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 quarterly period ended March 31, 2005

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 74,395,682
Class Shares Outstanding
as of April 29, 2005

PART I -- FINANCIAL INFORMATION	Page Number
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at March 31, 2005 and September 30, 2004	3
Consolidated Statements of Income for the three and six months ended
March 31, 2005 and March 31, 2004	4
Consolidated Statement of Stockholders' Equity for the six months ended
March 31, 2005	5
Consolidated Statements of Cash Flows for the six months ended
March 31, 2005 and March 31, 2004	6
Notes to Consolidated Interim Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations	10
Item 3. Quantitative and Qualitative Disclosure about Market Risk	37
Item 4. Controls and Procedures	45

PART II -- OTHER INFORMATION
Item 1. Legal Proceedings	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	46
Item 4. Submission of Matters to a Vote of Security Holders	46
Item 5. Other Information	46
Item 6. Exhibits	46

Signature Page	47

PART I -- FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Dollars in thousands, per share data and amounts are actual)

	March 31,	September 30,
	2005	2004
ASSETS:
Cash and cash equivalents	$63,906	$171,526
Investment securities held-to-maturity, at cost (market value of $502,902
and $645,601)	505,617	638,079
Mortgage-related securities:
Available-for-sale, at market (amortized cost of $971,471 and $1,204,994)	964,798	1,201,800
Held-to-maturity, at cost (market value of $1,554,548 and $1,443,168)	1,581,293	1,446,908
Loans receivable held for sale, net	951	3,425
Loans receivable, net	5,046,714	4,747,228
Mortgage servicing rights, net	3,334	3,340
Capital stock of Federal Home Loan Bank ("FHLB"), at cost	177,910	174,126
Accrued interest receivable	37,833	39,648
Premises and equipment, net	24,308	24,504
Real estate owned, net	3,245	4,249
Deferred income taxes, net	63,635	74,665
Other assets	25,220	11,538
TOTAL ASSETS	$8,498,764	$8,541,036

LIABILITIES:
Deposits	$4,051,329	$4,127,472
Advances from FHLB	3,424,878	3,449,429
Other borrowings, net	53,381	53,348
Advance payments by borrowers for taxes and insurance	36,845	40,829
Income taxes payable	5,104	3,674
Accounts payable and accrued expenses	69,571	33,870
Total Liabilities	7,641,108	7,708,622

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, 2005 and September 30, 2004	915	915
Additional paid-in capital	419,176	412,126
Unearned compensation, Employee Stock Ownership Plan ("ESOP")	(17,695)	(20,772)
Unearned compensation, Recognition and Retention Plan ("RRP")	(529)	(276)
Retained earnings	750,994	735,306
Accumulated other comprehensive loss	(4,143)	(1,983)
Less shares held in treasury (17,096,805 and 17,521,486 shares as of
March 31, 2005 and September 30, 2004, at cost)	(291,062)	(292,902)
Total Stockholders' Equity	857,656	832,414

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$8,498,764	$8,541,036

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

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

	For the Three Months Ended		For the Six Months Ended
	March 31,		March 31,
	2005	2004	2005	2004
INTEREST AND DIVIDEND INCOME:
Loans receivable	$67,028	$60,546	$132,751	$122,374
Mortgage-related securities	24,353	24,227	48,624	47,032
Investment securities	6,563	9,708	14,308	19,721
Capital stock of FHLB	1,948	1,486	3,784	2,979
Cash and cash equivalents	304	363	513	380
Total interest and dividend income	100,196	96,330	199,980	192,486

INTEREST EXPENSE:
Deposits	23,644	22,970	46,716	47,966
FHLB Advances	34,961	44,427	69,417	93,831
Other borrowings	734	45	1,404	291
Total interest expense	59,339	67,442	117,537	142,088

NET INTEREST AND DIVIDEND INCOME	40,857	28,888	82,443	50,398
PROVISION FOR LOAN LOSSES	--	--	--	--
NET INTEREST AND DIVIDEND INCOME
AFTER PROVISION FOR LOAN LOSSES	40,857	28,888	82,443	50,398

OTHER INCOME:
Retail fees and charges	3,647	3,505	7,455	7,183
Loan fees	509	602	1,067	1,252
Insurance commissions	604	525	1,004	1,015
Other, net	742	1,058	1,807	2,099
Total other income	5,502	5,690	11,333	11,549

OTHER EXPENSES:
Salaries and employee benefits	10,054	10,910	20,176	22,544
Occupancy	3,127	2,882	6,353	5,707
Regulatory and other services	1,344	951	2,321	2,044
Deposit and loan transaction fees	1,068	878	2,072	1,687
Advertising	1,272	761	2,047	1,416
Other, net	1,145	2,076	2,644	4,681
Total other expenses	18,010	18,458	35,613	38,079
INCOME BEFORE INCOME TAX EXPENSE	28,349	16,120	58,163	23,868
INCOME TAX EXPENSE	10,867	6,510	22,108	9,640
NET INCOME	$17,482	$9,610	$36,055	$14,228

Basic earnings per share	$0.24	$0.14	$0.50	$0.20
Diluted earnings per share	$0.24	$0.13	$0.49	$0.19
Dividends declared per share	$0.50	$0.50	$1.00	$1.81

Weighted Average Number of Common Shares Outstanding:
Basic	72,473	71,317	72,348	71,199
Diluted	73,096	72,773	73,050	72,710

See accompanying notes to consolidated interim financial statements.

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

Accumulated

Additional

Unearned

Unearned

Other

Common

Paid-In

Compensation

Compensation

Retained

Comprehensive

Treasury

Stock

Capital

(ESOP)

(RRP)

Earnings

Loss

Stock

Total

Balance at October 1, 2004

$915

$412,126

($20,772)

($276)

$735,306

($1,983)

($292,902)

$832,414

Comprehensive income:

   Net income

         36,055

36,055

   Changes in unrealized gains/(losses) on

   available-for-sale securities, net of deferred

   income taxes of $1,319

(2,160)

(2,160)

Total comprehensive income

33,895

Tax benefit of market value change in vested

  RRP shares

19

19

Common stock committed to be released for

  allocation - ESOP

2,528

1,008

3,536

Acquisition of treasury stock

(2,967)

(2,967)

Treasury stock activity related to RRP, net

296

(401)

(24)

108

(21)

Amortization of unearned compensation - RRP

148

148

Dividends in excess of debt service cost - ESOP

2,069

2,069

Stock options exercised

4,207

4,699

8,906

Dividends on common stock to

   stockholders ($1.00 per share)

(20,343)

(20,343)

Balance at March 31, 2005

$915

$419,176

($17,695)

($529)

$750,994

($4,143)

($291,062)

$857,656

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,
	2005	2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 36,055	$ 14,228
Adjustments to reconcile net income to net cash provided by
operating activities:
FHLB stock dividends	(3,784)	(2,980)
Net loan origination fees (costs) capitalized	(2,238)	1,137
Amortization of net deferred loan origination fees	(1,462)	(1,202)
Losses on sales of premises and equipment, net	57	84
Gains on sales of real estate owned, net	(476)	(514)
Gains on sales of loans receivable held for sale	(68)	(87)
Originations of loans receivable held for sale	(4,225)	(5,467)
Proceeds from sales of loans receivable held for sale	6,767	8,616
Amortization of mortgage servicing rights	580	750
Impairment of mortgage servicing rights	--	1,108
Recovery of impairment of mortgage servicing rights	(574)	--
Amortization and accretion of premiums and discounts on
mortgage-related securities and investment securities	6,572	13,933
Depreciation and amortization of premises and equipment	2,087	1,939
Amortization of deferred debt issuance costs	33	245
Common stock committed to be released for allocation - ESOP	3,536	3,580
Amortization of unearned compensation - RRP	148	1,249
RRP shares sold, net of forfeitures	(21)	--
Changes in:
Accrued interest receivable	1,815	474
Other assets	1,133	(625)
Income taxes payable/receivable and deferred income taxes	17,978	9,639
Accounts payable and accrued expenses	(3,661)	(7,844)
Net cash provided by operating activities	60,252	38,263

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or calls of investment securities	132,000	430,205
Purchases of investment securities	--	(150,000)
Principal collected on mortgage-related securities available-for-sale	228,595	471,341
Principal collected on mortgage-related securities held-to-maturity	154,224	76,431
Purchases of mortgage-related securities held-to-maturity	(289,791)	(594,118)
Loan originations, net of principal collected	(1,629)	(4,218)
Loan purchases, net of principal collected	(296,628)	(59,863)
Purchases of premises and equipment, net	(1,948)	(976)
Proceeds from sales of real estate owned	3,947	4,117
Net cash (used in) provided by investing activities	(71,230)	172,919

(Continued)

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	$ (20,343)	$ (34,721)
Dividends in excess of debt service cost of the ESOP, net	2,069	(964)
Deposits, net of withdrawals	(76,143)	(93,047)
Proceeds from advances/line of credit from FHLB	265,000	115,000
Repayments on advances/line of credit from FHLB	(265,000)	(115,000)
Proceeds from other borrowings	--	52,000
Capitalized debt issuance costs	--	(290)
Repayments on other borrowings	--	(81,391)
Change in advance payments by borrowers for taxes and insurance	(3,984)	(6,057)
Acquisitions of treasury stock	(174)	--
Acquisitions of treasury stock for exercise of stock options	(2,793)	(3,211)
Stock options exercised	4,726	4,440
Net cash used in financing activities	(96,642)	(163,241)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(107,620)	47,941
CASH AND CASH EQUIVALENTS:
Beginning of period	171,526	41,918
End of period	$ 63,906	$ 89,859

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments	$ 4,000	$ --
Interest payments, net of interest credited to deposits	$ 75,196	$ 99,824

SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to real estate owned	$ 2,471	$ 4,121

Loan modifications and refinances	$ 160,913	$ 243,573

Purchase of investment in the Capitol Federal Financial Trust I	$ --	$ 1,609

Tax effect of employee premature disposal of stock options	$ 4,180	$ 310

Tax effect of RRP share transactions	$ 19	$ 208

Treasury stock activity related to RRP (excluding RRP shares sold for
employee withholding tax purposes)	$ 108	$ 48

Purchase of mortgage-related securities that will settle in a subsequent period	$ 15,000	$ --
Market value change related to fair value hedge:
Interest rate swaps hedging FHLB advances	$ 24,551	$ (18,321)

(Concluded)

See accompanying notes to consolidated interim financial statements

7

<Index>

Notes to Consolidated Interim Financial Statements

1. Basis of Financial Statement Presentation

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 2004 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, deferred income tax assets 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 and per share data is actual, unless otherwise indicated.

2. Recent Accounting Pronouncements

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. T he 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 at the beginning of the Company's next fiscal year, October 1, 2005. The Company has not completed the process of evaluating the impact of SFAS 123(R) on its consolidated financial statements.

3. Accounting for Stock Based Compensation

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 basis 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 March 31, 2005 and $11.3 million for the same period last year. Compensation expense for the six months ended March 31, 2005 would have been $20.3 million and $23.3 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,
	2005	2004	2005	2004
	(Dollars in thousands, except per share amounts)
Net income	$17,482	$9,610	$36,055	$14,228

Add: Stock-based compensation expense included
in reported net income, net of related tax effects	78	380	94	743
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects	141	585	189	1,191

Pro forma net income	$17,419	$9,405	$35,960	$13,780

Net earnings per share:
Basic-as reported	$0.24	$0.14	$0.50	$0.20
Basic-pro forma	$0.24	$0.13	$0.50	$0.19

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

Balance at October 1, 2004	$915	$412,126	($20,772)	($276)	$735,306	($1,983)	($292,902)	$832,414
Comprehensive income:
Net income					36,055			36,055
Changes in unrealized gains/(losses) on
available-for-sale securities, net of deferred
income taxes of $1,319						(2,160)		(2,160)
Total comprehensive income								33,895

Tax benefit of market value change in vested
RRP shares		19						19
Common stock committed to be released for
allocation - ESOP		2,528	1,008					3,536
Acquisition of treasury stock							(2,967)	(2,967)
Treasury stock activity related to RRP, net		296		(401)	(24)		108	(21)
Amortization of unearned compensation - RRP				148				148
Dividends in excess of debt service cost - ESOP			2,069					2,069
Stock options exercised		4,207					4,699	8,906
Dividends on common stock to
stockholders ($1.00 per share)					(20,343)			(20,343)
Balance at March 31, 2005	$915	$419,176	($17,695)	($529)	$750,994	($4,143)	($291,062)	$857,656