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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 June 30, 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                                                                   73,972,001     

                                        Class                                                            Shares Outstanding

                                                                                                             as of July 30, 2004

 

PART I -- FINANCIAL INFORMATION

Page

Number

Item 1.  Condensed Financial Statements

 

             Consolidated Balance Sheets at June 30, 2004 and September 30, 2003

3

             Consolidated Statements of Income for the three and nine months ended

 

                  June 30, 2004 and June 30, 2003

4

             Consolidated Statement of Stockholders' Equity for the nine months ended

 

                  June 30, 2004

5

             Consolidated Statements of Cash Flows for the nine months ended

 

                  June 30, 2004 and June 30, 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

38

Item 4.  Controls and Procedures

50

 

 

PART II -- OTHER INFORMATION

 

Item 1.  Legal Proceedings

51

Item 2.  Changes in Securities and Use of Proceeds

51

Item 3.  Defaults Upon Senior Securities

51

Item 4.  Submission of Matters to a Vote of Security Holders

51

Item 5.  Other Information

51

Item 6.  Exhibits and Reports on Form 8-K

51

 

 

Signature Page

52

PART I -- FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)

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

June 30,

September 30,

2004

2003

ASSETS:

Cash and cash equivalents

$101,645 

$41,918 

Investment securities held-to-maturity, at cost (market value of $668,352

        and $1,046,693)

663,355 

1,022,412 

Mortgage-related securities:

        Available-for-sale, at market (amortized cost of $1,382,127 and $2,131,553)

1,365,629 

2,128,721 

        Held-to-maturity, at cost (market value of $1,498,969 and $821,603)

1,524,980 

815,453 

Loans receivable held for sale, net

831 

4,257 

Loans receivable, net

4,536,710 

4,307,440 

Mortgage servicing rights, net

3,844 

5,600 

Capital stock of FHLB, at cost

173,752 

169,274 

Accrued interest receivable

36,071 

41,937 

Premises and equipment, net

24,860 

26,509 

Real estate owned, net

4,663 

4,046 

Income taxes receivable

2,929 

10,537 

Other assets

8,084 

4,712 

        TOTAL ASSETS

$8,447,353 

$8,582,816 

LIABILITIES:

 

Deposits

$4,174,113 

$4,237,889 

Advances from FHLB

3,180,010 

3,200,000 

Other borrowings, net

53,334 

81,146 

Advance payments by borrowers for taxes and insurance

20,699 

38,935 

Deferred income taxes payable, net

4,108 

8,346 

Accounts payable and accrued expenses

51,102 

40,055 

        Total Liabilities

7,483,366 

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 June 30, 2004 and September 30, 2003

915 

915 

Additional paid-in capital

412,868 

401,745 

Retained earnings

875,183 

896,015 

Accumulated other comprehensive loss

(10,241)

(1,758)

Unearned compensation, Employee Stock Ownership Plan

(21,327)

(21,875)

Unearned compensation, Recognition and Retention Plan

(306)

(1,599)

Less shares held in treasury (17,542,586 and 18,203,228 shares as of

       June 30, 2004 and September 30, 2003, at cost)

(293,105)

(296,998)

           Total Stockholders' Equity

963,987 

976,445 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$8,447,353 

$8,582,816 

 

See accompanying notes to consolidated interim financial statements.


 

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

 

For the Three Months Ended

For the Nine Months Ended

June 30,

June 30,

2004

2003

2004

2003

INTEREST AND DIVIDEND INCOME:

Loans receivable

$60,916

$68,530

$183,290

$222,683

Mortgage-related securities

23,427

25,910

70,459

96,836

Investment securities

8,403

7,593

28,125

22,023

Capital stock of FHLB

1,499

1,477

4,478

4,504

Cash and cash equivalents

188

310

568

1,259

     Total interest and dividend income

94,433

103,820

286,920

347,305

INTEREST EXPENSE:

Deposits

22,295

29,255

70,261

97,618

FHLB Advances

44,416

49,633

138,247

149,018

Other borrowings

538

726

829

2,478

     Total interest expense

67,249

79,614

209,337

249,114

 

 

 

 

NET INTEREST AND DIVIDEND INCOME

27,184

24,206

77,583

98,191

PROVISION FOR LOAN LOSSES

20

--

20

-- 

    NET INTEREST AND DIVIDEND INCOME

       AFTER PROVISION FOR LOAN LOSSES

27,164

24,206

77,563

98,191

OTHER INCOME:

Retail fees and charges

4,369

3,892

11,664

11,324

Loan fees

592

787

1,844

2,266

Insurance commissions

418

463

1,433

1,514

Gain on sale of loans receivable held for sale

15

433

102

18,627

Other, net

1,039

884

3,050

2,926

     Total other income

6,433

6,459

18,093

36,657

OTHER EXPENSES:

Salaries and employee benefits

10,205

9,723

32,749

30,022

Occupancy of premises

3,125

2,768

8,832

8,200

Deposit and loan transaction fees

993

1,252

2,680

3,855

Regulatory and other services

880

1,077

2,924

3,046

Advertising

816

685

2,232

2,977

Office supplies and related expenses

620

860

1,808

2,093

Federal insurance premium

164

177

498

559

Other, net

906

1,754

4,177

3,588

     Total other expenses

17,709

18,296

55,900

54,340

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

15,888

12,369

39,756

80,508

INCOME TAX EXPENSE

6,403

4,842

16,043

31,437

NET INCOME

$9,485

$7,527

$23,713

$49,071

Basic earnings per share

$0.13

$0.11

$0.33

$0.70

Diluted earnings per share

$0.13

$0.11

$0.32

$0.68

Dividends declared per share

$0.50

$0.23

$2.31

$0.66

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

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

23,713 

23,713 

   Changes in unrealized gains/(losses) on

   available-for-sale securities, net of deferred

   income tax ($5,184)

(8,483)

(8,483)

Total comprehensive income

15,230 

Change in Employee Stock Ownership Plan

3,670

548 

4,218 

Change in Recognition and Retention Plan

2,665

(9)

1,293 

48 

3,997 

Acquisition of treasury stock

(3,355)

(3,355)

Stock options exercised

4,788

2 

7,200 

11,990 

Dividends on common stock to

   stockholders ($2.31 per share)

 

 

(44,538)

 

 

 

 

(44,538)

Balance at June 30, 2004

$915

$412,868

$875,183 

($10,241)

($21,327)

($306)

($293,105)

$963,987 

 

 

See accompanying notes to consolidated interim financial statements.









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

For the Nine Months Ended

June 30,

2004

2003

CASH FLOWS FROM OPERATING ACTIVITIES:

 

Net income

$23,713 

$49,071 

Adjustments to reconcile net income to net cash provided by

  operating activities:

  FHLB stock dividends

(4,478)

 --  

  Net loan origination fees capitalized

5,065 

12,181 

  Amortization of net deferred loan origination fees

(2,226)

(9,976)

  Provision for loan losses

20 

 --  

  Losses on sales of premises and equipment, net

82 

19 

  Gains on sales of real estate owned, net

(815)

(287)

  Gains on sales of loans receivable held for sale

(102)

(18,627)

  Originations of loans held for sale

(6,386)

(476,899)

  Proceeds from sales of loans held for sale

9,913 

613,648 

  Amortization of mortgage servicing rights

1,090 

1,050 

  Impairments of mortgage servicing rights

1,108 

848 

  Recovery of impairment valuation on mortgage servicing rights

(471)

--  

  Amortization and accretion of premiums and discounts on

          mortgage-related securities and investment securities

21,327 

21,912 

  Depreciation and amortization on premises and equipment

3,031 

2,583 

  Amortization of deferred debt issuance costs

260 

147 

  Compensation expense related to ESOP

5,182 

4,338 

  Compensation expense related to RRP

1,474 

1,783 

  RRP shares sold, net of forfeitures

(22)

 

27 

  Changes in:

          Accrued interest receivable

5,866 

(3,078)

          Other assets

(1,694)

(886)

          Income taxes receivable and deferred income taxes payable

16,044 

(4,782)

          Accounts payable and accrued expenses

(8,942)

4,064 

             Net cash provided by operating activities

69,039 

197,136 

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of investment in Capitol Federal Financial Trust I

(1,609)

 --  

Proceeds from maturities of investment securities

505,205 

25,000 

Purchases of investment securities

(150,000)

(505,044)

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

734,281 

953,465 

Purchases of mortgage-related securities available-for-sale

(1,050)

(2,340,718)

Principal collected on mortgage-related securities held-to-maturity

173,306 

1,084,317 

Purchases of mortgage-related securities held-to-maturity

(884,113)

(133,318)

Loan originations, net of principal collected

(28,794)

505,683 

Loan purchases, net of principal collected

(209,651)

70,059 

Purchases of premises and equipment, net

(1,464)

(4,788)

Proceeds from sales of real estate owned

6,473 

4,095 

             Net cash provided by (used in) investing activities

142,584 

(347,273)

CASH FLOWS FROM FINANCING ACTIVITIES:

Dividends paid

(44,538)

(35,365)

Dividends in excess of debt service cost of the ESOP

(964)

(2,706)

Deposits, net of withdrawals

(63,776)

(113,628)

Proceeds from advances from FHLB

115,000 

443,000 

Repayments on advances from FHLB

(115,000)

(443,000)

Proceeds from other borrowings

53,609 

 --  

Capitalized debt issuance costs

(290)

 --  

Repayments on other borrowings

(81,391)

(15,261)

Change in advance payments by borrowers for taxes and insurance

(18,236)

(20,130)

Acquisitions of treasury stock

 --  

(17,738)

Acquisitions of treasury stock from exercise of stock options

(3,355)

(788)

Stock options exercised

7,045 

4,030 

             Net cash used in financing activities

(151,896)

(201,586)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

59,727 

(351,723)

CASH AND CASH EQUIVALENTS:

Beginning of Period

41,918 

452,341 

End of Period

$101,645 

$100,618 

SUPPLEMENTAL SCHEDULE OF NON-CASH

      INVESTING AND FINANCING TRANSACTIONS:

             Loans transferred to real estate owned

$    6,316 

$    4,839 

             Tax effect of employee exercise of non-qualifying disposition

                  of stock options

$    4,446 

$       542 

             Tax effect of employee exercise of incentive stock options

$       499 

$       220 

             Tax effect of RRP share transactions

$    2,545 

$    2,403 

             Market value adjustment related to fair value hedges:

                 Interest rate swaps hedging FHLB advances

$  19,990 

$           -- 

 

See accompanying notes to consolidated interim financial statements.

 

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, 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.

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 June 30, 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 a material impact on its consolidated financial statements.

At the March 17-18, 2004 Emerging Issues Task Force ("EITF") meeting, the Task Force reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments". Issue 03-1 provides guidance for determining when an investment is other-than-temporarily impaired and disclosure requirements regarding impairments that have not been recognized as other-than-temporary. Other-than-temporary impairment evaluations and the disclosure requirements are effective for our September 30, 2004 consolidated financial statements. Issue 03-1 is not expected to have a material impact on our consolidated financial statements.

3.   Accounting for Stock Based Compensation

The Company has adopted the disclosure requirements of Statement of 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 $10.2 million for the three months ended June 30, 2004 and $10.1 million for the same period last year. Compensation expense for the nine months ended June 30, 2004 would have been $33.5 million and $31.0 million for the same period last year.

 

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

Three Months Ended

Nine Months Ended

June 30,

June 30,

2004

2003

2004

2003

Net Income

$9,485

$7,527

$23,713

$49,071

Add:  Stock-based compensation expense included

          in reported net income

2,501

2,621

8,630

7,896

Deduct:  Total stock-based employee

          compensation expense determined under

          fair value based method for all awards,

          net of related tax effects

2,525

2,825

9,102

8,512

Pro forma net income

$9,461

$7,323

$23,241

$48,455

Net earnings per share

   Basic-as reported

$0.13

$0.11

$0.33

$0.70

   Basic-pro forma

$0.13

$0.11

$0.33

$0.69

   Diluted-as reported

$0.13

$0.11

$0.32

$0.68

   Diluted-pro forma

$0.13

$0.10

$0.32

$0.67

 

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

During the nine months ended June 30, 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 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 nine months ended June 30, 2003. At June 30, 2004, the Bank had $831 thousand of student loans held for sale and no single family mortgage loans held for sale.

5.   Earnings Per Share

For the quarter ended June 30, 2004, basic 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

Nine Months Ended

June 30,

June 30,

2004

2003

2004

2003

Net Income

$9,485

$7,527

$23,713

$49,071

Average common shares outstanding

71,781,258

70,696,870

71,375,369

70,555,161

Average committed ESOP shares outstanding

101,374

101,374

50,778

50,779

Total basic average common shares

     outstanding

71,882,632

70,798,244

71,426,147

70,605,940