CAPITOL FEDERAL FINANCIAL - 10-Q Quarterly Report

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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 quarter ended March 31, 2004

OR

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

	For the transition period from _____________________to_____________________

		Commission file number 000-25391

CAPITOL FEDERAL FINANCIAL
(Exact name of registrant as specified in its charter)

United States			48-1212142
(State or other jurisdiction of incorporation			(I.R.S. Employer Identification No.)
or organization)

700 Kansas Avenue, Topeka, Kansas			66603
(Address of principal executive offices)			(Zip Code)


Registrant's telephone number, including area code: (785) 235-1341

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 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 issuer's classes of common stock, as of the latest
practicable date

Common Stock 73,794,012
Class Shares Outstanding
as of April 30, 2004

PART I -- FINANCIAL INFORMATION	Page Number
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2004 and September 30, 2003	3
Consolidated Statements of Income for the three and six months ended
March 31, 2004 and March 31, 2003	4
Consolidated Statement of Stockholders' Equity for the six months ended
March 31, 2004	5
Consolidated Statements of Cash Flows for the six months ended
March 31, 2004 and March 31, 2003	6
Notes to Consolidated Interim Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations	12
Item 3. Quantitative and Qualitative Disclosure about Market Risk	40
Item 4. Controls and Procedures	47

PART II -- OTHER INFORMATION
Item 1. Legal Proceedings	48
Item 2. Changes in Securities and Use of Proceeds	48
Item 3. Defaults Upon Senior Securities	48
Item 4. Submission of Matters to a Vote of Security Holders	48
Item 5. Other Information	48
Item 6. Exhibits and Reports on Form 8-K	48

Signature Page	49

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)

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

	March 31,	September 30,
	2004	2003
ASSETS:
Cash and cash equivalents	$89,859	$41,918
Investment securities held-to-maturity, at cost (market value of $760,238
and $1,046,693)	738,790	1,022,412
Mortgage-related securities:
Available-for-sale, at market (amortized cost of $1,650,036 and $2,131,553)	1,657,337	2,128,721
Held-to-maturity, at cost (market value of $1,347,577 and $821,603)	1,332,901	815,453
Loans receivable held for sale, net	1,195	4,257
Loans receivable, net	4,367,465	4,307,440
Mortgage servicing rights, net	3,704	5,600
Capital stock of Federal Home Loan Bank, at cost	172,254	169,274
Accrued interest receivable	41,463	41,937
Premises and equipment, net	25,462	26,509
Real estate owned, net	4,569	4,046
Income taxes receivable	6,219	10,537
Other assets	25,150	4,712
TOTAL ASSETS	$8,466,368	$8,582,816

LIABILITIES:
Deposits	$4,144,842	$4,237,889
Advances from Federal Home Loan Bank	3,218,321	3,200,000
Other borrowings, net	53,270	81,146
Advance payments by borrowers for taxes and insurance	32,878	38,935
Deferred income taxes payable, net	13,432	8,346
Accounts payable and accrued expenses	32,211	40,055
Total Liabilities	7,494,954	7,606,371

STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value) 50,000,000 shares
authorized; none issued	--	--
Common stock ($0.01 par value) 450,000,000 shares authorized; 91,512,287
shares issued as of March 31, 2004 and September 30, 2003	915	915
Additional paid-in capital	408,472	401,745
Retained earnings	875,537	896,015
Accumulated other comprehensive income (loss)	4,532	(1,758)
Unearned compensation, Employee Stock Ownership Plan	(21,831)	(21,875)
Unearned compensation, Recognition and Retention Plan	(531)	(1,599)
Less shares held in treasury (17,820,420 and 18,203,228 shares as of
March 31, 2004 and September 30, 2003, at cost)	(295,680)	(296,998)
Total Stockholders' Equity	971,414	976,445

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$8,466,368	$8,582,816

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

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

	For the Three Months Ended		For the Six Months Ended
	March 31,		March 31,
	2004	2003	2004	2003
INTEREST AND DIVIDEND INCOME:
Loans receivable	$60,546	$71,429	$122,374	$154,153
Mortgage-related securities	24,227	33,273	47,032	70,926
Investment securities	9,709	7,778	19,722	14,430
Cash and cash equivalents	363	126	380	949
Capital stock of Federal Home Loan Bank	1,486	1,474	2,979	3,027
Total interest and dividend income	96,331	114,080	192,487	243,485

INTEREST EXPENSE:
Deposits	22,970	32,644	47,966	68,363
FHLB Advances	44,427	49,107	93,831	99,385
Other borrowings	45	802	291	1,752
Total interest expense	67,442	82,553	142,088	169,500

NET INTEREST AND DIVIDEND INCOME	28,889	31,527	50,399	73,985
PROVISION FOR LOAN LOSSES	--	--	--	--
NET INTEREST AND DIVIDEND INCOME
AFTER PROVISION FOR LOAN LOSSES	28,889	31,527	50,399	73,985

OTHER INCOME:
Retail fees and charges	3,546	3,391	7,295	7,432
Loan fees	602	809	1,252	1,479
Insurance commissions	525	552	1,015	1,051
Gains on sales of loans receivable held for sale	82	948	87	18,194
Other, net	975	1,082	2,011	2,042
Total other income	5,730	6,782	11,660	30,198

OTHER EXPENSES:
Salaries and employee benefits	10,910	9,907	22,544	20,299
Occupancy of premises	2,882	2,687	5,707	5,432
Office supplies and related expenses	633	629	1,188	1,234
Regulatory and other services	951	1,172	2,044	1,969
Deposit and loan transaction fees	878	979	1,687	2,603
Advertising	761	1,317	1,416	2,292
Federal insurance premium	167	189	334	382
Other, net	1,317	1,088	3,271	1,833
Total other expenses	18,499	17,968	38,191	36,044

INCOME BEFORE INCOME TAX EXPENSE	16,120	20,341	23,868	68,139

INCOME TAX EXPENSE	6,510	7,963	9,640	26,595
NET INCOME	$9,610	$12,378	$14,228	$41,544

Basic earnings per share	$0.14	$0.18	$0.20	$0.59
Diluted earnings per share	$0.13	$0.17	$0.19	$0.57
Dividends declared per share	$0.50	$0.22	$1.81	$1.65

See accompanying notes to consolidated interim financial statements.

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

Accumulated

Additional

Other

Unearned

Unearned

Common

Paid-In

Retained

Comprehensive

Compensation

Compensation

Treasury

Stock

Capital

Earnings

Income (Loss)

(ESOP)

(RRP)

Stock

Total

Balance at October 1, 2003

$915

$401,745

$896,015

($1,758)

($21,875)

($1,599)

($296,998)

$976,445

Comprehensive Income:

   Net income

14,228

14,228

   Changes in unrealized gains/(losses) on

   available-for-sale securities, net of deferred

   income tax $3.8 million

6,290

6,290

Total comprehensive income

20,518

Change in Employee Stock Ownership Plan

2,572

44

2,616

Change in Recognition and Retention Plan

327

13

1,068

48

1,456

Stock options exercised

3,828

2

1,270

5,100

Dividends on common stock to

   stockholders ($1.81 per share)

(34,721)

(34,721)

Balance at March 31, 2004

$915

$408,472

$875,537

$4,532

($21,831)

($531)

($295,680)

$971,414

See accompanying notes to consolidated interim financial statements.

<Index>

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

	For the Six Months Ended
	March 31,
	2004	2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$14,228	$41,544
Adjustments to reconcile net income to net cash provided by
operating activities:
FHLB stock dividends	(2,980)	--
Net loan origination fees capitalized	1,137	8,405
Amortization of net deferred loan origination fees	(1,202)	(6,851)
Losses on sales of premises and equipment, net	84	23
Gains on sales of real estate owned, net	(514)	(195)
Gains on sales of loans receivable held for sale	(87)	(18,194)
Originations of loans held for sale	(5,467)	(456,663)
Proceeds from sales of loans held for sale	8,616	591,762
Amortization of mortgage servicing rights	750	670
Impairments of mortgage servicing rights	1,108	--
Amortization and accretion of premiums and discounts on
mortgage-related securities and investment securities	13,933	10,653
Depreciation and amortization on premises and equipment	1,939	1,659
Amortization of deferred debt issuance costs	245	99
Compensation expense related to ESOP	3,580	2,824
Compensation expense related to RRP	1,249	1,188
Changes in:
Accrued interest receivable	474	(4,400)
Other assets	(625)	(1,145)
Income taxes receivable	9,639	(4,024)
Accounts payable and accrued expenses	(7,844)	2,060
Net cash provided by operating activities	38,263	169,415

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment in Capitol Federal Financial Trust I	(1,560)	--
Proceeds from maturities of investment securities	430,205	--
Purchases of investment securities	(150,000)	(355,044)
Proceeds from the retirement of capital stock of FHLB	--	9,476
Purchases of capital stock of FHLB	--	(15,500)
Principal collected on mortgage-related securities available-for-sale	471,341	558,716
Purchases of mortgage-related securities available-for-sale	--	(1,826,711)
Principal collected on mortgage-related securities held-to-maturity	76,431	809,275
Purchases of mortgage-related securities held-to-maturity	(594,118)	--
Loan originations, net of principal collected	(4,218)	485,137
Loan purchases, net of principal collected	(59,863)	48,974
Purchases of premises and equipment, net	(976)	(2,806)
Proceeds from sales of real estate owned	4,117	3,006
Net cash provided by (used in) investing activities	171,359	(285,477)





CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	(34,721)	(31,047)
Dividends in excess of debt service cost of the ESOP	(964)	(2,706)
Deposits, net of withdrawals	(93,047)	(37,683)
Proceeds from advances from Federal Home Loan Bank	115,000	443,000
Repayments on advances from Federal Home Loan Bank	(115,000)	(443,000)
Proceeds from other borrowings	53,560	--
Capitalized debt issuance costs	(290)	--
Repayments on other borrowings	(81,391)	(10,174)
Change in advance payments by borrowers for taxes and insurance	(6,057)	(7,405)
Acquisition of treasury stock	--	(17,053)
Acquisition of treasury stock from forfeiture of shares	(3,211)	(426)
Stock options exercised	4,440	2,070
Net cash (used in) financing activities	(161,681)	(104,424)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	47,941	(220,486)
CASH AND CASH EQUIVALENTS:
Beginning of Period	41,918	452,341
End of Period	$ 89,859	$ 231,855

SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING TRANSACTIONS:
Loans transferred to real estate owned	$ 4,121	$ 2,471
Originated mortgage servicing rights recorded in conjunction
with the sale of loans held for sale	$ --	$ 221
Tax effect of employee exercise of non-qualifying disposition of
stock options	$ 3,561	$ 305
Tax effect of employee premature disposition of incentive stock options	$ 310	$ 146
Tax effect of RRP share transactions	$ 207	$ 331
Treasury stock activity related to Recognition and Retention Plan
(excluding Recognition and Retention Plan shares sold for
employee tax withholding purposes)	$ 48	$ --
Market value adjustment related to fair value hedges:
Interest rate swaps	$ 18,321	$ --
Federal Home Loan Bank advances	$ 18,321	$ --

See accompanying notes to consolidated interim financial statements.

<Index>

Notes to Consolidated Interim Financial Statements

1. Basis of Financial Statement Presentation and Significant Accounting Policies

The accompanying consolidated financial statements of Capitol Federal Financial and subsidiary (the "Company") 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 2003 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 valuation of mortgage servicing rights, allowances for losses on loans and derivative instruments. While management believes that these allowances are adequate, future additions to the allowances may be necessary based on changes in economic conditions.

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.

2. Recent Accounting Pronouncements

SEC Staff Accounting Bulletin ("SAB") No. 105 "Application of Accounting Principles to Loan Commitments" was released in March 2004. This release summarizes the SEC staff position regarding the application of GAAP to loan commitments accounted for as derivative instruments. The Company accounts for interest rate lock commitments issued on mortgage loans that will be held for sale as derivative instruments. Consistent with SAB No. 105, the Company considers the fair value of these commitments to be zero at the commitment date, with subsequent changes in fair value determined solely on changes in market interest rates. As of March 31, 2004, the Company had no interest rate lock commitments on mortgage loans to be held for sale. The Company's adoption of this bulletin did not have an initial impact on its consolidated financial statements.

3. Accounting for Stock Based Compensation

The Company has adopted the disclosure requirements of Statement on Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". The Company applies the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS Nos. 123 and 148, 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 $11.3 million for the three months ended March 31, 2004 and $10.2 million for the same period last year. Compensation expense for the six months ended March 31, 2004 would have been $23.3 million and $21.0 million for the same period last year.

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

	Three Months Ended		Six Months Ended
	March 31,		March 31,
	2004	2003	2004	2003
Net Income	$9,610	$12,378	$14,228	$41,544

Add: Stock-based compensation expense included
in reported net income	3,115	2,801	6,130	5,275
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects	3,320	3,004	6,578	5,697

Pro forma net income	$9,405	$12,175	$13,780	$41,122

Net earnings per share
Basic-as reported	$0.14	$0.18	$0.20	$0.59
Basic-pro forma	$0.13	$0.17	$0.19	$0.58

Diluted-as reported	$0.13	$0.17	$0.19	$0.57
Diluted-pro forma	$0.13	$0.17	$0.19	$0.57

4. Gain on the Sale of Mortgage Loans Held for Sale

During the six months ended March 31, 2004, the Bank did not complete any mortgage loan sales. During the same period in the previous fiscal year, a total of $574.6 million in fixed-rate single family loans, originated at historically low interest rates, were sold into the secondary market. The Bank recognized a gain of $18.2 million, pre-tax, on the sale of these loans. As a result of retaining servicing rights on these mortgage loans sold, the Bank recorded an increase of $5.1 million in its mortgage servicing rights during the six months ended March 31, 2003. At March 31, 2004, the Bank had no single family mortgage loans held for sale.

5. Earnings Per Share

For the quarter ended March 31, 2004, basic earnings per share were $0.14 and diluted earnings per share were $0.13. 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 denominators of the basic and diluted earnings per share calculations.

	Three Months Ended		Six Months Ended
	March 31,		March 31,
	2004	2003	2004	2003
Net Income	$9,610	$12,378	$14,228	$41,544

Average common shares outstanding	69,229,393	68,806,455	69,138,022	68,908,007
Average allocated ESOP shares outstanding	1,059,154	857,522	1,033,808	832,034
Average vested RRP shares outstanding	1,028,000	770,000	1,027,322	769,747
Total basic average common shares

				Accumulated
		Additional		Other	Unearned	Unearned
	Common	Paid-In	Retained	Comprehensive	Compensation	Compensation	Treasury
	Stock	Capital	Earnings	Income (Loss)	(ESOP)	(RRP)	Stock	Total

Balance at October 1, 2003	$915	$401,745	$896,015	($1,758)	($21,875)	($1,599)	($296,998)	$976,445
Comprehensive Income:
Net income			14,228					14,228
Changes in unrealized gains/(losses) on
available-for-sale securities, net of deferred
income tax $3.8 million				6,290				6,290
Total comprehensive income								20,518

Change in Employee Stock Ownership Plan		2,572			44			2,616
Change in Recognition and Retention Plan		327	13			1,068	48	1,456
Stock options exercised		3,828	2				1,270	5,100
Dividends on common stock to
stockholders ($1.81 per share)			(34,721)					(34,721)
Balance at March 31, 2004	$915	$408,472	$875,537	$4,532	($21,831)	($531)	($295,680)	$971,414