374
Deduct stock-based compensation expense determined using the fair value method, net of related tax effects		(6,635	)		(7,028	)		(3,601	)		(3,634	)

Pro forma net income	$	169,679		$	127,185		$	98,505		$	77,740

Earnings per share:
Basic-as reported	$	4.48		$	3.36		$	2.59		$	2.05
Basic-pro forma		4.32			3.19			2.49			1.96
Diluted-as reported		4.15			3.19			2.40			1.94
Diluted-pro forma		4.06			3.07			2.34			1.88

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Significant Accounting Policies (continued)

Earnings per share

Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the average number of common shares outstanding including all dilutive potentially issuable shares under various stock option plans and stock purchase contracts.

The following table presents a reconciliation of average shares outstanding (in thousands):


	Six Months Ended May 31,				Three Months Ended May 31,
	2004		2003		2004		2003
Basic average shares outstanding		39,322		39,896		39,484		39,622
Net effect of stock options assumed to be exercised		3,121		2,243		3,094		2,357

Diluted average shares outstanding		42,443		42,139		42,578		41,979

Comprehensive Income

The following table presents the components of comprehensive income (in thousands):


	Six Months Ended May 31,					Three Months Ended May 31,
	2004		2003			2004			2003
Net income	$	176,314	$	134,213		$	102,106		$	81,374
Foreign currency translation adjustment		3,707		26,187			(4,883	)		36,136
Net unrealized loss on hedges				(7,983	)					(1,859	)

Comprehensive income	$	180,021	$	152,417		$	97,223		$	115,651

The accumulated balances of other comprehensive income in the balance sheets as of May 31, 2004 and November 30, 2003 are comprised solely of cumulative foreign currency translation adjustments of $42.2 million and $38.5 million, respectively.

2. Inventories

Inventories consist of the following (in thousands):


	May 31,		November 30,
	2004		2003
Homes, lots and improvements in production	$	2,871,098	$	2,325,136
Land under development		682,686		558,346

Total inventories	$	3,553,784	$	2,883,482

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Inventories (continued)

The Company’s interest costs are as follows (in thousands):


	Six Months Ended May 31,						Three Months Ended May 31,
	2004			2003			2004			2003
Capitalized interest, beginning of period	$	122,741		$	97,096		$	133,100		$	102,957
Interest incurred		64,280			61,134			33,680			30,366
Interest expensed		(10,806	)		(15,998	)		(6,285	)		(5,552	)
Interest amortized		(34,500	)		(30,214	)		(18,780	)		(15,753	)

Capitalized interest, end of period	$	141,715		$	112,018		$	141,715		$	112,018

3. Consolidation of Variable Interest Entities

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46”). FASB Interpretation No. 46 is intended to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities (referred to as “variable interest entities” or “VIEs”) in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FASB Interpretation No. 46, an enterprise that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, is determined to be the primary beneficiary of the VIE and must consolidate the entity. FASB Interpretation No. 46 applied immediately to VIEs created after January 31, 2003 and was effective no later than the first interim or annual period ending after March 15, 2004 for VIEs created on or before January 31, 2003.

In the ordinary course of its business, the Company enters into land option contracts in order to procure land for the construction of homes. Under such land option contracts, the Company will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46, certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a VIE.

In compliance with FASB Interpretation No. 46, the Company analyzed its land option contracts and other contractual arrangements and has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. The consolidation of these VIEs, where the Company was determined to be the primary beneficiary, added $46.8 million to inventory and other liabilities in the Company’s consolidated balance sheet at May 31, 2004. The Company’s cash deposits related to these land option contracts totaled $2.9 million at May 31, 2004. Creditors, if any, of these VIEs have no recourse against the Company. As of May 31, 2004, excluding consolidated VIEs, the Company had cash deposits and/or letters of credit totaling $118.8 million which were associated with land option contracts having an aggregate purchase price of $2.01 billion.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Goodwill

The changes in the carrying amount of goodwill for the six months ended May 31, 2004, by segment, are as follows (in thousands):


			Mortgage
	Construction		Banking	Total
Goodwill, November 30, 2003	$	228,999	$	$	228,999
Goodwill acquired		6,958			6,958
Foreign currency translation		878			878

Goodwill, May 31, 2004	$	236,835	$	$	236,835

5. Accounting for Derivative Instruments and Hedging Activities

To meet the financing needs of its customers, the Company’s mortgage banking subsidiary is party to interest rate lock commitments (“IRLCs”), which are extended to borrowers who have applied for funding and meet certain defined credit and underwriting criteria. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Company’s mortgage banking subsidiary classifies and accounts for IRLCs as non-designated derivative instruments at fair value with gains and losses recorded to earnings.

In the normal course of business and pursuant to its risk management policy, the Company’s mortgage banking subsidiary uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. When interest rates rise, loans held for sale and any applications in process with locked-in interest rates decline in value. To preserve the value of such loans, the mortgage banking operations enter into mortgage forward delivery contracts and non-mandatory commitments to minimize the impact of movements in market interest rates on the mortgage loans held for sale and IRLCs.

On May 31, 2003, the Company’s mortgage banking subsidiary elected to discontinue its accounting for derivative instruments as cash flow hedges. Accordingly, all derivative instruments as of June 1, 2003 are carried in the balance sheet at fair value, with changes in the value recorded directly to earnings. Prior to this election, the mortgage forward delivery contracts and non-mandatory commitments were designated as cash flow hedges and changes in the fair value of these instruments were recognized in other comprehensive income until such time that earnings were affected by the underlying hedged item. The Company intends to designate mortgage forward delivery contracts and non-mandatory commitments as fair value hedges in the third quarter of fiscal year 2004. The Company believes this designation will not materially impact its financial position or results of operations.

The following table summarizes the interest rate sensitive instruments of the mortgage banking operations (in thousands):


	May 31, 2004				November 30, 2003
	Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value
Instruments:
Loans held for sale	$	160,426	$	160,224	$	197,627	$	197,605
Forward delivery contracts		137,334		824		290,915		152
IRLCs		67,056		59		60,282		78


		Page
		Number(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Six Months and Three Months Ended May 31, 2004 and 2003		3
Consolidated Balance Sheets - May 31, 2004 and November 30, 2003		4
Consolidated Statements of Cash Flows - Six Months Ended May 31, 2004 and 2003		5
Notes to Consolidated Financial Statements		6-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		29
Item 4. Submission of Matter to a Vote of Security Holders		30
Item 5. Other Information		30-31
Item 6. Exhibits and Reports on Form 8-K		31
SIGNATURES		32
INDEX OF EXHIBITS		33
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Table of Contents

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Table of Contents

1.		Basis of Presentation and Significant Accounting Policies

		The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of May 31, 2004, the results of its consolidated operations for the six months and three months ended May 31, 2004 and 2003, and its consolidated cash flows for the six months ended May 31, 2004 and 2003. The results of operations for the six months and three months ended May 31, 2004 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at November 30, 2003 has been taken from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2003 contained in the Company’s 2003 Annual Report to Stockholders.

		Segment information

		The Company has identified two reportable segments: construction and mortgage banking. Information for the Company’s reportable segments is presented in its consolidated statements of income and consolidated balance sheets included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Management evaluates a segment’s performance based upon a number of factors including pretax results.

		Stock-based compensation

		The Company has elected to account for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and, therefore, recorded no compensation expense in the determination of net income during the six-month and three-month periods ended May 31, 2004 and 2003. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in the six-month and three-month periods ended May 31, 2004 and 2003 (in thousands, except per share amounts):

1.		Basis of Presentation and Significant Accounting Policies (continued)

		Earnings per share

		Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the average number of common shares outstanding including all dilutive potentially issuable shares under various stock option plans and stock purchase contracts.

		The following table presents a reconciliation of average shares outstanding (in thousands):

2.		Inventories (continued)

		The Company’s interest costs are as follows (in thousands):

3.		Consolidation of Variable Interest Entities

		In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46”). FASB Interpretation No. 46 is intended to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities (referred to as “variable interest entities” or “VIEs”) in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FASB Interpretation No. 46, an enterprise that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, is determined to be the primary beneficiary of the VIE and must consolidate the entity. FASB Interpretation No. 46 applied immediately to VIEs created after January 31, 2003 and was effective no later than the first interim or annual period ending after March 15, 2004 for VIEs created on or before January 31, 2003.

		In the ordinary course of its business, the Company enters into land option contracts in order to procure land for the construction of homes. Under such land option contracts, the Company will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46, certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a VIE.

		In compliance with FASB Interpretation No. 46, the Company analyzed its land option contracts and other contractual arrangements and has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. The consolidation of these VIEs, where the Company was determined to be the primary beneficiary, added $46.8 million to inventory and other liabilities in the Company’s consolidated balance sheet at May 31, 2004. The Company’s cash deposits related to these land option contracts totaled $2.9 million at May 31, 2004. Creditors, if any, of these VIEs have no recourse against the Company. As of May 31, 2004, excluding consolidated VIEs, the Company had cash deposits and/or letters of credit totaling $118.8 million which were associated with land option contracts having an aggregate purchase price of $2.01 billion.

5.		Accounting for Derivative Instruments and Hedging Activities

		To meet the financing needs of its customers, the Company’s mortgage banking subsidiary is party to interest rate lock commitments (“IRLCs”), which are extended to borrowers who have applied for funding and meet certain defined credit and underwriting criteria. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Company’s mortgage banking subsidiary classifies and accounts for IRLCs as non-designated derivative instruments at fair value with gains and losses recorded to earnings.

		In the normal course of business and pursuant to its risk management policy, the Company’s mortgage banking subsidiary uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. When interest rates rise, loans held for sale and any applications in process with locked-in interest rates decline in value. To preserve the value of such loans, the mortgage banking operations enter into mortgage forward delivery contracts and non-mandatory commitments to minimize the impact of movements in market interest rates on the mortgage loans held for sale and IRLCs.

		On May 31, 2003, the Company’s mortgage banking subsidiary elected to discontinue its accounting for derivative instruments as cash flow hedges. Accordingly, all derivative instruments as of June 1, 2003 are carried in the balance sheet at fair value, with changes in the value recorded directly to earnings. Prior to this election, the mortgage forward delivery contracts and non-mandatory commitments were designated as cash flow hedges and changes in the fair value of these instruments were recognized in other comprehensive income until such time that earnings were affected by the underlying hedged item. The Company intends to designate mortgage forward delivery contracts and non-mandatory commitments as fair value hedges in the third quarter of fiscal year 2004. The Company believes this designation will not materially impact its financial position or results of operations.

		The following table summarizes the interest rate sensitive instruments of the mortgage banking operations (in thousands):