As filed with the Securities and Exchange Commission on December 4, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAPITOL FEDERAL FINANCIAL
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
United States 6035 To Be Requested
(State or other jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer Identification No.)
or organization) Classification Code Number)
</TABLE>
700 Kansas Avenue, Topeka, Kansas 66603 (785) 235-1341
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
John C. Dicus, Chairman and Chief Executive Officer
Capitol Federal Financial
700 Kansas Avenue
Topeka, Kansas 66603
(785) 235-1341
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please send copies of all communications to:
James S. Fleischer, P.C.
Martin L. Meyrowitz, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Amount
Class of Securities to be Purchase Price Aggregate Offering
to be Registered(1) Registered(1) Per Share Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value, 52,000,000 shares $10.00 $520,000,000 $144,560
per share
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</TABLE>
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(1) Includes shares of Common Stock to be issued to the Capitol Federal
Foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
CAPITOL FEDERAL FINANCIAL
(Proposed Holding Company for Capitol Federal Savings Bank)
50,000,000 Shares of Common Stock Anticipated Maximum, As Adjusted
Capitol Federal Savings and Loan Association is reorganizing into a
federally chartered, three-tier mutual holding company structure. As part of the
reorganization, Capitol Federal Savings and Loan Association is converting into
a federally chartered stock savings bank, and will change its name to Capitol
Federal Savings Bank. Capitol Federal Savings Bank will become a wholly owned
subsidiary of Capitol Federal Financial, which will be formed as part of the
reorganization. Capitol Federal Financial will become a majority-owned
subsidiary of Capitol Federal Savings Bank MHC, a federally chartered mutual
holding company, by issuing shares of its common stock to Capitol Federal
Savings Bank MHC. In addition to the reorganization, Capitol Federal Financial
is offering shares of its common stock for sale to the public. The
reorganization and the offering of shares to the public are being made in
accordance with a plan of reorganization and stock issuance. The plan of
reorganization and stock issuance must be approved by the Office of Thrift
Supervision and by a majority of the votes eligible to be cast by members of
Capitol Federal Savings and Loan Association.
Terms of the Offering
The number of shares to be offered to the public was determined based
on an independent appraisal of the estimated market value of the converted
Capitol Federal Savings Bank. Using this estimate, Capitol Federal Financial
will offer between 32,136,106 shares and 43,478,261 shares to members, directors
and officers of Capitol Federal Savings and Loan Association, the employee stock
ownership plan of Capitol Federal Financial and the public. In addition, Capitol
Federal Financial intends to contribute cash with a value equal to 4.0% of the
shares sold in this offering and to issue a number of shares equal to 4.0% of
the shares sold in this offering to a charitable foundation. Capitol Federal
Financial may increase the number of shares offered up to 50,000,000 shares,
subject to regulatory approval. Based on these estimates, we are making the
following offering of shares of common stock:
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<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
<S> <C> <C> <C> <C>
Per Share Price...................................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
Number of Shares..................................... 32,136,106 37,807,183 43,478,261 50,000,000
Underwriting Commission and other Expenses........... $ 5,445,652 $ 6,097,826 $ 6,750,000 $ 7,500,000
Net Proceeds to Capitol Federal Financial............ $315,915,408 $371,974,004 $428,032,610 $492,500,000
Net Proceeds Per Share...............................
</TABLE>
Please refer to Risk Factors beginning on page 16 of this document.
The shares of common stock being offered by this prospectus will
represent a minority ownership interest in Capitol Federal Financial. The
remaining issued and outstanding shares, representing a majority of the
outstanding shares of common stock, will be owned by Capitol Federal Savings
Bank MHC. These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any other federal agency or state securities regulator has
approved or disapproved these securities or determined if this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
For information on how to subscribe for common stock, call the Stock
Information Center at (___) __________.
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
--------------------
The date of this Prospectus is ____________, 1999.
<PAGE>
[MAP of Registrant's market area to be produced here.]
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements. References
in this document to "Capitol Federal Savings", the "Bank", "we", "us", and "our"
refer to Capitol Federal Savings and Loan Association either in its present form
or as a stock savings bank following the reorganization and stock issuance,
after which our name will change to Capitol Federal Savings Bank. In certain
circumstances where appropriate, "we", "us", or "our" refer collectively to the
Bank and Capitol Federal Financial and may also include Capitol Federal Savings
Bank MHC. References in this document to the "Stock Holding Company" refer to
Capitol Federal Financial. References to the "MHC" refer to Capitol Federal
Savings Bank MHC. This document contains certain forward-looking statements
consisting of estimates with respect to our financial condition, results of
operations and business. You are cautioned that these statements are not
guarantees of future performance and are subject to various factors which could
cause actual results to differ materially from these estimates. These factors
include changes in general economic and market conditions, and the development
of an interest rate environment that adversely affects the interest rate spread
or other income anticipated from our operations and investments. See "Risk
Factors" beginning at page 16 for a discussion of other factors that might cause
actual results to differ from such estimates.
The Stock Holding Company:
Capitol Federal Financial
700 Kansas Avenue
Topeka, Kansas 66603
Capitol Federal Financial is not currently an operating company and has
not engaged in any business to date. It will be formed as a federally chartered
corporation to be the mid-tier holding company for the Bank. The holding company
structure will provide greater flexibility in terms of operations, expansion and
diversification. See "Capitol Federal Financial" on pages 26 to 27.
The Bank:
Capitol Federal Savings and Loan Association
700 Kansas Avenue
Topeka, Kansas 66603
Capitol Federal Savings and Loan Association was originally chartered
in 1893. In 1938, we became a member of the Federal Home Loan Bank System and
obtained a federal charter. We are a community-oriented federal mutual savings
institution serving primarily the entire metropolitan areas of Topeka, Wichita,
Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the
metropolitan area of greater Kansas City through 24 full service and five
limited service banking offices. Generally, we provide financial services to
individuals and families. We emphasize residential mortgage lending, primarily
originating one- to four-family mortgage loans. Our deposits are insured up to
the limits set by the Federal Deposit Insurance Corporation. At September 30,
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1998, we had total assets of $5.31 billion, deposits of $3.89 billion, and total
equity of $662.3 million. See pages 27 to 28.
Financial and operational highlights of the Bank include the following:
Our strategy is to operate as an independent, retail oriented financial
institution dedicated to serving the needs of customers in our market areas. Our
commitment is to provide the broadest possible access to home ownership through
our residential lending programs. We also offer a variety of personal financial
products and services through our branch office network and have recently
emphasized the wholesale component of our operations.
Financial highlights of our strategy include:
o Single Family Portfolio Lending. The Bank is the largest
originator of one- to four-family residential mortgage loans in
the State of Kansas. Generally, we originate these loans for our
own portfolio, rather than for sale, and we service the loans we
originate. During fiscal year 1998, we originated $1.08 billion
of one- to four-family loans. At September 30, 1998, we had $3.50
billion of these loans, representing 93.5% of our total loan
portfolio.
o Commitment to Cost Control. We are very effective at controlling
our costs of operations. Lending and deposit support functions
are centralized for efficient processing, using technology to
increase productivity. Our average deposits per full service
branch at September 30, 1998 were over $150 million. As a result
of these efforts, our ratio of operating expenses to average
total assets was .97% for the year ended September 30, 1998 and
our efficiency ratio, a commonly used industry ratio measuring
the cost of producing each dollar of revenue, was 35.8%. These
ratios are both significantly better than peer group and national
averages.
o Strong Capital Position. Our policy has always been to protect
the safety and soundness of the Bank through conservative risk
management, balance sheet strength, consistent earnings and sound
operations. At September 30, 1998, our ratio of equity to total
assets was 12.5% and our return on average assets for the fiscal
year was 1.05%.
o Excellent Asset Quality. Through our commitment to single family
lending, we have very little credit risk and minimal
delinquencies. At September 30, 1998, our ratio of non-performing
assets to total assets was 0.15%.
o Wholesale Borrowings and Investments. In order to reduce our
interest rate risk we have borrowed money and invested in
adjustable rate mortgage-related securities. At September 30,
1998, we had $675.0 million in borrowings. See pages 45 to 49 for
a discussion of how these borrowings have reduced our interest
rate risk. We intend to extend this borrowing strategy to
leverage the capital we raise in the reorganization. See pages 17
to 18.
4
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The MHC:
Capitol Federal Savings Bank MHC
700 Kansas Avenue
Topeka, Kansas 66603
As part of the reorganization, we will organize the MHC as a federal
mutual holding company. Upon completion of the reorganization and the stock
issuance, including the proposed contribution of shares of common stock to the
charitable foundation, the MHC will own at least a majority (50.1 %) of the
issued and outstanding shares of Stock Holding Company common stock. As long as
they remain depositors of the Bank, persons who had membership or liquidation
rights with respect to the Bank as of the date of the reorganization will
continue to have these rights solely with respect to the MHC after the
reorganization.
The MHC's principal assets will be the shares of Stock Holding Company
common stock received in the reorganization. Immediately after completion of the
reorganization, it is expected that the MHC will not engage in any business
activity other than its investment in, and control of, more than a majority of
the issued and outstanding shares of common stock of the Stock Holding Company
and investing the funds retained by it. The MHC will be a mutual corporation
chartered under federal law and regulated by the OTS.
The Reorganization
On August 25, 1998, we adopted a Plan of Reorganization and Stock
Issuance Plan, which was subsequently amended, pursuant to which the Bank will
reorganize into the federal mutual holding company form of organization as a
wholly owned subsidiary of the Stock Holding Company, which in turn will be a
majority-owned subsidiary of the MHC. The Plan must be approved by members of
the Bank as of the voting record date established for a special meeting of
members to be called in order to consider the Plan. Following completion of the
reorganization, the Bank in its stock form will continue to conduct its business
and operations from the same offices and with the same personnel used prior to
the reorganization. The reorganization will not affect the balances, interest
rates or other terms of the Bank's loans or deposit accounts, and the deposit
accounts will continue to be insured by the FDIC to the same extent as they were
prior to the reorganization.
The Stock Issuance
The Stock Holding Company is offering between 32,136,106 and 43,478,261
shares of its common stock at $10.00 per share, subject to adjustment up to
50,000,000 shares of common stock, which will represent approximately 41.31% of
the Stock Holding Company's common stock to be outstanding upon completion of
the reorganization and stock issuance and the establishment of, and contribution
of shares to, the Capitol Federal Foundation. Any increase over 50,000,000
shares would require the approval of the OTS. You may not change or cancel any
stock order previously delivered to us as a result of an increase in the
offering within these limits.
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The corporate structure of the Bank, upon consummation of the
reorganization, the stock issuance and the proposed contribution of shares of
the Stock Holding Company's common stock to the Capitol Federal Foundation, is
diagramed below:
Total Public Shares
---------------------------------------------
CAPITOL FEDERAL SAVINGS MINORITY STOCKHOLDERS CAPITOL FEDERAL
BANK MHC FOUNDATION
- --------------------------------------------------------------------------------
57.03% of the 41.31% of the 1.65% of the
Common Stock Common Stock Common
Stock
- --------------------------------------------------------------------------------
CAPITOL FEDERAL FINANCIAL
- --------------------------------------------------------------------------------
100% of the Common Stock
- --------------------------------------------------------------------------------
CAPITOL FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
Stock Purchase Priorities. Shares of the Stock Holding Company common
stock will be offered on the basis of priorities. Certain depositors, as of the
June 30, 1997 eligibility record date, the December 31, 1998 supplemental
eligibility record date and the _____________, 1999 voting record date, and the
employee stock ownership plan established by us will receive subscription rights
to purchase shares of common stock. Any remaining shares not subscribed for may
be offered in a direct community offering or a public offering. Generally, you
may purchase up to $500,000 of common stock in the stock issuance. See pages 120
to 128.
Prohibition on Transfer of Subscription Rights. You may not sell or
assign your subscription rights. Any transfer of subscription rights is
prohibited by law and may result in the forfeiture of your subscription rights.
Stock Pricing and Number of Shares to be Issued in the Stock Issuance.
We set the purchase price per share of the common stock at $10.00. This is the
price most commonly used in recent years in stock offerings involving
reorganizations of mutual savings institutions to stock form. See pages 118 to
120.
The actual number of shares to be issued in the stock issuance will be
determined by us based upon an independent appraisal prepared by RP Financial,
an appraisal firm experienced in appraising financial institutions, of the
estimated pro forma market value of the common stock of the Stock Holding
Company, giving effect to the reorganization and the stock issuance. The
establishment of, and contribution to, the Capitol Federal Foundation had the
effect of reducing our market valuation. We have determined that the MHC, upon
consummation of the reorganization and the stock issuance and prior to the
contribution to the Capitol Federal Foundation, will own 57.03% of the issued
and outstanding shares of Stock Holding Company common stock. Accordingly, the
estimated offering
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range of the shares of common stock to be sold in the stock issuance is expected
to range from a minimum of 32,136,106 shares to a maximum of 43,478,261 shares.
The appraisal was based both upon our financial condition and results
of operations and upon the effect of the additional capital we will raise in the
stock issuance. The independent appraisal will be updated before we complete the
reorganization and stock issuance. Changes in market and financial conditions
and demand for the common stock may cause the estimated offering range to
increase by up to 15%, to $500,000,000. If this occurs, the maximum number of
shares that can be sold in the stock issuance can increase to 50,000,000 shares
(plus the 2,000,000 shares to be issued to the Capitol Federal Foundation). If
the estimated offering range is either below $321,361,060 or above $500,000,000,
then you will be notified and will have the opportunity to modify or cancel your
order. See pages 118 to 120.
The independent valuation prepared by RP Financial is not a
recommendation as to the advisability of purchasing the Stock Holding Company
common stock. Accordingly, you should not buy the Stock Holding Company common
stock based solely on the independent valuation.
Termination of the Offering. The subscription offering will terminate
at noon, Topeka, Kansas time, on ____________________, 1999. Any direct
community offering or public offering may terminate at any time without notice,
but no later than _________________, 1999, without approval by the OTS. If the
offering is not completed by ______________, 1999, all subscribers will be
notified and will be given the opportunity to cancel or modify their orders.
Benefits to Management and Employees from the Stock Issuance. Our
employees will participate in the stock issuance through individual purchases
and through our employee stock ownership plan, which is a type of retirement
plan. We also intend to implement a stock option plan and a restricted stock
plan, which may benefit the officers, employees and directors. If we adopt the
restricted stock plan, such individuals will be awarded stock at no cost to
them. We have no current intention to implement any stock option plan or
restricted stock plan less than six months from the closing of the
reorganization and stock issuance, subject to continuing OTS jurisdiction.
If a determination is made to implement a stock option plan or
restricted stock plan, it is anticipated that these plans will be submitted to
stockholders for their consideration at which time stockholders would be
provided with detailed information regarding the plans. If the plans are
approved and effected, they will have a dilutive effect on the Company's
stockholders as well as affect the Stock Holding Company's net income and
stockholders' equity, although the actual results cannot be determined until the
plans are implemented. See page 38, pages 18 to 19, and pages 104 to 105 for
additional information on the effects of the adoption of a stock option plan and
restricted stock plan.
The Charitable Foundation. To further our commitment to the local
communities we serve, we intend to establish the Capitol Federal Foundation as
part of the reorganization and stock issuance. We will make a contribution to
the Capitol Federal Foundation, in the form of shares of common stock, equal to
4% of the shares issued in the stock issuance plus a cash contribution equal to
the value of the common stock contributed. The Foundation will be dedicated to
supporting
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charitable causes in the Bank's primary market areas. Due to the issuance of
shares of common stock to the Foundation, persons purchasing shares in the stock
issuance will have their ownership and voting interest in the Stock Holding
Company diluted by 0.69%. We will incur an expense equal to the full amount of
the contribution to the Capitol Federal Foundation, offset in part by a tax
benefit, during the quarter in which the contribution is made. This expense will
reduce our earnings.
See pages 19 to 22, pages 42 to 43 and pages 113 to 117.
Use of the Proceeds Raised from the Sale of Holding Company Common
Stock in the Stock Issuance. We will use the net proceeds received from the
stock issuance as follows. The percentages used are estimates.
o 8.0% will be loaned to the employee stock ownership plan to fund
its purchase of common stock.
o $50.0 million, after funding the loan to the employee stock
ownership plan and the cash contribution to the Capitol Federal
Foundation, will be retained by the Stock Holding Company and
initially be placed in short-term investments, which may later be
used as a possible source of funds for the payment of dividends
to stockholders, for stock repurchases and for other general
corporate purposes.
o The remainder will be used to buy all of the capital stock of the
Bank.
The proceeds received by the Bank will increase our capital and will be
available for expansion of our retail banking franchise through future lending
and investment, in addition to general corporate purposes. Assuming appropriate
market conditions, however, the Bank intends to leverage these proceeds through
the use of additional borrowings in its efforts to maintain net interest income,
by increasing the level of the Bank's investments in investment and
mortgage-related securities, consistent with its interest rate risk management
strategy. See pages 28 and 30.
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the end of the offering period, no prospectus will be mailed any later
than five days prior to that date or hand delivered any later than two days
prior to that date. We will accept for processing only orders submitted on
original order forms. Copies of order forms and order forms unaccompanied by a
properly executed certification form will not be accepted. Payment by check,
money order, cash or debit authorization to an existing account at the Bank must
accompany the order form. No wire transfers will be accepted.
In order to ensure that each person or entity is properly identified as
to that party's stock purchase priorities, the party must list all deposit
accounts on the order form, giving all names on each account and the correct
account numbers. See pages 129 to 130.
Dividends
We currently plan to pay a quarterly cash dividend with an annualized
rate of $.40 per share starting after the first quarter following the
consummation of the reorganization and stock issuance. Further dividends will
depend upon a number of factors, including our financial condition and results
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of operations, tax considerations, statutory and regulatory limitations, and
general economic conditions. There can be no assurances that dividends will be
paid or that, if paid, dividends will not be reduced or eliminated in future
periods. We will not pay or undertake any action to affect a return of capital
distribution for one year following the stock issuance. See page 30.
Waivers of Dividends by the MHC
The OTS has allowed mutual holding companies to waive cash dividends on
a case-by-case basis, although there can be no assurance that the OTS will
permit future dividend waivers. The Board of Directors of the MHC, which
initially will consist of the same individuals as the Board of Directors of the
Bank, will determine whether the MHC will waive dividends as they are declared
by the Stock Holding Company. The MHC may elect to receive dividends and to use
the dividends for general corporate purposes and to fund the purchase of Stock
Holding Company common stock in the open market, or for the payment of
miscellaneous expenses. Any waiver of dividends by the MHC may result in an
adjustment to the ratio pursuant to which shares of Stock Holding Company common
stock are exchanged for shares of a stock holding company if the MHC converts
from the mutual to stock form of organization. This adjustment would have the
effect of diluting the ownership interest of stockholders other than the MHC.
The Board of Directors of the MHC presently intends to waive the receipt of
dividends declared by the Stock Holding Company and to seek OTS approval to do
so.
Conversion of the MHC to Stock Form
Although not currently contemplated, the MHC may convert to the stock
form of organization in the future, subject to OTS approval. If the MHC converts
to stock form, the shares of Stock Holding Company common stock not held by the
MHC will either be exchanged for shares of the stock holding company formed in
the MHC conversion or purchased by the MHC at the closing of the MHC conversion.
Market for Common Stock
We expect the Stock Holding Company common stock to be listed on the
Nasdaq National Market under the symbol "CFFN." KBW has indicated its intention
to act as a market maker in the Common Stock following the consummation of the
reorganization. Furthermore, KBW has indicated to the Stock Holding Company that
it will be able to secure at least two additional market makers for the common
stock as required for Nasdaq National Market listing. Persons purchasing shares
may not be able to sell their shares at a price equal to or above $10.00. See
pages 24 to 25 and page 34.
Important Risks in Owning Capitol Federal Financial's Common Stock
Before you decide to purchase stock in the stock issuance, you should
read the "Risk Factors" section on pages 16 to 26 of this document.
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GLOSSARY
ARM Adjustable Rate Mortgage.
Associate The term "Associate" of a person is defined to mean (i) any
corporation or organization (other than the Bank or its
subsidiaries, the Stock Holding Company or the MHC) of which
such person is a director, officer, partner or 10%
shareholder; (ii) any trust or other estate in which such
person has a substantial beneficial interest or serves as
trustee or in a similar fiduciary capacity; provided, however
that such term shall not include any employee stock benefit
plan of the Stock Holding Company or the Bank in which such a
person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person, or relative of such spouse,
who either has the same home as such person or who is a
director or officer of the Bank or its subsidiaries, the Stock
Holding Company or the MHC.
Bank Capitol Federal Savings and Loan Association, in mutual form,
and Capitol Federal Savings Bank in stock form.
Code The Internal Revenue Code of 1986, as amended.
Common Stock Common stock, par value $.01 per share of Capitol Federal
Financial.
Community Offering of shares of Common Stock not subscribed for in the
Offering Subscription Offering.
CRA Community Reinvestment Act.
Eligible Account Depositors of the Bank with account balances of at least
Holders $50.00 as of the close of business on June 30, 1997.
ERISA Employment Retirement Income Security Act of 1974, as amended.
Estimated Estimated value of the Common Stock sold in the Offerings,
Offering Range ranging from $321,361,060 to $434,782,610.
Estimated Estimated pro forma market value of the Bank on a fully
Valuation Range converted basis.
ESOP Capitol Federal Financial Employee Stock Ownership Plan.
Exchange Act Securities Exchange Act of 1934, as amended.
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FASB Financial Accounting Standards Board.
FDIA Federal Deposit Insurance Act.
FDIC Federal Deposit Insurance Corporation.
FHLB Federal Home Loan Bank.
FHLMC Freddie Mac.
FNMA Fannie Mae.
Foundation Capitol Federal Foundation.
FRB Federal Reserve Board.
GAAP Generally accepted accounting principles.
HOLA Home Owners' Loan Act.
IRS Internal Revenue Service.
KBW Keefe, Bruyette & Woods, Inc.
MHC Capitol Federal Savings Bank MHC, a federally chartered mutual
holding company that will be the majority owner of the Stock
Holding Company after the Reorganization.
Minority All stockholders who purchase shares of Common Stock except
Stockholders the MHC, which will own a majority of the Common Stock of the
Stock Holding Company.
NASD National Association of Securities Dealers, Inc.
NPV Net portfolio value.
OCC Office of the Comptroller of the Currency.
Offerings The offering of between 32,136,106 and 50,000,000 shares of
Capitol Federal Financial common stock at $10.00 per share
through the Subscription Offering, the Community Offering and
the Public Offering.
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Other Members Depositors and certain borrowers of the Bank as of the close
of business on _______ 1999, other than Eligible Account
Holders or Supplemental Eligible Account Holders.
OTS Office of Thrift Supervision.
Plan or Plan Plan of Capitol Federal Savings and Loan Association to
Reorganization reorganize into a three-tier mutual holding company structure,
and Stock as a wholly owned subsidiary of the Stock Holding Company,
Issuance Plan which in turn will be a majority-owned subsidiary of the MHC,
and the issuance of less than 50.0% of the Common Stock to the
public and the Foundation.
Public Offering The offering of shares of Common Stock to members of the
general public on a best efforts basis by KBW, who may enter
into agreements with selected broker-dealers to assist in this
offering.
Purchase Price $10.00 per share of Common Stock.
QTL Qualified thrift lender.
REO Real estated owned.
Reorganization The restructuring of the Bank pursuant to the Plan of
Reorganization and Stock Issuance Plan.
ROA Return on average assets.
ROE Return on average equity.
RP Financial RP Financial, LC., independent appraiser.
RRP The Capitol Federal Financial Recognition and Retention Plan
subject to approval of the Stock Holding Company's
stockholders.
SAIF Savings Association Insurance Fund of the FDIC.
SEC U.S. Securities and Exchange Commission.
Securities Act Securities Act of 1933, as amended.
SFAS Statement of Financial Accounting Standard.
Stock Shares contributed to the Capitol Federal Foundation.
Contrtibution
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Stock Holding Capitol Federal Financial, the federally chartered mid-tier
Company holding company of the Bank after the Reorganization.
Stock Issuance The issuance of shares in the Offerings, pursuant to the Stock
Issuance Plan.
Stock Option The Capitol Federal Financial Stock Option Plan subject to
Plan approval of the Stock Holding Company's stockholders.
Subscription Offering of non-transferable rights to subscribe for the
Offering Common Stock, in order of priority, to Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders,
Other Members and Directors, Officers and Employees.
Supplemental Depositors of the Bank with account balances of at least
Eligible $50.00 as of the close of business on December 31, 1998.
Account Holders
Voting Record The close of business on ______ _, 1999, the date for
Date determining voting members entitled to vote at the special
meeting.
Webb Charles Webb & Company, a division of KBW.
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SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended September 30 is derived from our audited financial
statements. The following information is only a summary and you should read it
in conjunction with our financial statements and notes beginning on page F-2.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets......................................... $5,314,901 $4,923,657 $4,453,672 $4,350,293 $4,009,047
Loans receivable, net................................ 3,710,252 3,322,102 2,944,906 2,751,634 2,288,472
Securities purchased under agreement to resell....... 235,000 -- -- -- --
Investment securities, held-to-maturity.............. 160,569 585,394 717,348 671,227 691,355
Mortgage-related securities:
Available-for-sale, at market value............... 747,991 754,179 607,738 -- --
Held-to-maturity.................................. 320,379 120,007 17,006 771,163 884,868
Federal Home Loan Bank stock......................... 43,584 40,398 37,752 35,415 35,415
Deposits............................................. 3,894,180 3,787,123 3,740,718 3,673,630 3,447,628
Borrowings........................................... 675,000 450,000 75,000 75,000 --
Equity............................................... 662,332 604,786 547,422 515,882 485,508
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
<S> <C> <C> <C> <C> <C>
Total interest and dividend income................... $363,644 $330,097 $306,389 $275,467 $241,793
Total interest expense............................... 234,897 207,457 200,401 193,197 151,358
--------- --------- --------- --------- ---------
Net interest income............................... 128,747 122,640 105,988 82,270 90,435
Provision (recovery) for loan losses................. 3,362 56 865 -- (1,986)
--------- --------- --------- --------- ---------
Net interest income after provision (recovery)
for loan losses.................................. 125,385 122,584 105,123 82,270 92,421
Fees and service charges............................. 8,398 7,450 6,966 4,898 4,787
Gain on sales of loans, mortgage-related
securities and investment securities................ -- -- -- -- 3,972
Other non-interest income............................ 4,455 3,637 4,431 6,329 5,929
--------- --------- --------- --------- ---------
Total non-interest income......................... 12,853 11,087 11,397 11,227 14,688
Total non-interest expense........................ 49,466 45,276 71,505(1) 43,266 42,914
--------- --------- --------- --------- ---------
Income before income tax expense.................. 88,772 88,395 45,015 50,231 64,195
Income tax expense................................... 34,781 35,691 18,393 19,857 24,359
--------- --------- --------- --------- ---------
Net income........................................ $ 53,991 $ 52,704 $ 26,622 $ 30,374 $ 39,836
========= ========= ========= ========= =========
</TABLE>
- -------------
(1) Included $24.2 million for the one-time SAIF assessment.
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996(1) 1995 1994
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) .................. 1.05% 1.12% 0.60% 0.73% 1.01%
Return on equity (ratio of net income 52
to average equity) ..................... 8.52 9.15 5.01 6.07 8.56
Interest rate spread information:
Average during period .................. 1.87 1.95 1.71 1.13 1.54
End of period .......................... 1.83 1.97 1.86 1.39 1.46
Net interest margin(2) .................. 2.55 2.66 2.46 2.01 2.33
Ratio of operating expense to average
total assets ........................... 0.97 0.97 1.62 1.04 1.08
Ratio of average interest-earning assets to
average interest-bearing liabilities ... 1.15 1.15 1.14 1.14 1.13
Efficiency ratio(3) ..................... 35.80 34.63 62.51 47.43 41.74
Asset Quality Ratios:
Non-performing assets to total assets at
end of period ........................... 0.15 0.18 0.17 0.41 0.21
Non-performing loans to total loans ...... 0.17 0.18 0.14 0.15 0.26
Allowance for loan losses to non-performing
loans ................................... 79.96 26.83 39.67 32.35 65.40
Allowance for loan losses to loans
receivable, net ......................... 0.13 0.05 0.05 0.05 0.17
Capital Ratios:
Equity to total assets at end of period .. 12.46 12.28 12.29 11.86 12.11
Average equity to average assets ......... 12.38 12.13 12.02 11.98 11.75
Other Data:
Number of full-service offices ........... 24 24 23 23 23
Number of limited service offices ........ 5 3 2 1 1
</TABLE>
- ---------------
(1) Fiscal 1996 results include the effect of a one-time SAIF recapitalization
assessment of approximately $24.2 million, or $14.5 million net of taxes.
Excluding this non-recurring assessment, return on average assets would
have been 0.93%, return on average equity would have been 7.73%, the ratio
of operating expense to average total assets would have been 1.08% and the
efficiency ratio would have been 41.39%.
(2) Net interest income divided by average interest earning assets.
(3) Total other operating expense, excluding real estate owned and repossessed
property expense, as a percentage of net interest income and total other
operating income, excluding net securities transactions.
15
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be carefully considered by investors in deciding whether
to make an investment in the Common Stock offered hereby.
Control of the Stock Holding Company by the MHC
The Stock Holding Company is required to be a majority-owned subsidiary
of the MHC as long as the MHC remains in existence. Following the Stock Issuance
and assuming the contribution to the Foundation of 4.0% of the shares of Common
Stock sold in the Offerings, the MHC will own 57.0% of the outstanding Common
Stock. Holders of deposit accounts in the Bank will be entitled to vote on all
matters presented to the members of the MHC for resolution by vote, including,
without limitation, election of directors of the MHC. Prior to the
Reorganization, members of the Bank generally granted revocable proxies to the
Board of Directors of the Bank, and members of the MHC may grant proxies to the
Board of Directors of the MHC after the Reorganization. According to regulations
of the OTS, the revocable proxies that members of the Bank have granted to the
Board of Directors of the Bank, which confer on the Board of Directors of the
Bank general authority to cast a member's vote on any and all matters presented
to the members, shall be deemed to cover the member's votes as members of the
MHC, and such authority shall be conferred on the Board of Directors of the MHC.
The use of such proxies will facilitate control over the MHC by the MHC's Board
of Directors and thereby control of the Stock Holding Company by virtue of the
MHC's ownership of a majority of the outstanding shares of Common Stock. The MHC
will be able to elect all of the members of the Board of Directors of the Stock
Holding Company and will be able to control the outcome of most matters
presented to the stockholders of the Stock Holding Company for resolution by
vote, excluding certain matters related to stock compensation plans and certain
votes regarding a conversion to stock form by the MHC. Therefore, purchasers of
the Common Stock in the Offerings will be minority stockholders of the Stock
Holding Company ("Minority Stockholders") and, as such, will not be able to
elect directors or effect a change of control in management of the Stock Holding
Company. The Board of Directors of the Stock Holding Company has no intention of
completing a full conversion. See "MHC Conversion to Stock Form."
No assurances can be given that the MHC or the Stock Holding Company
will not take action which the Minority Stockholders believe to be contrary to
their interests at some future time. For example, the MHC or the Stock Holding
Company could revise the Bank's dividend policy, prevent a conversion
transaction or defeat a candidate for the Bank's Board of Directors or other
proposals put forth by the Minority Stockholders. Moreover, the MHC's ownership
of a majority of the outstanding shares of Common Stock, the MHC's mutual form
of organization and, to a lesser extent, provisions in the Stock Holding
Company's Charter and Bylaws that eliminate cumulative voting for the election
of directors, authorize the issuance of additional amounts of capital stock and
require staggered terms for members of the Board of Directors, are likely to
perpetuate existing management and directors and discourage certain transactions
that involve an actual or threatened change in control of the Stock Holding
Company. See "Certain Restrictions on Acquisition of the Stock Holding Company
and the Bank."
16
<PAGE>
Waiver of Dividends by the MHC
The Board of Directors of the MHC will determine whether the MHC will
waive the receipt of dividends declared by the Stock Holding Company each time
the Stock Holding Company declares a dividend. The Board of Directors of the MHC
presently intends to waive the receipt of dividends declared by the Stock
Holding Company. OTS regulations require the MHC to notify the OTS of any
proposed waiver of the right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not to object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the subsidiary holding company is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company is
considered to be a restriction on the stockholders' equity of the subsidiary
holding company, which restriction, if material, is disclosed in the public
financial statements of the subsidiary holding company as a note to the
financial statements; (iii) the amount of any dividend waived by the mutual
holding company is available for declaration as a dividend solely to the mutual
holding company, and, in accordance with Statement of Financial Accounting
Standards No. 5, where the subsidiary holding company determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the subsidiary holding
company in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
transaction takes into account the amount of the dividends waived by the mutual
holding company. In addition, the OTS has announced that the dividends waived by
mutual holding companies will affect the ratio pursuant to which shares of
common stock of a subsidiary holding company held by minority stockholders would
be exchanged for shares of common stock of the converted holding company in a
conversion transaction. The OTS will not permit a pro rata exchange if the
mutual holding company has waived the receipt of cash dividends by the
subsidiary holding company. Accordingly, the precise treatment of any conversion
transaction cannot be assured. Any waiver of dividends by the MHC is likely to
result in an adjustment to the ratio pursuant to which shares of Common Stock
are exchanged for shares of the converted MHC in a conversion transaction, which
adjustment will have the effect of diluting Minority Stockholders' interests.
The Board of Directors of the MHC has no intention of converting to stock form.
See "MHC Conversion to Stock Form."
Impact of Wholesale Leverage Strategy
The Bank intends to use the net proceeds from the Stock Issuance to
increase its existing wholesale leveraging activities. The Bank borrows funds
either through reverse repurchase agreements or FHLB advances and generally uses
those funds to purchase adjustable rate mortgage-related securities at a
positive spread over the cost of the borrowings. The Bank attempts to shorten
the expected duration of its assets and lengthen the maturity of its liabilities
through this strategy, while increasing net interest income. The Bank intends to
use this strategy to purchase up to $3.0 billion in mortgage-related securities
from time to time over the three year period following completion of the
Reorganization and Stock Issuance. There can be no assurances that the Bank will
be able to continue to implement this strategy successfully, that the Bank will
be able to purchase adjustable-rate mortgage-related securities at an acceptable
positive spread over the cost of
17
<PAGE>
borrowings, or that the anticipated duration match of the mortgage-related
securities and the borrowings will be realized. If the mortgage-related
securities acquired ultimately have a significantly different average life than
the term of the borrowings, and/or the shape of the yield curve changes
unexpectedly, the interest rate risk exposure of the Bank could increase
significantly and the interest rate spread and net interest income could
decrease significantly.
Potential Low Return on Equity Following the Reorganization; Uncertainty as to
Future Growth Opportunities
At September 30, 1998, the Bank's ratio of equity to assets was 12.5%.
The Stock Holding Company's equity position will be significantly increased as a
result of the Stock Issuance. On a pro forma basis as of September 30, 1998,
assuming the sale of the shares of Common Stock at the maximum of the Estimated
Offering Range, the Stock Holding Company's ratio of equity to assets would be
18.18%. The Stock Holding Company's ability to leverage this capital will be
significantly affected by industry competition for loans and deposits. The Stock
Holding Company currently anticipates that it will take time to prudently deploy
such capital. As a result, the Stock Holding Company's return on equity
initially is expected to be below the industry average after the Reorganization.
In an effort to fully deploy post-Reorganization capital, in addition
to attempting to increase its loan and deposit growth and execute its wholesale
growth strategy outlined under "-Impact of Wholesale Leverage Strategy" and "Use
of Proceeds", the Stock Holding Company may seek to expand its banking franchise
by establishing new branch offices and/or by acquiring other financial
institutions or branches in the Bank's existing or contiguous market areas. The
Bank's total assets and total deposits increased by 19.3% and 4.1%,
respectively, from September 30, 1996 to September 30, 1998. The Stock Holding
Company's ability to grow through selective acquisitions of other financial
institutions or branches of such institutions will be dependent on successfully
identifying, acquiring and integrating such institutions or branches. There can
be no assurance the Stock Holding Company will be able to generate internal
growth, successfully execute its wholesale growth strategy or identify
attractive acquisition candidates, acquire such candidates on favorable terms or
successfully integrate any acquired institutions or branches into the Stock
Holding Company. Neither the Stock Holding Company nor the Bank has any specific
plans, arrangements or understandings regarding any such expansions or
acquisitions at this time, nor have criteria been established to identify
potential candidates for acquisition.
Dilutive Effect of Issuance of Additional Shares
If the RRP is approved by stockholders of the Stock Holding Company,
the RRP intends to acquire an amount of Common Stock equal to 4% of the shares
of Common Stock sold in the Offerings. If such shares are acquired at a per
share price equal to the Purchase Price, the cost of such shares would be $17.4
million, assuming the number of shares of Common Stock sold are equal to the
maximum of the Estimated Offering Range. The value of shares awarded under the
RRP will be expensed as they are earned by plan participants. Such shares of
Common Stock may be acquired in the open market with funds provided by the Stock
Holding Company, if permissible, or from authorized but unissued shares of
Common Stock. In the event that the RRP acquires authorized but unissued shares
of Common Stock from the Stock Holding Company, the interests of existing
18
<PAGE>
stockholders will be diluted. Assuming the issuance of 43,478,261 shares of
Common Stock and the contribution of 1,739,130 shares of Common Stock to the
Foundation, the issuance of authorized but unissued shares of Common Stock to
such plan in an amount equal to 4% of the shares of Common Stock sold in the
Offerings would dilute the voting interests of existing stockholders by
approximately 1.65%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management - Benefits - Other Stock Benefit Plans."
If the Stock Option Plan is approved by stockholders of the Stock
Holding Company, the Stock Holding Company intends to reserve for future
issuance pursuant to such plan a number of shares of Common Stock equal to an
aggregate of 10% of the shares of Common Stock sold (4,347,826 shares, based on
the sale of the maximum 43,478,261 shares). Such shares may be authorized but
previously unissued shares, treasury shares or shares purchased by the Stock
Holding Company in the open market or from private sources. Assuming the sale of
43,478,261 shares and the contribution of 1,739,130 shares of Common Stock to
the Foundation, if only authorized but previously unissued shares are used under
such plan, the issuance of the total number of shares available under such plan
would dilute the voting interests of existing Minority Stockholders by
approximately 0.69%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management - Benefits."
Establishment of the Foundation
Pursuant to the Plan, the Stock Holding Company intends to voluntarily
establish a charitable foundation in connection with the Reorganization. The
Plan provides that the Foundation will be incorporated under Kansas law as a
nonstock corporation and will be funded with cash and shares of Common Stock
contributed by the Stock Holding Company. The contribution of Common Stock to
the Foundation will be dilutive to the interests of stockholders and will have
an adverse impact on the reported earnings of the Stock Holding Company in
fiscal 1999, the year in which the Foundation will be established.
Dilution of Stockholders' Interests. The Stock Holding Company proposes
to fund the Foundation with a contribution in the form of shares of Common Stock
equal to 4.0% of the shares of Common Stock sold in the Offerings plus a cash
contribution equal to the value of the Common Stock contributed. Assuming the
sale of the shares of Common Stock at the maximum of the Estimated Offering
Range, upon completion of the Reorganization and establishment of the
Foundation, the Stock Holding Company will have 105,239,130 shares of Common
Stock issued and outstanding of which the Foundation will own 1,739,130 shares
of Common Stock, or 1.65%, and the Minority Stockholders will own 43,478,261
shares, or 41.31%. As a result, persons purchasing shares of Common Stock in the
Offerings will have their ownership and voting interests in the Stock Holding
Company diluted. See "Pro Forma Data."
Impact on Earnings. The contribution of Common Stock to the Foundation
will have a significant adverse impact on the Stock Holding Company's and the
Bank's earnings in the year in which the contribution is made. The Stock Holding
Company will recognize the full expense of the amount of the contribution of
Common Stock and cash to the Foundation in the quarter in which it occurs, which
is expected to be the third quarter of fiscal 1999. The contribution expense
will be
19
<PAGE>
partially offset by the tax benefit related to the expense. The Stock Holding
Company and the Bank have been advised by their independent tax advisors that
the contribution to the Foundation will be tax deductible, subject to an annual
limitation based on 10% of the Stock Holding Company's consolidated annual
taxable income. Assuming a contribution of $34.8 million in cash and Common
Stock, the Stock Holding Company estimates a net tax effected expense of $21.6
million (based on a 38.0% tax rate). If the Foundation had been established at
September 30, 1998, the Bank would have reported net income of $32.4 million for
the year ended September 30, 1998 rather than reporting net income of $54.0
million. Management cannot predict earnings for fiscal 1999, but expects that
the establishment and funding of the Foundation will have a significant adverse
impact on the Stock Holding Company's earnings for such year.
Tax Considerations. The Stock Holding Company and the Bank have been
advised by their independent tax advisors that an organization created for the
above-described purposes would qualify as a Section 501(c)(3) exempt
organization under the Internal Revenue Code of 1986, as amended (the "Code"),
and would be classified as a private foundation. The Foundation will submit a
request to the IRS to be recognized as an exempt organization. The Stock Holding
Company and the Bank have received an opinion of their independent tax advisors
that the Foundation would qualify as a Section 501(c)(3) exempt organization
under the Code, except that such opinion does not consider the impact of the
condition expected to be required by regulatory authorities that Common Stock
issued to the Foundation be voted in the same ratio as all other shares of the
Stock Holding Company's Common Stock on all proposals considered by stockholders
of the Stock Holding Company. See "The Reorganization and Stock Issuance
- -Establishment of the Foundation-Regulatory Conditions Imposed on the
Foundation." Consistent with this condition, in the event that the Stock Holding
Company or the Foundation receives an opinion of its legal counsel that
compliance with the voting restriction would (i) cause a violation of Kansas law
and the OTS determines that federal law would not preempt the application of the
laws of Kansas to the Foundation, (ii) have the effect of causing the Foundation
to lose its tax-exempt status, or otherwise have a material and adverse tax
consequence on the Foundation or (iii) subject the Foundation to an excise tax
under Section 4941 of the Code, the OTS shall waive such voting restriction upon
submission of a legal opinion by the Stock Holding Company or the Foundation
that is satisfactory to the OTS. The independent tax advisor's opinion further
provides that there is a position that the Stock Holding Company's contribution
of its own stock to the Foundation would not constitute an act of self-dealing,
and that the Stock Holding Company may be entitled to a deduction in the amount
of the fair market value of the stock and cash at the time of the contribution.
The deductibility of the contribution is further subject to an annual limitation
based on 10% of the combined taxable income of the Stock Holding Company and the
Bank's taxable income. The Stock Holding Company, however, would be able to
carryforward any unused portion of the deduction for five years following the
fiscal year of the contribution. Thus, while the Stock Holding Company would
have generated a tax benefit of approximately $13.2 million in fiscal 1998
(based upon a contribution of $34.8 million of Common Stock and cash and the
Bank's pre-tax income for fiscal 1998), as a result of the limitation on
deductible amounts, the Stock Holding Company expects to carry over the excess
contribution in the five following years. The Stock Holding Company estimates
that for federal income tax purposes, a substantial portion of the deduction
should be deductible over the six-year period. Although the Stock Holding
Company and the Bank have received an opinion of their independent tax advisors
that the Stock Holding Company may be entitled to the deduction of the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation
20
<PAGE>
as a Section 501(c)(3) exempt organization or that the deduction will be
permitted. In such an event, the Stock Holding Company's tax benefit related to
the Foundation may not ultimately be realized.
The Foundation will receive working capital from any dividends that may
be paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets.
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Reorganization. The establishment of the
Foundation was taken into account by RP Financial in determining the estimated
pro forma market value of the shares of Common Stock. The aggregate price of the
shares of Common Stock being offered in the Offerings is based upon the
independent appraisal conducted by RP Financial of the estimated pro forma
market value of the Common Stock. The pro forma aggregate price of the shares of
Common Stock being offered for sale in the Offerings is currently estimated to
be between $321.4 million and $434.8 million, with a midpoint of $378.1 million.
The pro forma price to book ratio and the pro forma price to earnings ratio, at
and for the year ended September 30, 1998, are 101.83% and 16.67x, respectively,
at the maximum of the Estimated Offering Range. In the event that the
Reorganization and Stock Issuance did not include the Foundation, RP Financial
has estimated that the estimated pro forma market value of the shares of Common
Stock sold in the Offerings would be $483.1 million at the maximum based on a
pro forma price to book ratio and the pro forma price to earnings ratio of
97.66% and 15.87x, respectively. Assuming the Subscription Offering closes at
the maximum of the Estimated Offering Range, the contribution to the Foundation
would amount to 1,739,130 shares of Common Stock (with a value of $17,391,300
based on the Purchase Price) and $17,391,300 in cash, and the amount of the
shares of Common Stock sold would be $48.3 million less than the amount which
would have been sold without the Foundation based on the estimate provided by RP
Financial. Accordingly, certain account holders of the Bank who subscribe to
purchase shares of Common Stock in the Subscription Offering would receive fewer
shares depending on the size of a depositor's stock order and the amount of the
account holder's qualifying deposits in the Bank and the overall level of
subscriptions. See "Comparison of Valuation and Pro Forma Information with No
Foundation." This estimate by RP Financial was prepared solely for purposes of
providing Eligible Account Holders and subscribers with information with which
to make an informed decision on the Reorganization.
The decrease in the amount of shares of Common Stock being offered as a
result of the contribution of Common Stock to the Foundation will not have a
significant effect on the Stock Holding Company or the Bank's capital position.
The Bank's regulatory capital is in excess of its regulatory capital
requirements and will further exceed such requirements following the
Reorganization and Stock Issuance. The Bank's tangible and core capital ratios
at September 30, 1998 would be 16.67% and its risk-based capital ratio would be
38.93%, respectively, and on a consolidated basis, the Stock Holding Company's
pro forma stockholders' equity would be $1.03 billion, or approximately 18.18%
of pro forma consolidated assets, assuming the sale of shares of Common Stock at
the maximum of the Estimated Offering Range. Pro forma stockholders' equity
21
<PAGE>
per share and pro forma diluted net earnings per share would be $9.82 and $0.60,
respectively. If the Foundation were not being established in the
Reorganization, based on the RP Financial estimate, the Stock Holding Company's
pro forma stockholders' equity would be approximately $1.08 billion, or
approximately 18.84% of pro forma consolidated assets at the maximum of the
Estimated Offering Range, and pro forma stockholders' equity per share and pro
forma net earnings per share would be $9.39 and $0.55, respectively. See
"Comparison of Valuation and Pro Forma Information with No Foundation."
Potential Challenges. To date, there has been limited precedent with
respect to the establishment and funding of a charitable foundation as part of a
mutual holding company reorganization and stock issuance. In addition,
establishment and funding of the Foundation will require the OTS to grant the
Stock Holding Company and the Bank waivers from its regulations. As such, the
Foundation and the OTS's non-objection to the Reorganization may be subject to
potential challenges with respect to, among other things, the Stock Holding
Company's and the Bank's ability to establish the Foundation, notwithstanding
that the Board of Directors of the Bank and the Stock Holding Company have
carefully considered the various factors involved in the establishment of the
Foundation in reaching their determination to establish the Foundation as part
of the Reorganization, and/or with respect to the OTS' authority to grant the
waivers necessary to establish the Foundation. See "The Reorganization and Stock
Issuance - Establishment of the Foundation-Purpose of the Foundation." If
challenges were to be instituted seeking to require the Bank and the Stock
Holding Company to eliminate establishment of the Foundation in connection with
the Reorganization, no assurances can be made that the resolution of such
challenges would not result in a delay in the consummation of the Reorganization
or that any objecting persons would not be ultimately successful in obtaining
such removal or other relief against the Bank and the Stock Holding Company. In
addition, if the Bank and the Stock Holding Company are forced to eliminate the
Foundation, it could affect the amount of orders received in the Offerings and,
if the number of shares of Common Stock subscribed for times the Purchase Price
would be either below the minimum or more than 15% above the maximum of the
Estimated Offering Range, then the Stock Holding Company may be required to
resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the special meeting. The Foundation will be considered as
a separate matter from approval of the Plan. If the Bank's members approve the
Plan, but not the establishment of the Foundation, the Bank intends to complete
the Reorganization and Stock Issuance without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the shares of Common Stock being offered for sale in the
Offerings since the Estimated Offering Range, as set forth herein, takes into
account the proposed contribution to the Foundation. If the pro forma market
value of the Stock Holding Company without the Foundation is either greater than
$555.6 million or less than $357.1 million or if the OTS otherwise requires a
resolicitation of subscribers, the Bank will establish a new Estimated Offering
Range and commence a resolicitation of subscribers (i.e., subscribers will be
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest). Any change in the Estimated Offering Range must be approved by
the OTS. See "The Reorganization and Stock Issuance -Stock Pricing and Number of
Shares to be Issued."
22
<PAGE>
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The operations of depository institutions, including the Bank, are
substantially dependent on net interest income, which is the difference between
the interest income earned on its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Like most savings
institutions, the Bank's earnings are affected by changes in market interest
rates, and other economic factors beyond its control.
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. The relationship of short-term interest rates to long-term interest rates
may also impact the Bank's net interest income. The Bank attempts to reduce the
vulnerability of its operations to changes in interest rates by maintaining
significant amounts of liquid assets and assets with relatively short estimated
lives. Based upon certain repricing assumptions, the Bank's interest-earning
liabilities repricing or maturing within one year exceeded its interest-bearing
assets with similar characteristics by $204.2 million or 3.8% of total assets.
Accordingly, an increase in interest rates generally would result in a decrease
in the Bank's average interest rate spread and net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management."
In addition to affecting interest income and expense, changes in
interest rates also can affect the value of the Bank's interest-earning assets,
which are comprised of fixed and adjustable-rate instruments, and the ability to
realize gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At September
30, 1998, the Bank had $748.0 million of securities available for sale ($284.5
million of which had fixed-rates of interest) and $15.0 million of loans
available for sale (all of which had fixed-rates of interest).
Changes in interest rates also can affect the average life of loans and
mortgage-related and other securities. Decreases in interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-related
securities, as borrowers refinanced to reduce borrowing costs. Under these
circumstances, the Bank is subject to reinvestment risk to the extent that it is
not able to reinvest such prepayments at rates which are comparable to the rates
on the maturing loans or securities. The Bank also has utilized FHLB advances as
an additional source of funds. Such advances often have features permitting them
to be called by the FHLB which subjects the Bank to interest rate risk if it is
required to replace such borrowings at higher rates of interest. See "Business
of the Bank - Lending Activities."
Strong Competition Within the Bank's Market Area
Competition in the banking and financial services industry is intense.
In its market area, the Bank competes with other savings institutions,
commercial banks, credit unions and mortgage bankers operating locally and
elsewhere. Certain of these competitors have substantially greater resources
than the Bank and may offer certain services that the Bank does not or cannot
provide. The
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profitability of the Bank depends upon its continued ability to successfully
compete in its market area.
Geographic Concentration of Loans
The market areas of the Bank are comprised primarily of the entire
metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina,
Kansas and a portion of the metropolitan area of greater Kansas City. The real
estate loans of the Bank are primarily secured by properties located in such
market areas and its non-real estate loans are primarily made to local
residents. Accordingly, the asset quality of the loan portfolios of the Bank are
highly dependent upon the economy and the unemployment rate in these market
areas. While the economy in Kansas generally has been stable in recent years,
there is still potential for volatility in the local economy. No assurance can
be given that downturns in the economy in the Bank's market areas may not
adversely affect the Bank's operations in the future. See "Business of the Bank
- - Market Areas" and "- Competition."
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority, and by the FDIC as insurer
of deposits. The Bank is a member of the FHLB System and is subject to certain
limited regulations promulgated by the Federal Reserve Board. The MHC and the
Stock Holding Company also will be subject to regulation and oversight by the
OTS. Such regulation and supervision govern the activities in which an
institution can engage and are intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Stock Holding Company, the Bank and their respective
operations. See "Regulation."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or state-chartered thrift, (ii) require all savings and
loan holding companies to become bank holding companies and (iii) abolish the
OTS. It is uncertain when or if any of this type of legislation will be passed,
and, if passed, in what form the legislation would be passed. As a result,
management cannot accurately predict the possible impact of such legislation.
Absence of Market for the Common Stock
The Stock Holding Company has never issued capital stock. Webb has been
retained to assist in the distribution of the Common Stock on a "best efforts"
basis and is not obligated to purchase any shares of Common Stock in the
Offerings. The Stock Holding Company has applied to have its Common Stock quoted
on the Nasdaq National Market, and there must be, among other things, at least
three market makers for the Common Stock. KBW intends to make a market in the
Common
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Stock, and the Stock Holding Company anticipates, based on advice received from
representatives of Webb, that it will be able to secure at least two additional
market makers for the Common Stock.
See "Market for the Common Stock."
Possible Increase in Number of Shares of Common Stock Issued in the
Reorganization
The number of shares of Common Stock to be sold in the Stock Issuance
may be increased as a result of an increase in the Estimated Offering Range of
up to 15% to reflect changes in market and financial conditions prior to
completion of the Reorganization or to fill the order of the ESOP. In the event
that the Estimated Offering Range is so increased, it is expected that the Stock
Holding Company will issue up to 50,000,000 shares of Common Stock at the
Purchase Price for an aggregate price of up to $500.0 million. An increase in
the number of shares will decrease net income per share and stockholders' equity
per share on a pro forma basis and will increase the Stock Holding Company's
consolidated stockholders' equity and net income. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net income per share.
The ESOP currently intends to purchase 8.0% of the shares sold in the
Offerings. In the event that the number of shares to be sold in the Offerings is
increased as a result of an increase in the Estimated Offering Range, the ESOP
shall have a first priority to purchase all of such shares sold in excess of
43,478,261 shares, up to a maximum of 8.0% of the total number of shares sold in
the Offerings. See "Pro Forma Data" and "The Reorganization and Stock Issuance -
Stock Pricing and Number of Shares to be Issued."
Potential Increased Compensation Expense After the Reorganization
Current accounting standards for employee stock ownership plans require
an employer to record compensation expense in an amount equal to the fair value
of shares committed to be released to employees from an employee stock ownership
plan, rather than an amount equal to the cost basis of such shares. If the
shares of Common Stock appreciate in value over time, additional shares
committed to be released will result in increased compensation expense with
respect to the ESOP as compared with prior periods. It is impossible to
determine at this time the extent of such impact on future net income. See "Pro
Forma Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of Accounting Pronouncements." In addition, after
consummation of the Reorganization, the Stock Holding Company intends to
implement, subject to stockholder approval (which approval cannot be obtained
earlier than six months subsequent to the Reorganization), the RRP. Upon
implementation, the release of shares of Common Stock from the RRP will result
in additional compensation expense. See "Pro Forma Data" and "Management -
Benefits - Other Stock Benefit Plans."
Year 2000 Issues
The "Year 2000 problem" arose in industries of all types because many
existing computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. The extent of the potential
global
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impact of the Year 2000 problem is not known, and if not timely corrected, it
could affect the worldwide economy.
Accurate data processing is essential to the Bank's operations and a
lack of accurate processing either internally or by its vendors could have a
significant adverse impact on the financial condition and results of operations
of the Bank. The Board of Directors has been actively involved in addressing the
Year 2000 problem, along with a sixteen member project control team that
includes the senior officers of each of the business units of the Bank. Most of
the Bank's data processing is performed in-house. With respect to these systems,
the Bank is taking appropriate steps to remediate the Year 2000 problem. As of
September 30, 1998, remediation was substantially complete and testing had
begun. The Bank anticipates all mission critical programming corrections will be
completed by December 31, 1998, and internal testing will also be substantially
completed by that date. The Bank anticipates external mission critical systems
will be substantially remediated by March 31, 1999, and testing of all systems
will be completed by June 30, 1999. Contingency plans have been developed if, by
the end of 1998, it appears that any problems with primary data processing
systems will be unresolved in a timely manner. The Bank does not anticipate any
significant Year 2000 problems with its facilities and non-informational
systems. The Bank has budgeted $2.3 million to remedy the Year 2000 problem and
anticipates staying within this budget.
In addition to expenses related to the Bank's systems, losses could
occur if loan payments are delayed due to Year 2000 problems affecting any of
the Bank's significant borrowers or impairing the payroll systems of large
employers in the Bank's market areas. The Bank has developed and sent
questionnaires to certain of our large borrowers to help evaluate and coordinate
any corrective measures required by them to be prepared for the Year 2000.
Although there can be no assurances, the Bank does not anticipate any material
adverse effect on its operations as a result of the impact of the Year 2000
problem on its borrowers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Issues."
Irrevocability of Orders; Potential Delay in Completion of Offerings
Orders submitted in the Subscription Offering and any Direct Community
Offering or any Public Offering are irrevocable. Funds submitted in connection
with any purchase of Common Stock in the Offerings will be held by the Bank for
the Stock Holding Company until the completion or termination of the
Reorganization and Stock Issuance, including any extension of the Expiration
Date of up to 45 days. Because, among other factors, completion of the
Reorganization and Stock Issuance will be subject to an update of the
independent appraisal prepared by RP Financial, there may be one or more delays
in the completion of the Reorganization and Stock Issuance. Subscribers will
have no access to subscription funds and/or shares of Common Stock until the
Reorganization and Stock Issuance is completed or terminated, 45 days have
elapsed from the Expiration Date, or except as otherwise required by the OTS.
CAPITOL FEDERAL FINANCIAL
The Stock Holding Company will be incorporated under Federal law for
the purpose of holding all of the capital stock of the Bank and in order to
facilitate the Reorganization and Stock
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Issuance. The Stock Holding Company has applied for the approval of the OTS to
become a savings and loan holding company and as such will be subject to
regulation by the OTS. After completion of the Reorganization and Stock
Issuance, the Stock Holding Company will conduct business initially as a unitary
savings and loan holding company. See "Regulation - Regulation of The Stock
Holding Company." Upon consummation of the Reorganization, the Stock Holding
Company will have no significant assets other than all of the outstanding shares
of common stock of the Bank, the portion of the net proceeds from the Offerings
retained by the Stock Holding Company and the Stock Holding Company's loan to
the ESOP. The Stock Holding Company will have no significant liabilities. See
"Use of Proceeds." Initially, the management of the Stock Holding Company and
the Bank will be substantially identical and the Stock Holding Company will
neither own nor lease any property but will instead use the facilities of the
Bank. At the present time, the Stock Holding Company intends to utilize the
support staff of the Bank from time to time and will compensate the Bank
accordingly. Additional employees will be hired as appropriate to the extent the
Stock Holding Company expands or changes its business in the future.
Management believes that the proposed corporate structure of the Bank
upon consummation of the Reorganization will provide the Stock Holding Company
and the Bank with additional flexibility to diversify their business activities
through existing or newly-formed subsidiaries, or through acquisitions of other
entities, including other financial institutions and financial services- related
companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities or transactions, the Stock Holding
Company will be in a position after the Reorganization, subject to regulatory
limitations and the Stock Holding Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Stock Holding Company are anticipated to be funded
by the proceeds to be retained by the Stock Holding Company and earnings
thereon, as well as dividends from the Bank.
See "Dividend Policy."
The Stock Holding Company's principal executive offices will be located
at 700 Kansas Avenue, Topeka, Kansas 66603, and its telephone number is (785)
235-1341.
CAPITOL FEDERAL SAVINGS BANK
The Bank is a federally chartered, SAIF-insured mutual savings
institution conducting business from its 24 full service offices and five
limited service offices. At September 30, 1998, the Bank had total assets of
$5.31 billion, total deposits of $3.89 billion and equity of $662.3 million. For
additional information with respect to the business and operations of the Bank,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of the Bank."
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary federal regulator. The
Bank is also regulated by the FDIC, the administrator of the SAIF. The Bank is
also subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the FHLB of Topeka, which is one of the 12 regional
banks comprising the FHLB System.
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The Bank's principal executive offices are located at 700 Kansas
Avenue, Topeka, Kansas 66603, and its telephone number is (785) 235-1341.
CAPITOL FEDERAL SAVINGS BANK MHC
As part of the Reorganization, the Bank will organize the MHC as a
federal mutual holding company with the powers set forth in its proposed charter
and bylaws. As long as they remain depositors of the Bank, persons who had
membership or liquidation rights with respect to the Bank as of the date of the
Reorganization will continue to have such rights solely with respect to the MHC
after the Reorganization. Borrowers whose loans were outstanding on January 6,
1993 have membership rights in the Bank and, accordingly, will have membership
rights in the MHC upon completion of the Reorganization so long as their loans
remain outstanding. Members of the MHC (consisting solely of depositors and
certain borrowers of the Bank) shall have exclusive authority to elect the board
of directors of the MHC for so long as the MHC remains a mutual institution.
The MHC's principal assets will be the shares of Common Stock received
in the Reorganization and up to $100,000 received as its initial capitalization.
Immediately after consummation of the Reorganization, it is expected that the
MHC will not engage in any business activity other than its investment in, and
control of, a majority of the Common Stock of the Stock Holding Company and
investing funds retained by it. The MHC will be a mutual corporation chartered
under federal law and regulated by the OTS. The MHC will be subject to the
limitations and restrictions imposed on savings and loan holding companies by
HOLA. See "Regulation - The Mutual Holding Company."
The MHC's principal executive offices will be located at 700 Kansas
Avenue, Topeka, Kansas 66603, and its telephone number will be (785) 235-1341.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the shares of Common
Stock cannot be determined until the Reorganization and Stock Issuance is
completed, it is presently anticipated that the net proceeds from the sale of
the shares of Common Stock will be between $315.9 million and $428.0 million
($492.5 million assuming an increase in the Estimated Offering Range by 15%).
See "Pro Forma Data" and "The Reorganization and Stock Issuance - Stock Pricing
and Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
The Stock Holding Company will retain $50.0 million of the net
Reorganization proceeds and will purchase all of the capital stock of the Bank
to be issued in the Reorganization in exchange for the remaining Reorganization
proceeds (net of Reorganization-related expenses and the loan to be made to the
ESOP). The Stock Holding Company intends to use a portion of the net proceeds to
make a loan directly to the ESOP to enable the ESOP to purchase up to 8.0% of
the shares of Common Stock sold in the Offerings. Based upon the issuance of
32,136,106 shares of Common Stock and 43,478,261 shares of Common Stock at the
minimum and maximum of the Estimated Offering Range, respectively, the loan to
the ESOP would be $25.7 million and $34.8 million,
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respectively. See "Management - Benefits - Employee Stock Ownership Plan." The
remaining net proceeds retained by the Stock Holding Company initially may be
used to invest in U.S. Government and federal agency securities of various
maturities, mortgage-related or other securities, deposits in either the Bank or
other financial institutions, or a combination thereof. The net proceeds
retained by the Stock Holding Company may ultimately be used to support the
Bank's lending activities, repay borrowings in the ordinary course, or support
the future expansion of operations through the establishment of additional
banking offices or other customer facilities or through acquisitions of other
financial institutions or branch offices (although no such acquisition
transactions are specifically being considered at this time). The net proceeds
from the Offerings may also be used for other business and investment purposes,
including the payment of regular or special cash dividends, possible repurchases
of the Common Stock or returns of capital (the Stock Holding Company and the
Bank have committed not to take any action to further the payment of any return
of capital on the Common Stock during the one-year period subsequent to
consummation of the Reorganization). Management of the Stock Holding Company may
consider expanding or diversifying, as such opportunities become available.
Because of state and local tax issues, the Stock Holding Company and the Bank
have determined to retain only $50.0 million of the net proceeds at the Stock
Holding Company level.
Following the six-month anniversary of the completion of the
Reorganization (to the extent permitted by the OTS), and based upon then
existing facts and circumstances, the Stock Holding Company's Board of Directors
may determine to repurchase shares of Common Stock, subject to any applicable
statutory and regulatory requirements. Such facts and circumstances may include
but not be limited to (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and an improvement in the Stock
Holding Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Stock
Holding Company and its stockholders. Any stock repurchases will be subject to
the determination of the Stock Holding Company's Board of Directors that the
Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases.
The portion of the net proceeds used by the Stock Holding Company to
purchase the capital stock of the Bank will be added to the Bank's general funds
to be used for general corporate purposes, including increased lending
activities and to support the expansion of the Bank's wholesale leverage
strategy, which entails the purchase of adjustable rate mortgage-related
securities funded by fixed rate borrowings. See "Risk Factors - Impact of
Wholesale Leverage Strategy." While the amount of net proceeds received by the
Bank will further strengthen the Bank's capital position, which already
substantially exceeds all regulatory requirements, it should be noted that the
Bank is not reorganizing primarily to raise capital. After the Reorganization
and Stock Issuance, the Bank's tangible capital ratio will be approximately
16.67 % (based upon the maximum of the Estimated Offering Range). As a result,
the Bank will continue to be a well-capitalized institution.
The net proceeds may vary because total expenses of the Reorganization
and Stock Issuance may be more or less than those estimated. The net proceeds
will also vary if the number of shares
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to be issued in the Reorganization and Stock Issuance is adjusted to reflect a
change in the estimated pro forma market value of the Bank. Payments for shares
made through withdrawals from existing deposit accounts at the Bank will not
result in the receipt of new funds for investment by the Bank but will result in
a reduction of the Bank's interest expense and liabilities as funds are
transferred from interest-bearing certificates or other deposit accounts.
DIVIDEND POLICY
Following consummation of the Reorganization, the Board of Directors of
the Stock Holding Company intends to pay quarterly cash dividends on the Common
Stock, beginning after the first quarter following completion of the
Reorganization and Stock Issuance. The initial annual dividend rate to be paid
on the Common Stock will be at an annualized rate of $.40 per share. The
continued payment of dividends will depend upon a number of factors, including
capital requirements, the Stock Holding Company's and the Bank's financial
condition and results of operations, tax considerations, statutory and
regulatory limitations, and general economic conditions. No assurances can be
given that any dividends will be paid or that, if paid, will not be reduced or
eliminated in future periods. If the MHC does not waive the receipt of any
dividends from the Stock Holding Company, the amount of dividends payable by the
Stock Holding Company to public stockholders may be reduced. Special cash
dividends, stock dividends or returns of capital may be paid in addition to, or
in lieu of, regular cash dividends (however, the Stock Holding Company and the
Bank have committed to the OTS that they will take no action to further the
payment of any return of capital during the one-year period following
consummation of the Reorganization and Stock Issuance). The Stock Holding
Company intends to file consolidated tax returns with the Bank. Accordingly, it
is anticipated that any cash distributions made by the Stock Holding Company to
its stockholders would be treated as cash dividends and not as a non-taxable
return of capital for federal and state tax purposes.
Dividends from the Stock Holding Company will depend, in large part,
upon receipt of dividends from the Bank, because the Stock Holding Company
initially will have no source of income other than dividends from the Bank,
earnings from the investment of proceeds from the sale of shares of Common Stock
retained by the Stock Holding Company, and interest payments with respect to the
Stock Holding Company's loan to the ESOP. A regulation of the OTS imposes
limitations on "capital distributions" by savings institutions. See "Regulation
- - Limitations on Dividends and Other Capital Distributions."
Any payment of dividends by the Bank to the Stock Holding Company which
would be deemed to be drawn out of the Bank's bad debt reserves, would require a
payment of taxes at the then-current tax rate by the Bank on the amount of
earnings deemed to be removed from the reserves for such distribution. The Bank
does not intend to make any distribution to the Stock Holding Company that would
create such a federal tax liability. See "Taxation."
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WAIVER OF DIVIDENDS BY THE MHC
The Board of Directors of the MHC will determine whether the MHC will
waive the receipt of dividends declared by the Stock Holding Company each time
the Stock Holding Company declares a dividend. The Board of Directors of the MHC
presently intends to waive the receipt of dividends declared by the Stock
Holding Company. OTS regulations require the MHC to notify the OTS of any
proposed waiver of the right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not to object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the subsidiary holding company is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company is
considered to be a restriction on the stockholders' equity of the subsidiary
holding company, which restriction, if material, is disclosed in the public
financial statements of the subsidiary holding company as a note to the
financial statements; (iii) the amount of any dividend waived by the mutual
holding company is available for declaration as a dividend solely to the mutual
holding company, and, in accordance with Statement of Financial Accounting
Standards No. 5, where the subsidiary holding company determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the subsidiary holding
company in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
transaction takes into account the amount of the dividends waived by the mutual
holding company. In addition, the OTS has announced that the dividends waived by
the mutual holding companies will affect the ratio pursuant to which shares of
common stock of a subsidiary holding company held by Minority Stockholders would
be exchanged for shares of common stock of the converted holding company in a
conversion transaction. The OTS will not permit a pro rata exchange if the
mutual holding company has waived the receipt of cash dividends by the
subsidiary holding company. Accordingly, the precise treatment of any conversion
transaction cannot be assured. Any waiver of dividends by the MHC is likely to
result in an adjustment to the ratio pursuant to which shares of Common Stock
are exchanged for shares of the converted MHC in a conversion transaction, which
adjustment will have the effect of diluting Minority Stockholders' interests.
The Board of Directors of the MHC has no intention of converting to stock form.
See "MHC Conversion to Stock Form."
The MHC's Board of Directors may conclude that a dividend waiver by the
MHC, which permits retention of capital by the Stock Holding Company, is in the
best interest of the MHC's members because, among other reasons: (i) the MHC has
no need for the dividend for its business operations, (ii) the cash that would
be received could be invested by the Stock Holding Company more effectively; and
(iii) such waiver preserves the retained earnings of the MHC through its
principal asset (the Stock Holding Company), which would be available for
distribution in the unlikely event of a voluntary liquidation of the Stock
Holding Company after satisfaction of claims of depositors and other creditors.
The Board of Directors may consider other factors in determining whether such
waiver is consistent with its fiduciary duties to members of the MHC. There is
no assurance that the MHC will waive the receipt of the dividends.
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Immediately after consummation of the Reorganization and the Stock
Issuance, it is expected that the MHC's operations will consist of activities
relating to its investment in, and control of, a majority of the shares of
Common Stock of the Stock Holding Company, maintenance of books and records
relating to members of the MHC and investing funds retained by it. In the
future, the MHC may accept dividends paid by the Stock Holding Company to be
used for the payment of operating expenses and other purposes, including
purchasing Common Stock from time to time in the open market or from the Stock
Holding Company. There can be no assurance that the MHC will accept dividends
paid by the Stock Holding Company, or if such dividends are accepted, that the
MHC will purchase shares of Common Stock in the open market. Any purchases of
Common Stock other than from the MHC will increase the percentage of the Stock
Holding Company's outstanding shares of Common Stock held by the MHC and
increase the number of shares eligible to be sold in any subsequent offering or
mutual to stock conversion of the MHC. Any waiver of dividends by the MHC is
likely to result in an adjustment to the ratio pursuant to which shares of
Common Stock are exchanged for shares of the converted MHC in the event of a
conversion transaction, which adjustment will have the effect of diluting
Minority Stockholders' percentage ownership interest in the converted MHC's
shares. See "MHC Conversion to Stock Form."
MHC CONVERSION TO STOCK FORM
As long as the MHC remains a mutual holding company, it must own at
least a majority of the outstanding voting stock of the Stock Holding Company.
OTS regulations specifically authorize mutual holding companies to (i) convert
to stock form and (ii) exchange stock issued by the converted holding company
for stock issued by a subsidiary holding company. OTS regulations require that
such exchange be "fair and reasonable" but do not specify the basis for such
exchange. Although the MHC could convert to stock form in the future, the Bank
and the MHC have no current plans and there can be no assurance as to when, if
ever, such a conversion will occur. Any conversion transaction would be subject
to federal securities laws and regulations of the OTS in effect at the time of
the conversion transaction. In addition, the OTS may, in the future, authorize
alternative forms of structure or organization for mutual holding companies or
their affiliates or subsidiaries. Although the Bank and the MHC may consider
such alternative forms of structure or organization, there can be no assurances
as to when, if ever, the Bank and the MHC will choose to avail itself of any
such alternative form of structure or organization. A decision by the MHC to
convert to stock form would require the approval of its members prior to the
conversion transaction. It is expected that these members will have subscription
rights to purchase stock of the converted MHC. In a conversion transaction, the
MHC, the Stock Holding Company or the Bank will have to demonstrate to the OTS
that the terms of such exchange are fair and reasonable and comply with the
stock purchase limitations of the OTS conversion regulations (which may, as a
condition to OTS approval of the conversion transaction, in certain limited
circumstances, require certain insiders of the Bank who have accumulated shares
in excess of stock purchase limitations in the conversion transaction to divest
such shares in connection with such conversion transaction, and also potentially
restrict or prohibit additional purchases of Common Stock in the conversion
transaction by other stockholders that would be in excess of such stock purchase
limitations). The fairness of the exchange may be supported by an opinion from
an independent third party.
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The OTS policy with respect to dividends waived by mutual holding
companies requires that, in the case of mutual to stock conversions of recently
formed mutual holding companies, such as the MHC, the aggregate amount of cash
dividends waived by a mutual holding company must be considered when
establishing a fair and reasonable basis for exchanging subsidiary holding
company common stock for converted MHC common stock. The OTS will not permit a
pro rata exchange if the mutual holding company has waived the receipt of cash
dividends by the subsidiary holding company. Accordingly, the precise treatment
of any conversion transaction cannot be assured. Any waiver of dividends by the
MHC is likely to result in an adjustment to the ratio pursuant to which shares
of Common Stock are exchanged for shares of the converted MHC in a conversion
transaction, which adjustment will have the effect of diluting Minority
Stockholders' ownership interests.
In addition to the possible adjustment to the exchange ratio due to
waived dividends, the percentage of the converted MHC's common stock received by
Minority Stockholders in any conversion transaction may be affected by any
purchases of Common Stock by the MHC, any subsequent offerings or other stock
issuances by the Stock Holding Company (including shares issued under the terms
of the Stock Option Plan and RRP), any intervening acquisitions by the MHC, the
Stock Holding Company's dividend policy, including special dividends and the
amount of dividends paid by the Stock Holding Company.
As an alternative to the exchange of shares discussed above, if the
stockholders of the Stock Holding Company do not receive shares of the converted
MHC or the stock institution resulting from the conversion transaction based
upon a fair and reasonable exchange ratio, or cash from the resulting
institution in an amount equal to the fair market value of their stock given the
circumstances of the conversion transaction, the Stock Holding Company or the
MHC (and its successors) may elect to purchase all shares of the Common Stock
not owned by it simultaneously with the consummation of the conversion
transaction at the fair market value of the stock on the date of the conversion
transaction, subject to OTS approval and compliance with the limitations of the
OTS regulations governing capital distributions and other conditions that the
OTS may impose. Such fair market value of the Stock Holding Company's Common
Stock shall be established by an independent appraisal, and may be greater than
or less than the Purchase Price. Moreover, if the Common Stock is traded and has
an established and liquid trading market, of which there is no assurance, the
fair market value of the Common Stock, as established by the independent
appraisal, may be greater than or less than the trading price of such stock.
Moreover, in the event that the MHC converts to stock form in a
conversion transaction, any options or other convertible securities held by an
officer, director or employee of the Stock Holding Company, convertible into
shares of Common Stock shall become options to purchase or convertible into
shares of the converted MHC; provided, however, that if such options or
convertible shares cannot be so reconstituted, the holders of such options or
other convertible securities shall be entitled to receive cash payment for such
shares in an amount equal to the offering price of the number of shares of the
converted MHC into which such securities would otherwise be converted, less the
exercise price of such options of other convertible securities. Any such
exchange or redemption of these securities will be subject to the written
approval of the OTS, and there can be no assurance that such approval would be
obtained. In addition, the OTS may place restrictions on the Stock Holding
Company's or the MHC's ability to purchase Common Stock that are more
restrictive than the OTS
33
<PAGE>
regulations governing capital distributions. The fair market value of the common
stock of the converted MHC shall be established by the independent appraisal
utilized in the conversion transaction pursuant to the OTS regulations governing
conversions. However, there is no plan, agreement or understanding with respect
to such a conversion, and there can be no assurance that such a conversion will
occur.
Further, if the MHC were to undertake a conversion transaction, and in
connection therewith additional shares of stock of the converted MHC were
proposed to be contributed to the Foundation, any conversion transaction and
contribution of additional shares of Common Stock to the Foundation will be
voted on as separate matters and both matters will require the approval of (i) a
majority of the total outstanding vote of the members of the MHC eligible to be
cast and (ii) a majority vote of the total outstanding shares of Common Stock
held by stockholders other than the MHC and the Foundation.
MARKET FOR THE COMMON STOCK
The Stock Holding Company and the Bank have never issued capital stock,
and, consequently, there is no established market for the Common Stock at this
time. The Stock Holding Company has applied to have its Common Stock quoted on
the Nasdaq National Market under the symbol "CFFN." Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at these quoted prices, subject to various
securities laws and other regulatory requirements. Additionally, the development
of a liquid public market depends on the existence of willing buyers and
sellers, the presence of which is not within the control of the Stock Holding
Company, the Bank or any market maker. Accordingly, the number of active buyers
and sellers of the Common Stock at any particular time may be limited. The Stock
Holding Company intends to meet the requirements for listing on the Nasdaq
National Market. There can be no assurance, however, that purchasers will be
able to sell their shares at or above the Purchase Price.
REGULATORY CAPITAL
At September 30, 1998, the Bank exceeded all of the regulatory capital
requirements applicable to it. The table on the following page sets forth the
historical regulatory capital of the Bank at September 30, 1998 and the pro
forma regulatory capital of the Bank after giving effect to the Reorganization
and Stock Issuance, based upon the sale of the number of shares shown in the
table. The pro forma regulatory capital amounts reflect the receipt by the Bank
of the net Stock Issuance proceeds, minus expenses, the amounts to be loaned to
the ESOP and contributed to the RRP and $50.0 million to be retained by the
Stock Holding Company. The pro forma risk-based capital amounts assume the
investment of the net proceeds received by the Bank in assets which have a
risk-weight of 20% under applicable regulations, as if such net proceeds had
been received and so applied at September 30, 1998.
34
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1998
----------------------------------------------------------
Historical at 32,136,106 Shares 37,807,183 Shares
September 30, 1998 Sold at $10.00 per Share Sold at $10.00 per Share
------------------------ -------------------------- -----------------------
Percent of Percent of Percent of
Amount Assets(1) Amount Assets Amount Assets
------ --------- ------ ------ ------ ------
(Dollars in Thousands)
Tangible capital:
<S> <C> <C> <C> <C> <C> <C>
Actual ...................... $649,199 12.13% $863,596 15.31% $910,581 16.00%
Requirement ................. 79,724 1.50 84,609 1.50 85,381 1.50
-------- ----- -------- ----- -------- -----
Excess ...................... $569,475 10.63% $778,987 13.81% $825,200 14.50%
======== ===== ======== ===== ======== =====
Core capital:
Actual ...................... $649,199 12.13% $863,596 15.31% $910,581 16.00%
Requirement ................. 159,447 3.00 169,218 3.00 170,762 3.00
-------- ----- -------- ----- -------- -----
Excess ...................... $489,752 9.13% $694,378 12.31% $739,819 13.00%
======== ===== ======== ===== ======== =====
Risk-based capital
Actual ...................... $650,584 27.32% $868,246 35.43% $915,231 37.19%
Requirement ................. 191,168 8.00 196,071 8.00 196,895 8.00
-------- ----- -------- ----- -------- -----
Excess ...................... $459,416 19.32% $672,175 27.43% $718,336 29.19%
======== ===== ======== ===== ======== =====
</TABLE>
Pro Forma at September 30, 1998
---------------------------------------------------
43,487,261 Shares 50,000,000 Shares
Sold at $10.00 per Share Sold at $10.00 per Share
------------------------ ------------------------
Percent of Percent of
Amount Assets Amount Assets
------ ------ ------ ------
(Dollars in Thousands)
Tangible capital:
Actual ............... $ 957,566 16.67% $1,011,599 17.43%
Requirement .......... 86,154 1.50 87,043 1.50
---------- ----- ---------- -----
Excess ............... $ 871,412 15.17% $ 924,556 15.93%
========== ===== ========== =====
Core capital:
Actual ............... $ 957,566 16.67% $1,011,599 17.43%
Requirement .......... 172,308 3.00 174,086 3.00
---------- ----- ---------- -----
Excess ............... $ 785,258 13.67% $ 837,513 14.43%
========== ===== ========== =====
Risk-based capital
Actual ............... $ 962,216 38.93% $1,016,249 40.92%
Requirement .......... 197,720 8.00 198,668 8.00
---------- ----- ---------- -----
Excess ............... $ 764,496 30.93% $ 817,581 32.92%
========== ===== ========== =====
- --------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
35
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at September 30, 1998, and the pro forma consolidated capitalization of the
Company after giving effect to the Reorganization, based upon the sale of the
number of shares shown below and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
The Stock Holding Company - Pro Forma
Based Upon Sale at $10.00 Per Share
-------------------------------------------------------------------------
50,000,000
32,136,106 37,807,183 43,478,261 Shares(1)
The Bank - Shares Shares Shares (Maximum of
Historical (Minimum of (Midpoint of (Maximum of Range, as
Capitalization Range) Range) Range) Adjusted)
-------------- ------ ------ ------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) .............................................. $ 3,894,180 $ 3,894,180 $ 3,894,180 $ 3,894,180 $ 3,894,180
Borrowings:
FHLB advances ........................................ 500,000 500,000 500,000 500,000 500,000
Securities sold under agreement to
repurchase .......................................... 175,000 175,000 175,000 175,000 175,000
----------- ----------- ----------- ----------- -----------
Total deposits and borrowings ............................ $ 4,569,180 $ 4,569,180 $ 4,569,180 $ 4,569,180 $ 4,569,180
=========== =========== =========== =========== ===========
Stockholders' equity
Preferred Stock, $.01 par value, 50,000,000
shares authorized; none to be issued ................ $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 450,000,000
shares authorized; shares to be issued as
reflected(3) ........................................ -- 778 915 1,052 1,210
Additional paid-in capital ........................... -- 315,137 371,059 426,980 491,290
Retained earnings .................................... 649,199 649,199 649,199 649,199 649,199
Shares issued to Foundation(4) ....................... --
Net unrealized gains on mortgage-related
securities available for sale ....................... 13,133 13,133 13,133 13,133 13,133
Less:
Expense of contribution to Foundation,
net(5) .............................................. -- (15,940) (18,752) (21,565) (24,800)
Common Stock to be acquired by the
ESOP(6) ............................................. -- (25,709) (30,246) (34,783) (40,000)
Common Stock to be acquired by the
RRP(7) .............................................. -- (12,854) (15,123) (17,391) (20,000)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............................... $ 662,332 $ 923,744 $ 970,185 $ 1,016,625 $ 1,070,032
=========== =========== =========== =========== ===========
</TABLE>
- ------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
36
<PAGE>
(3) Reflects the issuance of the shares of Common Stock to be sold in the
Offerings including the issuance of additional shares of Common Stock to
the Foundation. No effect has been given to the issuance of additional
shares of Common Stock pursuant to the proposed Stock Option Plan. See "Pro
Forma Data" and "Management - Benefits - Other Stock Benefit Plans."
(4) Reflects shares to be contributed to the Foundation at an assumed value of
$10.00 per share.
(5) Net of the tax effect of the contribution of Common Stock and cash to the
Foundation based upon an assumed 38.0% tax rate. The realization of the
deferred tax benefit is limited annually to 10% of the Stock Holding
Company's annual taxable income, subject to the ability of the Stock
Holding Company to carry forward any unused portion of the deduction for
five years following the year in which the contribution is made. Historical
equity has been reduced in the pro forma presentation by $100,000 due to
the retention of such amount by the MHC as its initial capitalization upon
consummation of the MHC.
(6) Assumes that 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction from stockholders'
equity. The ESOP shares will be purchased with funds loaned to the ESOP by
the Stock Holding Company. See "Pro Forma Data" and "Management - Benefits
- Employee Stock Ownership Plan."
(7) The Stock Holding Company intends to adopt the RRP and to submit such plan
to stockholders at an annual or special meeting of stockholders held at
least six months following the consummation of the Reorganization. If the
plan is approved by stockholders, the Stock Holding Company intends to
contribute sufficient funds to the RRP to enable the plan to purchase a
number of shares of Common Stock equal to 4.0% of the Common Stock sold in
the Offerings. Assumes that stockholder approval has been obtained and that
the shares have been purchased in the open market at the Purchase Price.
However, in the event the Stock Holding Company issues authorized but
unissued shares of Common Stock to the RRP in the amount of 4.0% of the
Common Stock sold in the Offerings, the voting interests of existing
stockholders would be diluted approximately 3.8%. The shares are reflected
as a reduction of stockholders' equity. See "Pro Forma Data" and
"Management - Benefits - Other Stock Benefit Plans."
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Reorganization is completed. However, net proceeds are
currently estimated to be between $303.1 million and $410.6 million (or $472.5
million in the event the Estimated Offering Range is increased by 15%) based
upon the following assumptions: (i) all shares of Common Stock will be sold in
the Subscription Offering; (ii) no fees will be paid to Webb on shares purchased
by (x) the ESOP and any other employee benefit plan of the Stock Holding Company
or the Bank, (y) officers, directors, employees and members of their immediate
families or (z) the Foundation; (iii) Webb will receive a fee equal to 1.25% of
the aggregate Purchase Price for sales in the Subscription Offering (excluding
the sale of shares to the ESOP, employee benefit plans, officers, directors and
their immediate families and the Foundation); (iv) the Stock Holding Company
will contribute to the Foundation an amount of cash equal to the value of 4.0%
of the Common Stock sold in the Offerings and an amount of Common Stock equal to
4.0% of the Common Stock sold in the Offerings from authorized but unissued
shares; and (v) total expenses, including the marketing fees paid to Webb will
be between $5.4 million and $6.8 million (or $7.5 million in the event the
Estimated Offering Range is increased by 15%). Actual expenses may vary from
those estimated.
Pro forma consolidated net income and stockholders' equity of the Stock
Holding Company have been calculated for the fiscal year ended September 30,
1998, as if the Common Stock to be issued in the Offerings had been sold at the
beginning of the period and the net proceeds had been invested at 4.39%, which
represents the yield on one-year U.S. Government securities at September
37
<PAGE>
30, 1998 (which, in light of changes in interest rates in recent periods, are
deemed by the Stock Holding Company and the Bank to more accurately reflect pro
forma reinvestment rates than the arithmetic average method). The effect of
withdrawals from deposit accounts for the purchase of Common Stock has not been
reflected. A tax rate of 38.0% has been assumed for the period, resulting in an
after-tax yield of 2.72% for the year ended September 30, 1998. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock, as adjusted to
give effect to the shares purchased by the ESOP and the effect of the issuance
of shares to the Foundation. See Note 3 to the tables below. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "Use of Proceeds," the Stock
Holding Company intends to make a loan to fund the purchase of 8.0% of the
Common Stock by the ESOP and intends to retain $50 million of the net proceeds
from the Offerings.
No effect has been given in the tables to the issuance of additional
shares of Common Stock pursuant to the proposed Stock Option Plan. See
"Management - Benefits - Other Stock Benefit Plans." The table below gives
effect to the RRP, which is expected to be adopted by the Stock Holding Company
following the Reorganization and presented (together with the Stock Option Plan)
to stockholders for approval at an annual or special meeting of stockholders to
be held at least six months following the consummation of the Reorganization. If
the RRP is approved by stockholders, the RRP intends to acquire an amount of
Common Stock equal to 4.0% of the shares of Common Stock sold in the Offerings,
either through open market purchases or from authorized but unissued shares of
Common Stock. The table below assumes that stockholder approval has been
obtained, as to which there can be no assurance, and that the shares acquired by
the RRP are purchased in the open market at the Purchase Price. No effect has
been given to (i) the Stock Holding Company's results of operations after the
Reorganization, (ii) the market price of the Common Stock after the
Reorganization or (iii) a less than 4.0% purchase by the RRP.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Stock Holding Company
computed in accordance with GAAP.
38
<PAGE>
The following table gives effect to the issuance of authorized but
unissued shares of the Common Stock to the Foundation concurrently with the
completion of the Reorganization. The pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
different than amounts that would be available for distribution to stockholders
in the event of liquidation.
<TABLE>
<CAPTION>
50,000,000
32,136,106 37,807,183 43,478,261 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(8)
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Gross Proceeds ................................ $ 321,361 $ 378,072 $ 434,783 $ 500,000
Plus: Shares acquired by Foundation
(equal to 4.0% of the shares sold
in the Offerings) ............................ 12,854 15,123 17,391 20,000
------------- ------------- ------------- -------------
Pro forma market capitalization ............... $ 334,215 $ 393,195 $ 452,174 $ 520,000
============= ============= ============= =============
Gross proceeds ................................ $ 321,361 $ 378,072 $ 434,783 $ 500,000
Less cash contribution to Foundation .......... (12,854) (15,123) (17,391) (20,000)
Less offering expenses and commissions ........ (5,446) (6,098) (6,750) (7,500)
------------- ------------- ------------- -------------
Estimated net proceeds .................... 303,061 356,851 410,642 472,500
Less: Shares purchased by the ESOP .......... (25,709) (30,246) (34,783) (40,000)
Shares purchased by the RRP ........... (12,854) (15,123) (17,391) (20,000)
------------- ------------- ------------- -------------
Total estimated net proceeds,
as adjusted(1) ............................... $ 264,498 $ 311,482 $ 358,468 $ 412,500
============= ============= ============= =============
Net income(2):
Historical ................................ $ 53,991 $ 53,991 $ 53,991 $ 53,991
Pro forma income on net proceeds,
as adjusted .............................. 7,196 8,475 9,754 11,225
Pro forma ESOP adjustment(3) .............. (1,063) (1,250) (1,438) (1,653)
Pro forma RRP adjustment(4) ............... (1,594) (1,875) (2,157) (2,480)
------------- ------------- ------------- -------------
Pro forma net income ...................... $ 58,530 $ 59,341 $ 60,150 $ 61,083
============= ============= ============= =============
Net income per share(2)(5):
Historical ................................ $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma income on net proceeds,
as adjusted .............................. 0.10 0.10 0.10 0.10
Pro forma ESOP adjustment(3) .............. (0.01) (0.01) (0.01) (0.01)
Pro forma RRP adjustment(4) ............... (0.02) (0.02) (0.02) (0.02)
------------- ------------- ------------- -------------
Pro forma net income per share(4)(6) ...... $ 0.79 $ 0.68 $ 0.60 $ 0.53
============= ============= ============= =============
Number of shares outstanding for
pro forma net income per share
calculations(5) .............................. 75,385,948 88,689,351 101,992,753 117,291,667
============= ============= ============= =============
Offering price to pro forma net
income per share(5) .......................... 12.66x 14.71x 16.67x 18.87x
============= ============= ============= =============
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
50,000,000
32,136,106 37,807,183 43,478,261 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(8)
------ ------ ------ ------------
Stockholders' equity:
<S> <C> <C> <C> <C>
Historical ......................................... $ 662,232 $ 662,232 $ 662,232 $ 662,232
Estimated net proceeds ............................. 303,061 356,851 410,461 472,500
Plus: Shares issued to Foundation .................. 12,854 15,123 17,391 20,000
Less: Contribution to Foundation ................... (12,854) (15,123) (17,391) (20,000)
Plus: Tax benefit of the contribution
to Foundation ............................... 9,769 11,493 13,217 15,200
Less: Common Stock acquired by the ESOP(3) ......... (25,709) (30,246) (34,783) (40,000)
Common Stock to be acquired by
the RRP(4) .................................. (12,854) (15,123) (17,391) (20,000)
-------------- -------------- --------------- ---------------
Pro forma stockholders' equity(4)(6)(7) ............ $ 936,499 $ 985,207 $ 1,033,736 $ 1,089,932
============== ============== =============== ===============
Stockholders' equity per share(5):
Historical ......................................... $ 8.51 $ 7.24 $ 6.29 $ 5.47
Estimated net proceeds ............................. 3.90 3.90 3.90 3.90
Plus: Shares issued to Foundation .................. 0.17 0.17 0.17 0.17
Less: Contribution to Foundation ................... (0.17) (0.17) (0.17) (0.17)
Plus: Tax benefit of the contribution to Foundation 0.13 0.13 0.13 0.13
Less: Common Stock acquired by the ESOP(3) ......... (0.33) (0.33) (0.33) (0.33)
Common Stock to be acquired by
the RRP(4) .................................. (0.17) (0.17) (0.17) (0.17)
-------------- -------------- --------------- ---------------
Pro forma stockholders' equity per share(4)(6)(7) .. $ 12.04 $ 10.77 $ 9.82 $ 9.00
============== ============== =============== ===============
Offering price as a percentage of pro forma
stockholders' equity per share(5) ..................... 83.06% 92.85% 101.83% 111.11%
============== ============== =============== ===============
Number of shares outstanding for pro forma stockholders'
equity per share calculations(5) ...................... 77,785,444 91,512,288 105,239,130 121,025,000
============== ============== =============== ===============
</TABLE>
- -----------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offerings minus (i) the proceeds attributable to the purchase by
the ESOP and (ii) the value of the shares to be purchased by the RRP,
subject to stockholder approval, after the Reorganization at an assumed
purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be recognized
in fiscal 1999 as a result of the contribution to the Foundation. The Stock
Holding Company will recognize an after-tax expense for the amount of the
cash and stock contribution to the Foundation which is expected to total
$15.9 million, $18.8 million, $21.6 million and $24.8 million at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Offering Range, respectively. Assuming the contribution to the Foundation
was expensed during the year ended September 30, 1998, pro forma net
earnings per share would be $0.56, $0.46, $0.38 and $0.31 at the minimum,
midpoint, maximum and maximum, as adjusted, respectively. Per share net
income data is based on 75,385,948, shares of Common Stock outstanding at
the minimum of the Estimated Offering Range, outstanding at the 88,689,351
shares of
40
<PAGE>
Common Stock outstanding at the midpoint of such range, 101,992,753 shares
of Common Stock outstanding at the maximum of such range and 117,291,667
shares of Common Stock outstanding at 15% above the maximum of such range,
respectively, which represents shares issued to the MHC, shares sold in the
Offerings, shares contributed to the Foundation and shares to be allocated
or distributed under the ESOP and RRP for the period presented.
(3) It is assumed that 8.0% of the shares of Common Stock sold in the Offerings
will be purchased by the ESOP with funds loaned by the Stock Holding
Company. The Stock Holding Company and the Bank intend to make annual
contributions to the ESOP in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net earnings assumes (i)
that the loan to the ESOP is payable over 15 years, with the ESOP shares
having an average fair value of $10.00 per share in accordance with SOP
93-6, entitled "Employers' Accounting for Employee Stock Ownership Plans,"
of the AICPA, and (ii) the effective tax rate was 38.0% for the period. See
"Management - Benefits - Employee Stock Ownership Plan."
(4) It is assumed that the RRP will purchase, following stockholder approval of
such plan, a number of shares of Common Stock equal to 4.0% of the shares
of Common Stock sold in the Offerings for issuance to directors, officers
and employees. Funds used by the RRP to purchase the shares initially will
be contributed to the RRP by the Stock Holding Company. It is further
assumed that the shares were acquired by the RRP at the beginning of the
period presented in open market purchases at the Purchase Price and that
20% of the amount contributed, net of taxes, was an amortized expense
during the year ended September 30, 1998. The issuance of authorized but
unissued shares of Common Stock pursuant to the RRP in the amount of 4.0%
of the Common Stock sold in the Offerings would dilute the voting interests
of existing stockholders by approximately 3.8% and under such circumstances
pro forma net earnings per share for the year ended September 30, 1998
would be $0.77, $0.67, $0.59 and $0.52, at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Offering Range, respectively,
and pro forma stockholders' equity per share at September 30, 1998 would be
$12.01, $10.75, $9.82 and $9.01 at the minimum, midpoint, maximum and 15%
above the maximum of such range, respectively. There can be no assurance
that the actual purchase price of shares purchased by or issued to the RRP
will be equal to the Purchase Price. See "Management - Benefits - Other
Stock Benefit Plans."
(5) The per share calculations are determined by adding the number of shares
assumed to be issued to the MHC and sold in the Offerings as well as
contributed to the Foundation and for purposes of calculating earnings per
share, in accordance with SOP 93-6, subtracting 2,454,727 shares, 2,822,936
shares, 3,246,377 shares, and 3,733,333 shares, respectively, representing
the ESOP shares which have not been committed for release during the year
ended September 30, 1998. Thus, it is assumed at September 30, 1998 that
77,121,175shares of Common Stock are outstanding at the minimum of the
Estimated Offering Range, 88,689,351shares of Common Stock are outstanding
at the midpoint of such range, 101,992,753 shares of Common Stock are
outstanding at the maximum of such range and 117,291,667 shares of Common
Stock are outstanding at 15% above the maximum of the such range,
respectively. Assuming the uncommitted ESOP shares were not subtracted from
the number of shares of Common Stock outstanding at September 30, 1998, the
offering price as a multiple of pro forma net earnings per share would be
13.57x, 15.42x, 17.50x and 19.81x at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Offering Range, respectively. For
purposes of calculating pro forma stockholders' equity per share, it is
assumed that shares outstanding total 79,575,902 shares at the minimum of
the Estimated Valuation Range, 91,512,288 shares at the midpoint of such
range, 105,239,130 shares at the maximum of such range and 121,025,000
shares at 15% above the maximum of the such range, respectively.
(6) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan, which will be adopted by the Stock
Holding Company following the Reorganization and presented for approval by
stockholders at an annual or special meeting of stockholders of the Stock
Holding Company held at least six months following the consummation of the
Reorganization. If the Stock Option Plan is approved by stockholders, an
amount equal to 10% of the Common Stock sold in the Offerings, or 3,213,611
shares at the minimum of the Estimated Offering Range, 3,780,718 shares at
the midpoint of such range, 4,347,826 shares at the maximum of such range
and 5,000,000 shares at 15% above the maximum of the such range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plan will
result in the dilution of existing stockholders' interests. Assuming
stockholder approval of the Stock Option Plan, that all these options were
exercised at the beginning of the period at an exercise price of $10.00 per
share and that the shares to fund the RRP are acquired through open market
purchases at the Purchase Price, pro forma net earnings per share for the
year ended September 30, 1998 would be $0.76, $0.65, $0.58, and $0.51 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Offering Range, respectively, and pro forma stockholders' equity per share
at September 30, 1998 would be $11.94, $10.72, $7.81 and $9.02 at the
minimum, midpoint, maximum and 15% above the maximum of such range,
respectively. See "Management - Benefits - Other Stock Benefit Plan."
41
<PAGE>
(7) The retained earnings of the Bank will be substantially restricted because
certain distributions from the Bank's retained earnings may be treated as
being from its accumulated bad debt reserve for tax purposes, which would
cause the Bank to have additional taxable income. See "Taxation - Federal
Taxation." Pro forma stockholders' equity and pro forma stockholders'
equity per share do not give effect to the bad debt reserves established by
the Bank for federal income tax purposes in the event of a liquidation of
the Bank. Pro forma retained earnings have been reduced by $100,000 to
reflect the proposed capitalization of the MHC.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Reorganization, RP Financial has estimated that the pro forma aggregate
market capitalization of the Stock Holding Company would be approximately $420.1
million at the midpoint, which is approximately $26.9 million greater than the
pro forma aggregate market capitalization of the Stock Holding Company if the
Foundation is included, and would result in an approximately $42.0 million
increase in the amount of Common Stock offered for sale in the Stock Issuance.
At the mid-point, the pro forma price to book ratio and pro forma price to
earnings ratio without the Foundation would be 97.66% and 15.87x, respectively,
compared to 92.85% and 14.71x, respectively, with the Foundation. Further,
assuming the midpoint of the Estimated Offering Range, pro forma stockholders'
equity per share and pro forma earnings per share without the Foundation would
be $10.24 and $0.63, respectively, and $10.77 and $0.68, respectively, with the
Foundation. There is no assurance that in the event the Foundation was not
formed that the appraisal prepared at the time would have concluded that the pro
forma market value of the Stock Holding Company would be the same as that
estimated herein. Any appraisals prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Offering Range, assuming the
Reorganization and Stock Issuance was completed at September 30, 1998 without
the establishment of the Foundation.
42
<PAGE>
<TABLE>
<CAPTION>
At the Minimum At the Midpoint
--------------------------- --------------------------
With No With No
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Estimated offering amount........................ $ 321,361 $ 357,068 $ 378,072 $ 420,080
Pro forma market capitalization.................. 334,216 357,068 393,195 420,080
Total assets..................................... 5,589,068 5,623,165 5,637,777 5,677,890
Total liabilities................................ 4,652,569 4,652,569 4,652,569 4,652,569
Pro forma stockholders' equity................... 936,499 970,596 985,208 1,025,321
Pro forma consolidated net earnings.............. 58,530 59,429 59,341 60,398
Pro forma stockholders' equity per share......... 12.04 11.41 10.77 10.24
Pro forma consolidated net earnings per share.... 0.79 0.73 0.68 0.63
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per share........ 83.06% 87.64% 92.85% 97.66%
Offering price to pro forma net earnings
per share(1)................................ 12.66x 13.70x 14.71x 15.87x
Pro forma market capitalization to assets.... 5.98% 6.35% 6.97% 7.40%
Pro forma financial ratios:
Return on assets(2).......................... 1.05% 1.06% 1.05% 1.06%
Return on stockholders' equity(3)............ 6.25% 6.12% 6.02% 5.89%
Stockholders' equity to assets............... 16.76% 17.26% 17.48% 18.06%
Minority shares.................................. 32,136,106 35,706,784 37,807,183 42,007,982
Share dilution............................... 10.00% 3,570,678 10.00% 4,200,798
Voting share................................. 41.31% 42.01% 41.31% 42.01%
Dilution................................. 0.69% 0.69%
Foundation shares................................ 1,285,444 1,512,287
Share dilution............................... N/A N/A
Voting share................................. 1.65% 1.65%
Dilution................................. N/A N/A
Mutual Holding Company shares.................... 44,363,894 49,293,216 52,192,817 57,992,018
Share dilution............................... 10.00% 4,929,322 10.00% 5,799,201
Voting share................................. 57.03% 57.99% 57.03% 57.99%
Dilution................................. 0.96% 0.96%
</TABLE>
<TABLE>
<CAPTION>
At the Maximum
At the Maximum As Adjusted
--------------------------- --------------------------
With No With No
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Estimated offering amount........................ $ 434,783 $ 483,092 $ 500,000 $ 555,556
Pro forma market capitalization.................. 452,174 483,092 520,000 555,556
Total assets..................................... 5,686,486 5,732,616 5,742,501 5,795,551
Total liabilities................................ 4,652,569 4,652,569 4,652,569 4,652,569
Pro forma stockholders' equity................... 1,033,917 1,080,047 1,089,932 1,142,982
Pro forma consolidated net earnings.............. 60,150 61,367 61,083 62,480
Pro forma stockholders' equity per share......... 9.82 9.39 9.00 8.64
Pro forma consolidated net earnings per share.... 0.60 0.55 0.53 0.49
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per share........ 101.83% 106.50% 111.11% 115.74%
Offering price to pro forma net earnings
per share(1)................................ 16.67x 18.18x 18.87x 20.41x
Pro forma market capitalization to assets.... 7.95% 8.43% 9.06% 9.59%
Pro forma financial ratios:
Return on assets(2).......................... 1.06% 1.07% 1.06% 1.08%
Return on stockholders' equity(3)............ 5.82% 5.68% 5.60% 5.47%
Stockholders' equity to assets............... 18.18% 18.84% 18.98% 19.72%
Minority shares.................................. 43,478,261 48,309,179 50,000,000 55,555,556
Share dilution............................... 10.00% 4,830,918 10.00% 5,555,556
Voting share................................. 41.31% 42.01% 41.31% 42.01%
Dilution................................. 0.69% 0.69%
Foundation shares................................ 1,739,130 2,000,000
Share dilution............................... N/A N/A
Voting share................................. 1.65% 1.65%
Dilution................................. N/A N/A
Mutual Holding Company shares.................... 60,021,739 66,690,821 69,025,000 76,694,444
Share dilution............................... 10.00% 6,669,082 10.00% 7,669,444
Voting share................................. 57.03% 57.99% 57.03% 57.99%
Dilution................................. 0.96% 0.96%
</TABLE>
- ----------------
(1) If the contribution to the Foundation had been expensed during the year
ended September 30, 1998, the offering price to pro forma net earnings per
share would have been 17.70x, 21.85x, 26.43x and 32.43x at the minimum,
midpoint, maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended September 30, 1998, return on assets would have been 0.76%, 0.72%,
0.68% and 0.63% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended September 30, 1998, return on stockholders' equity would have been
4.55%, 4.12%, 3.73% and 3.33% at the minimum, midpoint, maximum and
maximum, as adjusted, respectively.
43
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
INTEREST AND DIVIDEND INCOME:
Loans receivable ............................ $268,446 $240,009 $211,458
Mortgage-related securities ................. 57,967 41,473 48,642
Investment securities ....................... 23,025 43,641 41,004
Securities purchased under agreement
to resell .................................. 6,955
Cash and cash equivalents ................... 4,065 2,507 2,948
Capital stock of Federal Home Loan Bank ..... 3,186 2,647 2,337
-------- -------- --------
Total interest and dividend income .. 363,644 330,097 306,389
INTEREST EXPENSE:
Deposits .................................... 203,426 202,429 195,765
Borrowings .................................. 31,471 5,028 4,636
-------- -------- --------
Total interest expense .............. 234,897 207,457 200,401
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME .............. 128,747 122,640 105,988
PROVISION FOR LOAN LOSSES ..................... 3,362 56 865
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN LOSSES .................... 125,385 122,584 105,123
OTHER INCOME:
Automated teller and debit card
transaction fees ........................... 3,267 2,528 1,291
Checking account transaction fees ........... 2,791 2,359 2,845
Loan fees ................................... 2,340 2,563 2,830
Insurance commissions ....................... 1,424 1,479 1,388
Other, net .................................. 3,031 2,158 3,043
-------- -------- --------
Total other income .................. 12,853 11,087 11,397
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits .............. 26,157 23,710 21,572
Occupancy of premises ....................... 7,756 6,477 5,894
Office supplies and related expenses ........ 3,325 3,275 2,842
Deposit and loan transaction fees ........... 2,915 2,856 2,407
Advertising ................................. 2,564 2,709 2,726
Federal insurance premium ................... 2,409 3,391 8,729
BIF/SAIF special assessment ................. 24,158
Other, net .................................. 4,340 2,858 3,177
-------- -------- --------
Total other expenses ................ 49,466 45,276 71,505
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE .............. 88,772 88,395 45,015
INCOME TAX EXPENSE ............................ 34,781 35,691 18,393
-------- -------- --------
NET INCOME .................................... $ 53,991 $ 52,704 $ 26,622
======== ======== ========
See notes to consolidated financial statements.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Bank. The discussion and
analysis does not include any comments relating to the Company since the Company
has no significant operations. The information contained in this section should
be read in conjunction with the Consolidated Financial Statements and the
accompanying Notes to Consolidated Financial Statements and the other sections
contained in the Prospectus.
The Bank's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans and mortgage-related and investment
securities, and interest expense on interest-bearing liabilities which
principally consist of deposits and borrowings. The Bank's results of operations
also are affected by the level of its noninterest income and expenses, and
income tax expense.
Asset and Liability Management and Market Risk
Qualitative Aspects of Market Risk. As stated above, we derive our
income primarily from the excess of interest collected over interest paid. The
rates of interest we earn on assets and pay on liabilities generally are
established contractually for a period of time. Market interest rates change
over time. Accordingly, our results of operations, like those of other financial
institutions, are impacted by changes in interest rates and the interest rate
sensitivity of our assets and liabilities. The risk associated with changes in
interest rates and our ability to adapt to these changes is known as interest
rate risk and is the Bank's most significant market risk.
Quantitative Aspects of Market Risk. In an attempt to manage our
exposure to changes in interest rates and comply with applicable regulations, we
monitor the Bank's interest rate risk. In monitoring interest rate risk we
continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
the fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities repricing during the same period, and is considered
negative when the amount of interest-rate sensitive liabilities exceeds the
amount of interest-rate sensitive assets. Generally, during a period of rising
interest rates, a negative gap within shorter repricing periods would adversely
affect net interest income, while a positive gap within shorter repricing
periods would
45
<PAGE>
result in an increase in net interest income. During a period of falling
interest rates, the opposite would be true. As of September 30, 1998, the ratio
of the Bank's one-year gap to total assets was a positive 3.8% and its ratio of
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 1.1%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Bank's results of operations, the
Bank has adopted asset and liability management policies to better match the
maturities and repricing terms of the Bank's interest-earning assets and
interest-bearing liabilities. The Board of Directors sets and recommends the
asset and liability policies of the Bank which are implemented by the Asset and
Liability Management Committee ("ALCO"). The ALCO is chaired by the Chief
Financial Officer and is comprised of members of the Bank's senior management.
The purpose of the ALCO is to communicate, coordinate and control
asset/liability management consistent with the Bank's business plan and Board
approved policies. The ALCO establishes and monitors the volume and mix of
assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs. The objectives are to manage
assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The ALCO
generally meets on a monthly basis to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and
capital positions, anticipated changes in the volume and mix of assets and
liabilities and interest rate risk exposure limits versus current projections
pursuant to gap analysis and income simulations. At each meeting, the ALCO
recommends appropriate strategy changes based on such review. The Chief
Financial Officer or his designee is responsible for reviewing and reporting on
the effects of the policy implementations and strategies to the Board of
Directors, at least quarterly.
In order to manage its assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, the Bank has focused its strategies on (i) originating adjustable rate
loans, (ii) maintaining a significant level of investment securities and
mortgage-related securities with maturities of less than five years or with
interest rates that reprice in less than three years, (iii) managing its
deposits to establish stable deposit relationships, and (iv) acquiring
longer-term borrowings at fixed interest rates to offset the negative impact of
longer-term fixed rate loans in the Bank's loan portfolio. At times, depending
on the level of general interest rates, the relationship between long- and
short-term interest rates, market conditions and competitive factors, the ALCO
may determine to increase the Bank's interest rate risk position somewhat in
order to maintain its net interest margins. In the future, the Bank intends to
increase its emphasis on the origination of relatively short-term and/or
adjustable rate consumer loans.
The ALCO regularly reviews interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value of
an institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and MVPE that are authorized by the Board of Directors of the
Bank.
46
<PAGE>
The following table sets forth at September 30, 1998 the estimated
percentage change in the Bank's net interest income over a four-quarter period
and MVPE based on the indicated changes in interest rates.
Estimated Change in
---------------------------------------
Change (in Basis Points) Net Interest Income
in Interest Rates(1) (next four quarters) MVPE
-------------------- -------------------- ----
-400 bp -29.83% -3.55%
-300 bp -18.50% -3.20%
-200 bp -9.47% -5.07%
-100 bp -2.18% -0.60%
0 bp 0 0
100 bp -3.15% -7.85%
200 bp -6.10% -19.48%
300 bp -8.90% -34.71%
400 bp -12.04% -51.99%
- -----------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of the
Bank's operations to changes in interest rates in the table above are utilized
in, and set forth under, the gap table below. Although management finds these
assumptions reasonable, the interest rate sensitivity of the Bank's assets and
liabilities and the estimated effects of changes in interest rates on the Bank's
net interest income and MVPE indicated in the above table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions.
47
<PAGE>
The following table summarizes the anticipated maturities or repricing
of the Bank's interest-earning assets and interest-bearing liabilities as of
September 30, 1998, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
More Than One More Than
Within Three Three to Twelve Year to Three Three Years to Over
Months Months Years Five Years Five Years Total
------ ------ ----- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Fixed ............................. $ 67,439 $ 176,669 $ 545,504 $ 374,477 $ 955,923 $ 2,120,012
Adjustable ........................ 264,346 665,708 500,384 70,443 -- 1,500,881
Other loans .......................... 101,304 29,804 10,875 1,328 48 143,359
Securities:
Non-mortgage(3) ...................... 150,470 -- 10,100 -- -- 160,570
Mortgage-related fixed(4) ............ 17,084 46,504 118,661 59,887 37,561 279,697
Mortgage-related adjustable(4) ....... 399,416 276,233 93,219 -- -- 768,868
Other interest-earning assets ........... 254,570 -- -- -- -- 254,570
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets ..... 1,254,629 1,194,918 1,278,743 506,135 993,532 5,227,957
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Deposits:
NOW accounts(5) ...................... 52,088 145,846 52,192 9,188 1,126 260,440
Savings accounts(5) .................. 32,295 77,508 16,470 2,907 -- 129,180
Money market deposit
accounts(5) ........................ 82,986 187,292 117,895 26,189 24,175 438,537
Certificates of deposit .............. 731,934 935,355 1,309,967 86,830 1,937 3,066,023
Other borrowings(6) ..................... -- -- -- -- 675,000 675,000
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities ..................... 899,303 1,346,001 1,496,524 125,114 702,238 4,569,180
----------- ----------- ----------- ----------- ----------- -----------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities .................... $ 355,326 $ (151,083) $ (217,781) $ 381,021 $ 291,294 $ 658,777
=========== =========== =========== =========== =========== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities ........... $ 355,326 $ 204,243 $ (13,538) $ 367,483 $ 658,777 $ 658,777
=========== =========== =========== =========== =========== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities as a
percent of total assets ................ 6.69% 3.84% (0.25)% 6.91% 12.39%
Cumulative one-year gap at
September 30, 1997 ..................... 9.31%
Cumulative one-year gap at
September 30, 1996 ..................... 0.35%
</TABLE>
- -----------------
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, as adjusted to
take into account estimated prepayments in assessing the interest rate
sensitivity of saving associations in the Bank's region.
(2) Balances have not been reduced for non-performing loans, which amounted to
$6.2 million at September 30, 1998.
48
<PAGE>
(3) Based on contractual maturities.
(4) Reflects estimated prepayments in the current interest rate environment.
(5) Although the Bank's NOW accounts, passcard savings accounts and money
market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer effective maturities. The decay rates used on these
accounts are based on the latest available OTS assumptions and should not
be regarded as indicative of the actual withdrawals that may be experienced
by the Bank. If all of the Bank's NOW accounts, passcard savings accounts
and money market deposit accounts had been assumed to be subject to
repricing within one year, interest-bearing liabilities which were
estimated to mature or reprice within one year would have exceeded
interest-earning assets with comparable characteristics by $45.9 million,
for a cumulative one-year gap of (0.86)% of total assets.
(6) Assumes call features will not be exercised in the current interest rate
environment.
Certain assumptions are contained in the above table which affect the
presentation. Although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.
Changes in Financial Condition
General. The Bank's total assets increased by $391.2 million or 7.9% to
$5.31 billion at September 30, 1998 compared to $4.92 billion at September 30,
1997. The increase was primarily due to a $388.2 million or 11.7% increase in
loans, which totaled $3.71 billion at September 30, 1998 compared to $3.32
billion at September 30, 1997. This increase was also due to the Bank's decision
to leverage its capital through an increase in mortgage-related securities of
$194.2 million, acquired through the utilization of proceeds from additional
borrowings. These increases were partially offset by a decrease of $189.8
million or 32.4% in investment securities and securities purchased under
agreement to resell.
Loans. The Bank's net loan portfolio increased from $3.32 billion at
September 30, 1997 to $3.71 billion at September 30, 1998. The increase in the
loan portfolio over this time period was due to increased loan demand.
Securities. Investment securities and securities purchased under
agreement to resell amounted to $585.4 million at September 30, 1997, and $395.6
million at September 30, 1998, respectively. The decrease of $189.8 million or
32.4% was primarily due to the use of funds from maturities and prepayments to
fund the Bank's loan and mortgage-related securities growth.
Liabilities. The Bank's total liabilities increased $333.7 million or
7.71% to $4.65 billion at September 30, 1998 compared to $4.32 billion at
September 30, 1997. Such increase was due primarily to an increase in borrowed
funds of $225.0 million to fund mortgage-related securities growth and, to a
lesser extent, an increase in deposits of $107.1 million.
49
<PAGE>
Equity. Total equity amounted to $662.3 million at September 30, 1998
and $604.8 million at September 30, 1997, or 12.5%, and 12.3% of total assets at
such dates. The increase in equity over the period was due to continued
profitable operations and an increase in the unrealized gains on securities
available for sale, net, from $9.6 million at September 30, 1997 to $13.1
million at September 30, 1998.
50
<PAGE>
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances (we do not believe that the
use of monthly averages rather than daily averages has a significant effect upon
our results). Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------ ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)............. $3,470,898 $264,752 7.63 $3,065,946 $236,105 7.70 $2,757,878 $207,056 7.51%
Other loans..................... 46,082 3,694 8.02 48,689 3,904 8.02 53,667 4,402 8.20
Mortgage-related securities..... 911,659 57,967 6.36 592,719 41,473 7.00 693,797 48,642 7.01
Investment securities........... 556,646 34,045 6.12 717,114 45,968 6.41 734,516 43,952 5.98
FHLB stock...................... 41,598 3,186 7.66 38,698 2,647 6.84 36,272 2,337 6.44
---------- -------- ---------- -------- ---------- --------
Total Interest-Earning
Assets(1)..................... $5,026,883 363,644 7.23 $4,463,166 330,097 7.40 $4,276,130 306,389 7.17
========== --------- ========== -------- ========== --------
Interest-Bearing Liabilities:
Savings deposits................ $ 131,343 2,918 2.22 $ 131,912 2,931 2.22 $ 134,337 2,985 2.22
Demand and NOW deposits......... 661,871 19,861 3.00 570,865 15,141 2.65 578,325 15,879 2.75
Certificate accounts............ 3,071,829 180,647 5.88 3,082,984 184,357 5.98 2,963,367 176,901 5.97
Borrowings...................... 548,275 31,471 5.74 87,140 5,028 5.77 77,917 4,636 5.95
---------- --------- ---------- -------- ---------- --------
Total Interest-Bearing
Liabilities................... $4,413,318 234,897 5.32 $3,872,901 207,457 5.36 $3,753,946 200,401 5.34
========== --------- ========== -------- ========== --------
Net interest income.............. $128,747 $122,640 $105,988
======== ======== ========
Net interest rate spread......... 1.91% 2.04% 1.83%
==== ==== ====
Net earning assets............... $ 613,565 $ 590,265 $ 522,184
========== =========== ==========
Net interest margin.............. 2.56% 2.75% 2.48%
==== ==== ====
Average Interest-Earning
Assets to Average
Interest-Bearing Liabilities.... 113.90% 115.24% 113.91%
====== ====== ======
</TABLE>
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
51
<PAGE>
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume).
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------------
1997 vs. 1998 1996 vs. 1997
-------------------------------------------- --------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
------------------------------ Total ------------------------------ Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable .................. $ 31,265 $ (2,383) $ (445) $ 28,437 $ 23,050 $ 5,030 $ 471 $ 28,551
Mortgage-related securities ....... 21,995 (5,524) 23 16,494 (5,318) (1,755) (96) (7,169)
Investment securities ............. (7,884) (2,886) (1,153) (11,923) (35) 2,100 (49) 2,016
Other ............................. 198 317 24 539 155 145 10 310
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets ........................ $ 45,574 $(10,476) $ (1,551) $ 33,547 $ 17,852 $ 5,520 $ 336 $ 23,708
======== ======== ======== -------- ======== ======== ======== ========
Interest-bearing liabilities:
Savings deposits .................. $ (13) $ -- $ -- $ (13) $ (54) $ -- $ -- $ (54)
Demand and NOW deposits ........... 2,412 1,998 319 4,729 (205) (578) 7 (776)
Borrowings ........................ 26,498 (9) (46) 26,443 549 (140) (17) 392
Certificate accounts .............. (647) (3,083) 11 (3,719) 7,186 296 12 7,494
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities .................... $ 28,250 $ (1,094) $ 284 $ 27,440 $ 7,476 $ (422) $ 2 $ 7,056
======== ======== ======== -------- ======== ======== ======== ========
Net interest income ................ $ 6,107 $ 16,652
======== ========
</TABLE>
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<PAGE>
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and borrowings and the resultant interest rate
spreads at the dates indicated. Weighted average balances are based on monthly
balances.
At September 30,
---------------------------
1998 1997 1996
---- ---- ----
Weighted average yield on:
Loans receivable ............................. 7.38% 7.63% 7.51%
Mortgage-related securities .................. 6.66% 6.75% 6.86%
Investment securities ........................ 5.93% 6.52% 6.45%
Other interest-earning assets ................ 5.26% 5.67% 5.83%
Combined weighted average yield
on interest-earning assets ................ 7.07% 7.32% 7.22%
Weighted average rate paid on:
Savings deposits ............................. 3.64% 3.02% 2.88%
Demand and NOW deposits ...................... 1.50% 1.88% 2.14%
Certificate accounts ......................... 5.75% 5.92% 5.98%
Borrowings ................................... 5.73% 5.75% 5.78%
Combined weighted average rate
paid on interest-bearing liabilities ...... 5.24% 5.35% 5.37%
Spread ........................................ 1.83% 1.97% 1.86%
Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997
General. The Bank reported net income of $54.0 million for the year
ended September 30, 1998 compared to net income of $52.7 million for the year
ended September 30, 1997, an increase of $1.3 million or 2.5%. The increase in
1998 was primarily due to an increase in net interest income, which was
partially offset by increases in total other expenses and the provision for loan
losses.
Net Interest Income. Net interest income increased $6.1 million or 5.0%
to $128.7 million for 1998 compared to 1997, reflecting a $33.5 million or 10.2%
increase in interest income which was partially offset by a $27.4 million or
13.2% increase in interest expense. The Bank's interest rate spread and net
interest margin decreased to 1.91% and 2.56%, respectively, for 1998 compared to
2.04% and 2.75%, respectively, for 1997. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
113.9% for 1998 compared to 115.2% for 1997.
Interest Income. The increase in interest income during the year ended
September 30, 1998 was primarily due to an increase in the average balance of
the Bank's interest-earning assets. The average balance of the loan portfolio
increased $402.3 million or 12.9% to $3.52 billion for 1998 compared to 1997 due
to increased loan demand. The average balance of the Bank's mortgage-related
securities and investment securities portfolios increased $158.5 million or
12.1% to $1.47 billion for 1998 compared to 1997 primarily as a result of the
use of additional borrowings to purchase mortgage-related assets. The average
yield earned on the Bank's loan portfolio decreased from 7.71% in 1997 to 7.63%
in 1998, and the average yield earned on the Bank's mortgage-related
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<PAGE>
and investment securities portfolios decreased from 6.68% for 1997 to 6.27% for
1998. The decrease in average yield earned on the Bank's mortgage-related and
investment securities portfolios was primarily due to the purchase of
lower-yielding mortgage-related securities that had adjustable rates of
interest, consistent with the Bank's asset and liability management policies.
Interest Expense. The increase in interest expense during the year
ended September 30, 1998 was primarily due to the increase of $461.1 million or
529.2% in the average balance of borrowings and to an increase in the average
balance of deposits. The average balance of deposits increased $79.3 million or
2.1% to $3.87 billion for 1998, $90.4 million of which consisted of an increase
in demand deposits, including noninterest-bearing checking, NOW and money market
accounts and $11.2 million of which consisted of a decrease in the average
balance of certificates of deposit. The average rate paid on deposits decreased
slightly from 5.35% in 1997 to 5.26% in 1998. The average rate paid on
borrowings decreased from 5.77% in 1997 to 5.74% in 1998.
Provision for Loan Losses. For the year ended September 30, 1998, the
expense provision for loan losses amounted to $3.4 million compared to a
provision for loan losses in 1997 of $56,000. The allowance for loan losses is
determined based upon management's evaluation of the Bank's loan portfolios
considering past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, current economic conditions
and other relevant factors. The primary reason for the increase in the Bank's
provision for loan losses in fiscal 1998 was the increase in multi-family and
commercial real estate, construction and development and consumer loans in the
Bank's portfolio. In making this determination, the Bank considered in
particular that these types of loans generally are deemed to be more risky than
the single-family residential mortgage loans which are the mainstay of the Bank.
At September 30, 1998, the Bank's ratio of allowance for loan losses to
non-performing loans was approximately 80.0%.
Other Income. Other income amounted to $12.9 million and $11.1 million
for the years ended September 30, 1998 and 1997, respectively. The increase
consisted primarily of a $1.2 million or 24.0% increase in automated teller and
debit card transaction fees and checking account transaction fees, resulting
from increased debit card usage and from an increased number of checking
accounts.
Other Expenses. Other expenses increased $4.2 million or 9.3% to $49.5
million for the year ended September 30, 1998 compared to the year ended
September 30, 1997. This increase was primarily due to a $2.4 million or 10.3%
increase in personnel expenses and a $1.3 million or 19.8% increase in occupancy
costs resulting from the addition of two limited service branch offices in 1998.
Provision for Income Taxes. The provision for income taxes amounted to
$34.8 million and $35.7 million for 1998 and 1997, respectively, resulting in
effective tax rates of 39.2% and 40.4%, respectively.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
General. The Bank's net income amounted to $52.7 million for the year
ended September 30, 1997 compared to $26.6 million for the year ended September
30, 1996, an increase of $26.1
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<PAGE>
million or 98.1%. However, the $26.6 million of net income for 1996 reflects a
$14.5 million after-tax charge for the SAIF special assessment. Without such
assessment, net income for 1996 would have been $41.1 million. During 1997
compared to 1996, net interest income increased $16.7 million or 15.7% and total
other income decreased $300,000 or 2.7%. Total other expenses excluding the
special assessment, decreased $2.1 million or 4.4%.
Net Interest Income. The increase in net interest income in 1997
compared to 1996 reflects an increase of $23.7 million or 7.7% in interest
income, which was partially offset by an increase of $7.1 million or 3.5% in
interest expense. The interest rate spread increased to 2.04% for 1997 compared
to 1.83% for 1996, and the Bank's net interest margin increased to 2.75% for
1997 compared to 2.48% for 1996. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities increased to
115.2% for 1997 compared to 113.9% for 1996.
Interest Income. The increase in interest income of $23.7 million or
7.7% to $330.1 million in 1997 compared to 1996 was primarily due to an increase
in the average volume of loans outstanding and an increase in the average yield
earned on the Bank's loan and mortgage-related and investment securities
portfolios, partially offset by a decrease in the average volume of the
securities portfolios (primarily the mortgage-related securities portfolio). The
average balance of the Bank's loan portfolio increased $303.1 million or 10.8%
to $3.11 billion for the year ended September 30, 1997 compared to $2.81 billion
for the year ended September 30, 1996 due to an increase in loan demand. In
addition, the average yield on the Bank's loan and mortgage-related and
investment securities portfolios increased from 7.52% and 6.48%, respectively,
in 1996 to 7.71% and 6.68%, respectively, for 1997. The increase in the average
yield earned on the Bank's loan portfolio was due primarily to the adjustment of
certain of the Bank's adjustable-rate loans to the fully indexed rate. The
increase in the average yield earned on the Bank's mortgage-related and
investment securities portfolios was due to the maturity of lower yielding
securities and the reinvestment of these funds in higher yielding securities.
The average balance of the mortgage-related and investment securities portfolios
decreased $118.5 million or 8.3% to $1.31 billion for 1997 compared to 1996.
Interest Expense. The increase in interest expense of $7.1 million or
3.5% to $207.5 million during 1997 compared to $200.4 million during 1996 was
due primarily to an increase in the average balance of deposits and borrowings,
primarily with respect to certificates of deposit. The average balance of
deposits increased $109.7 million or 3.0% to $3.79 billion for 1997. The average
rate paid on deposits increased to 5.35% for 1997 compared to 5.33% for 1996,
due primarily to the Bank's increasing balance of higher rate certificate of
deposit accounts.
Other Expenses. The decrease in other expenses of $26.2 million or
36.6% to $45.3 million in 1997 from $71.5 million in 1996 was primarily due to
the one-time $24.2 million special assessment in 1996 and a decrease in SAIF
insurance premiums of $5.3 million, partially offset by a $2.1 million increase
in personnel expenses as a result of the addition of two limited service branch
offices, a customer service call center and the introduction of the debit card
operations center.
Provision for Income Taxes. The provision for income taxes amounted to
$35.7 million and $18.4 million for the years ended September 30, 1997 and 1996,
respectively, resulting in effective tax rates of 40.4% and 40.9%, respectively.
55
<PAGE>
Liquidity and Commitments
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Bank invests excess funds in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
Historically, the Bank has been able to generate sufficient cash through its
deposits and has only utilized borrowings to a limited degree. The Bank utilizes
repurchase agreements and FHLB advances to leverage its capital base and provide
funds for its lending and investment activities, and to enhance its interest
rate risk management. The Bank intends to increase its use of borrowed funds to
leverage its capital after the Reorganization. See "Use of Proceeds."
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. On a longer term basis,
the Bank maintains a strategy of investing in various lending products as
described in greater detail under "Business of the Bank - Lending Activities."
The Bank uses its sources of funds primarily to meet its ongoing commitments, to
pay maturing certificates of deposit and savings withdrawals, to fund loan
commitments and to maintain its portfolio of mortgage-backed and
mortgage-related securities and investment securities. At September 30, 1998,
the total approved loan origination commitments outstanding amounted to $140.7
million. At the same date, the unadvanced portion of construction loans was
$21.3 million. Unused home equity lines of credit were $123.0 million as of
September 30, 1998 and outstanding letters of credit totaled $4.0 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
1998, totaled $1.55 billion. Investment and mortgage-related securities
scheduled to mature in one year or less at September 30, 1998 totaled $391.5
million. Based on historical experience, management believes that a significant
portion of maturing deposits will remain with the Bank. The Bank anticipates
that it will continue to have sufficient funds, through deposits and borrowings,
to meet its current commitments.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $662.3
million at September 30, 1998, or 12.5% of total assets on that date. As of
September 30, 1998, the Bank exceeded all capital requirements of the OTS. The
Bank's regulatory capital ratios at September 30, 1998 were as follows: Tier I
(leverage) capital, 12.2%; Tier I risk- based capital, 27.2%; and Total
risk-based capital, 27.3%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
56
<PAGE>
Year 2000 Issues
General. The Year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors, centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus
upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institution Examination Council ("FFIEC") has issued several interagency
statements on Y2K Project Management Awareness. These statements require
financial institutions to, among other things, examine the Y2K implications of
their reliance on vendors with respect to data exchange and the potential impact
of the Y2K issue on their customers, suppliers and borrowers. These statements
also require each federally regulated financial institution to survey its
exposure, measure its risk and prepare a plan to address the Y2K issue. In
addition, the federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions to assure
resolution of any Y2K problems. The federal banking agencies have assured that
Y2K testing and certification is a key safety and soundness issue in conjunction
with regulatory exams and thus, that an institution's failure to address
appropriately the Y2K issue could result in supervisory action, including the
reduction of the institution's supervisory ratings, the denial of applications
for approval of mergers or acquisitions or the imposition of civil money
penalties.
Risk. Like most financial service providers, the Bank and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software, hardware and other
equipment, both within and outside the Bank's direct control and third parties
with whom the Bank electronically or operationally interfaces are likely to be
affected. If computer systems are not modified in order to be able to identify
the year 2000, many computer applications could fail or create erroneous
results. As a result, many calculations which rely on date field information,
such as interest, payment or due dates and other operating functions, could
generate results which are significantly misstated, consequently the Bank could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances a
failure to adequately address the Y2K issue could adversely affect the viability
of the Bank's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Y2K issue could result in a significant
adverse impact on the Bank's operations and, in turn, its financial condition
and results of operations.
State of Readiness. During April 1997, the Bank formulated its plan to
address the Y2K issue. Since that time, the Bank has taken the following steps:
o Established senior management advisory and review
responsibilities;
o Completed a company-wide inventory of application and system
software;
o Built an internal tracking database for application and vendor
software;
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<PAGE>
o Developed compliance plans and schedules for all lines of
business;
o Began computer code testing;
o Initiated vendor compliance verification;
o Began awareness and education activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquiries as well as
help educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank's senior management formally
established a Y2K plan, and a project team was assembled for management
of the Y2K project. The project team created a plan of action that
includes milestones, budget estimates, strategies, and methodologies to
track and report the status of the project. Members of the project team
also attended conferences and information sharing sessions to gain more
insight into the Y2K issue and potential strategies for addressing it.
This stage is substantially complete.
Assessment Phase. The Bank's strategies were further developed
with respect to how the objectives of the Y2K plan would be achieved,
and a Y2K business risk assessment was made to quantify the extent of
the Bank's Y2K exposure. A corporate inventory (which is periodically
updated as new technology is acquired and as systems progress through
subsequent phases) was developed to identify and monitor Y2K readiness
for information systems (hardware, software, utilities, and vendors) as
well as environmental systems (security systems, facilities, etc.).
Systems were prioritized based on business impact and available
alternatives. Mission critical systems supplied by vendors were
researched to determine Y2K readiness. If Y2K-ready versions were not
available, the Bank began identifying functional replacements which
were upgradable or are currently Y2K-ready, and a formal plan was
developed to repair, upgrade or replace all mission critical systems.
This phase is substantially complete.
By June 1998, the Bank's larger borrowers were evaluated for
Y2K exposure using a questionnaire developed by the Bank's Y2K Business
Systems Team. As part of the current credit approval process, all new
and renewed loans are evaluated for Y2K risk. While the Bank will
continue to monitor the progress being made by its larger borrowers in
addressing their own Y2K issues, to date the Bank is generally
satisfied with these customers' responses to the Bank's inquiries.
Renovation Phase. The Bank's corporate inventory revealed that
Y2K upgrades were available for all vendor supplied mission critical
systems, and these Y2K-ready versions have been delivered, installed
and have entered the validation process. The Bank has substantially
renovated all mission critical proprietary software.
58
<PAGE>
Validation Phase. The validation phase is designed to test the
ability of hardware and software to accurately process date sensitive
data. The Bank currently is in the process of validation testing of
each mission critical system. The Bank has created a test environment
comprised of an IBM Multiprise 2000 dedicated to Y2K testing which is
virtually insulated from production and development environments. The
Bank anticipates that the validation phase will follow the estimated
industry norm in that it will absorb at least 50% of the total Y2K
resources (computer and personnel) over the life cycle of the project.
The Bank has increased staff in anticipation of that work effort. The
company's validation phase is expected to be completed by December 31,
1998 for all mission critical systems. During the validation testing
process to date, no significant Y2K problems have been identified
relating to any modified or upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting
Y2K-ready code into production before having actually completed Y2K
validation testing. Y2K-ready modified or upgraded versions have been
installed and placed into production with respect to all proprietary
mission critical systems.
Company Resources Invested. The Bank's Y2K project team has been
assigned the task of ensuring that all mission critical systems across the Bank
are identified, analyzed for Y2K compliance, corrected if necessary, tested, and
changes put into service by the end of 1998. The Y2K project team members
represent all functional areas of the Bank, including branches, data processing,
loan administration, accounting, item processing and operations, compliance,
internal audit, human resources, and marketing. The team is headed by an
Executive Vice President who reports directly to the President. The Bank's Board
of Directors oversees the Y2K plan and provides guidance and resources to and
receives monthly updates from the Y2K project team leader.
The Bank is expensing all costs associated with required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project for the Bank is
estimated to be $2.3 million. Expenses of approximately $914,000 were incurred
and expensed through September 30, 1998. Y2K expenses are not expected to exceed
the budget, and the Bank does not expect significant increases in future data
processing costs relating to Y2K compliance.
Contingency Plans. During the assessment phase, the Bank began to
develop back-up or contingency plans for each of its mission critical systems. A
few of the Bank's mission critical systems are dependent upon third party
vendors or service providers, therefore, contingency plans include selecting a
new vendor or service provider and converting to their system. In the event a
current vendor's system fails during the validation phase, and it is determined
that the vendor is unable or unwilling to correct the failure, the Bank will
convert to a new system from a pre-selected list of prospective vendors. In each
case, realistic trigger dates have been established to allow for orderly and
successful conversions. For some systems, contingency plans consist of using or
reverting to manual systems until system problems can be corrected.
Virtually all of the Bank's mission critical systems are written and
maintained by the Bank's Information Systems Department. The Bank has already
hired additional programmers to assist in completing the project on time.
Contingency plans have been adopted which includes hiring more
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<PAGE>
programmers or to contract with programmers to speed the renovation process, if
necessary. As of November 16, 1998, 98.6% of all mission critical proprietary
software has been renovated. Although there can be no assurances, the Bank does
not anticipate any material adverse effect on its operations as a result of the
impact of the Y2K issue.
Impact of Accounting Pronouncements
New Statements of Financial Accounting Standards - In February 1997,
the FASB issued SFAS No. 128, "Earnings per Share". The Statement establishes
standards for computing and presenting earnings per share ("EPS"). It replaces
the presentation of primary EPS with a presentation of basic EPS. The Statement
is effective for the Bank's financial statements as of September 30, 1999. The
Bank will compute earnings per share under the new standard upon completion of
its stock offering. See Note 20 of the Notes to Consolidated Financial
Statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". The Statement establishes standards for
disclosing information about an entity's capital structure. The Statement is
effective for the Bank's financial statements as of September 30, 1999. The Bank
is prepared to comply with the additional reporting requirements of this
Statement, and does not anticipate that the implementation of this Statement
will have a material impact on the Bank's consolidated financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This Statement
requires that the Bank (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for the Bank's financial statements for the fiscal year
ending September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the Bank's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". The Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Statement is effective for the Bank's financial statements for the fiscal
year ending September 30, 1999. The Bank is prepared to comply with the
additional reporting requirements of this Statement and does not anticipate that
the implementation of this Statement will have a material impact on the Bank's
consolidated financial statements.
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<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post-retirement Benefits". The Statement revises
employers' disclosures about pensions and other post-retirement benefit plans.
The Statement does not change the measurement or recognition of those plans. The
Statement is effective for the Bank's financial statements for the fiscal year
ending September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the Bank's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities. The Statement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Statement is
effective for the Bank's financial statements for the fiscal year ending
September 30, 2000. The adoption of this Statement is not expected to have a
material impact on the Bank's consolidated financial statements.
In October 1998, FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". The Statement changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. The Statement
is effective for the Bank's financial statements as of January 1, 1999. The Bank
does not anticipate that the implementation of this Statement will have a
material impact on the consolidated financial statements.
BUSINESS OF THE HOLDING COMPANY
The Bank will be reorganized into a three-tier mutual holding company
with a minority stock issuance by Capitol Federal Financial, a majority-owned
subsidiary of Capitol Federal Savings Bank MHC. Capitol Federal Financial
initially will not be an operating company and, after the Reorganization, is not
expected to engage in any significant business activity other than to hold the
Common Stock of the Bank and the ESOP loan, and to invest the funds retained by
it.
Capitol Federal Financial is not expected to own or lease real or
personal property initially, but will instead use the facilities of the Bank. At
the present time, Capitol Federal Financial does not intend to employ any
persons other than certain officers of the Bank, but will utilize the support
staff of the Bank from time to time.
BUSINESS OF THE BANK
General
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied,
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<PAGE>
one- to four-family residences. We also originate a limited amount of loans
secured by first mortgages on nonowner-occupied one- to four-family residences,
consumer loans, permanent and construction loans secured by commercial real
estate, multi-family real estate loans and land acquisition and development
loans. While our primary business is the origination of one- to four-family
residential mortgage loans funded through retail deposits, we also purchase
whole loans and invest in certain investment and mortgage-related securities.
Our revenues are derived principally from interest on mortgage loans
and interest on investment and mortgage-related securities.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and non-interest bearing checking
accounts and certificates of deposit with varied terms ranging from 91 days to
96 months. We only solicit deposits in our market areas and we have not accepted
brokered deposits.
Market Areas
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We primarily serve the entire metropolitan areas of Topeka, Wichita,
Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the
metropolitan area of greater Kansas City. We may originate loans outside of
these areas on occasion, and we do purchase whole loans secured by properties
located outside of these areas from correspondent lenders, to the extent such
loans meet our underwriting criteria.
Lending Activities
General. Our primary lending activity is the origination of loans
secured by first mortgages on one- to four-family residential properties. We
also make a limited number of consumer loans and loans secured by multi-family
dwellings, commercial properties and land acquisition and development loans. Our
mortgage loans carry either a fixed or an adjustable rate of interest. Mortgage
loans are generally long-term and amortize on a monthly basis with principal and
interest due each month. At September 30, 1998, our net loan portfolio totaled
$3.71 billion, which constituted 69.8% of our total assets.
All originated loans are generated by our own employees, with larger
loans subject to approval by the Board of Directors. Loans over $450,000 must be
underwritten by two underwriters. Any mortgage loan over $750,000 must be
approved by the ALCO and loans over $1.5 million must be approved by the Board
of Directors. For loans requiring Board approval, management is responsible for
presenting to the Board information about the creditworthiness of a borrower and
the estimated value of the subject property. Information pertaining to
creditworthiness of a borrower generally consists of a summary of the borrower's
credit history, employment, employment stability, net worth and income. The
estimated value of the property must be supported by an independent appraisal
report prepared in accordance with our appraisal policy.
62
<PAGE>
At September 30, 1998, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities was approximately $97.6
million. At that date, we had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount.
Our largest lending relationship to a single borrower or a group of
related borrowers consisted of six loans totaling $26.5 million at September 30,
1998. The largest of these was a $14.0 million line of credit to be used solely
for the acquisition and development of a 320 acre residential housing community
located in Overland Park, Kansas. The loan balance at September 30, 1998 was
$9.7 million. This loan was originated in 1995, has a term of five years with
one automatic extension of three years, has an adjustable interest rate with a
minimum and maximum rate and had a 100% loan-to-value ratio at origination.
Principal repayments are not on a monthly schedule, but are required from the
sale of each building lot. Interest payments are funded from loan proceeds. The
borrowers have provided additional collateral, in the form of $750,000 in
certificates of deposit placed in escrow in the Bank, in addition to personal
guarantees of up to $2.3 million. The loan terms require additional contingent
interest payments to the Bank of 25% of the net profits of the development, if
any. At September 30, 1998, five of a planned eight phases have been developed,
with 267 lots completed and 165 lots sold to builders, with an additional 30
lots sold but not yet closed. An additional 166 lots remained to be developed at
that date. The next largest loan to one of the partners in this group of
borrowers is a $6.2 million, combination two year construction and 10 year
permanent loan for the construction of a 51 unit apartment building located in
Kansas City, Missouri. The loan was originated in 1997, has a fixed interest
rate with a 25 year amortization and a loan-to-value ratio, as completed, of
79%. The loan requires the payment of interest only during the construction
period (which may be funded from loan proceeds). This loan is fully guaranteed
by the borrower, is cross-collateralized with other loan collateral held by the
Bank, and the Bank has an assignment of leases. The remaining three loans to
this borrower each have a balance of $3.0 million or less. Each of the loans to
this group of borrowers was current and performing in accordance with its terms
at September 30, 1998.
The second largest lending relationship at September 30, 1998,
consisted of loans totaling $13.5 million for numerous multi-family and
commercial real estate projects throughout Kansas. No single loan in this group
exceeded $3.0 million at that date. All of these loans were current and
performing in accordance with their terms at September 30, 1998.
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<PAGE>
Loan Portfolio Composition. The following table presents information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.......... $3,504,799 93.47% $3,145,799 93.69% $2,794,342 93.80% $2,611,554 94.29% $2,155,272 93.23%
Multi-family................. 40,361 1.08 26,688 0.79 29,341 0.98 32,795 1.18 44,082 1.91
Commercial................... 9,069 0.24 5,924 0.18 4,999 0.17 4,721 0.17 5,301 0.23
Construction and development. 52,086 1.39 51,157 1.52 38,488 1.29 14,088 0.51 11,069 0.48
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans. 3,606,315 96.18 3,229,568 96.18 2,867,170 96.24 2,663,158 96.15 2,215,724 95.85
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Other Loans:
Consumer Loans:
Savings................... 16,446 0.44 16,314 0.49 16,703 0.56 16,016 0.58 14,690 0.64
Student................... 20,120 0.54 23,365 0.70 27,703 0.93 32,765 1.18 27,881 1.21
Home improvement.......... 2,776 0.07 3,341 0.10 2,183 0.07 2,221 0.08 1,900 0.08
Automobile................ 5,758 0.15 4,120 0.12 2,372 0.08 2,183 0.08 1,953 0.08
Home equity............... 97,829 2.61 80,640 2.40 62,895 2.11 53,107 1.92 49,226 2.13
Other..................... 420 0.01 294 0.01 309 0.01 234 0.01 279 0.01
---------- ------ ---------- ------ ---------- ------ ---------- ----- ---------- ------
Total consumer loans.... 143,349 3.82 128,074 3.82 112,165 3.76 106,526 3.85 95,929 4.15
Commercial business loans.... 10 -- -- -- -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans....... 143,359 3.82 128,074 3.82 112,165 3.76 106,526 3.85 95,929 4.15
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans receivable.. 3,749,674 100.00% 3,357,642 100.00% 2,979,335 100.00% 2,769,684 100.00% 2,311,653 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............. 21,690 21,872 21,047 5,773 8,024
Deferred fees and discounts.. 12,751 12,029 11,799 10,918 11,279
Allowance for losses......... 4,981 1,639 1,583 1,359 3,878
---------- ---------- ---------- ---------- ----------
Total loans receivable, net.. $3,710,252 $3,322,102 $2,944,906 $2,751,634 $2,288,472
========== ========== ========== ========== ==========
</TABLE>
64
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family......... $2,010,809 53.64% $1,403,790 41.81% $1,085,992 36.45% $ 817,233 29.51% $ 640,240 27.70%
Multi-family................ 34,266 0.91 19,069 0.57 16,113 0.54 18,469 0.67 18,671 0.81
Commercial.................. 8,208 0.22 4,667 0.14 3,463 0.12 2,734 0.10 2,968 0.13
Construction and development 19,829 0.53 9,404 0.28 6,315 0.21 5,292 0.19 2,629 0.11
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans.... 2,073,112 55.29 1,436,930 42.80 1,111,883 37.32 843,728 30.47 664,508 28.75
Consumer..................... 29,970 0.80 27,335 0.81 22,585 0.76 21,586 0.78 28,016 1.21
Commercial business.......... 10 --- --- --- --- --- --- --- --- ---
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total fixed-rate loans..... 2,103,092 56.09 1,464,265 43.61 1,134,468 38.08 865,314 31.25 692,524 29.96
Adjustable-Rate Loans:
Real estate:
One- to four-family......... 1,493,990 39.85 1,742,009 51.88 1,708,350 57.34 1,794,322 64.77 1,515,032 65.53
Multi-family................ 6,095 0.16 7,619 0.23 13,228 0.44 14,326 0.52 25,411 1.10
Commercial.................. 861 0.02 1,257 0.04 1,536 0.05 1,987 0.07 2,333 0.10
Construction and development 32,257 0.86 41,753 1.24 32,173 1.08 8,796 0.32 8,440 0.37
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans.... 1,533,203 40.89 1,792,638 53.39 1,755,287 58.91 1,819,431 65.68 1,551,216 67.10
Consumer..................... 113,379 3.02 100,739 3.00 89,580 3.01 84,939 3.07 67,913 2.94
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total adjustable-rate loans 1,646,582 43.91 1,893,377 56.39 1,844,867 61.92 1,904,370 68.75 1,619,129 70.04
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans................ 3,749,674 100.00% 3,357,642 100.00% 2,979,335 100.00% 2,769,684 100.00% 2,311,653 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............. 21,690 21,872 21,047 5,773 8,024
Deferred fees and discounts.. 12,751 12,029 11,799 10,918 11,279
Allowance for loan losses.... 4,981 1,639 1,583 1,359 3,878
---------- ---------- ---------- ---------- ----------
Total loans receivable, net. $3,710,252 $3,322,102 $2,944,906 $2,751,634 $2,288,472
========== ========== ========== ========== ==========
</TABLE>
65
<PAGE>
The following schedule illustrates the contractual maturity of the
Bank's loan portfolio at September 30, 1998. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------
Multi-family and Construction Commercial
One- to Four-Family Commercial and Development Consumer Business Total
------------------- ---------------- --------------- --------------- --------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1)............ $ 2,881 7.05% $ --- ---% $ 384 9.50% $ --- ---% $ --- ---% $ 3,265 7.33%
1999............... 32,094 6.33 1,037 7.50 5,800 9.50 10,158 7.59 --- --- 49,089 6.99
2000............... 11,639 6.90 --- --- 9,000 9.00 6,573 8.33 10 10.50 27,222 7.94
2001 and 2002...... 18,781 7.62 --- --- 25,559 8.50 7,062 8.82 --- --- 51,402 8.22
2003 to 2004....... 22,744 6.87 716 7.67 11,343 6.97 3,625 9.10 --- --- 38,428 7.12
2005 to 2019....... 971,850 6.71 43,326 8.16 --- --- 86,781 8.75 --- --- 1,101,957 6.93
2020 and beyond.... 2,444,810 6.66 4,351 7.70 --- --- 29,150 9.02 --- --- 2,478,311 6.69
</TABLE>
- ------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after September 30, 1999 which have
predetermined interest rates is $2.10 billion, while the total amount of loans
due after such date which have floating or adjustable interest rates is $1.60
billion.
66
<PAGE>
One- to Four-Family Residential Real Estate Lending. Residential loan
originations are generated by referrals from real estate brokers and builders,
our marketing efforts and existing and walk-in customers. We focus our lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied one- to four-family residences in our market areas. In order to
generate additional lending volume, we purchase whole loans throughout the
midwest. These purchases allow us to attain geographic diversification and
manage credit concentration risks in the loan portfolio. At September 30, 1998,
one- to four-family residential mortgage loans totaled $3.50 billion, or 93.5%
of our gross loan portfolio.
We generally underwrite our one- to four-family loans based on the
applicant's employment, credit history, and appraised value of the subject
property. Presently, we lend up to 97% of the lesser of the appraised value or
purchase price for one- to four-family residential loans. For loans with a
loan-to-value ratio in excess of 80%, we require private mortgage insurance in
order to reduce our exposure below 80%. Properties securing our one- to
four-family loans are appraised by either staff appraisers or independent fee
appraisers approved by the Board of Directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance (if necessary) in an
amount not less than the value of the property improvements.
We currently originate one- to four-family mortgage loans on either a
fixed or adjustable basis, as consumer demand dictates. Our pricing strategy for
mortgage loans includes setting interest rates that are competitive with FNMA
and FHLMC, other local financial institutions, and our internal needs. ARM loans
are offered with either a one-year, three-year or five-year term to the initial
repricing date. After the initial period, the interest rate for each ARM loan
generally adjusts annually for the remainder of the term of the loan. We use a
number of different indexes to reprice our ARM loans. During the 1998 and 1997
fiscal years, we originated $198.9 million and $315.3 million of one- to
four-family ARM loans, and $878.6 million and $413.0 million of one- to
four-family fixed-rate mortgage loans, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management."
Fixed-rate loans secured by one- to four-family residences have
contractual maturities of up to 30 years, and are fully amortizing, with
payments due monthly. These loans normally remain outstanding, however, for a
substantially shorter period of time because of refinancing and other
prepayments. A significant change in the current level of interest rates could
alter the average life of a residential loan in our portfolio considerably. Our
one- to four-family loans are generally not assumable, do not contain prepayment
penalties and do not permit negative amortization of principal. Our real estate
loans generally contain a "due on sale" clause allowing us to declare the unpaid
principal balance due and payable upon the sale of the security property.
Our one- to four-family residential ARM loans are fully amortizing
loans with contractual maturities of up to 30 years, with payments due monthly.
Our ARM loans generally provide for specified minimum and maximum interest
rates, with a lifetime cap and floor, and an annual adjustment on the interest
rate over the rate in effect on the date of origination. As a consequence of
using caps, the interest rates on these loans may not be as rate sensitive as is
our cost of funds. Our ARM loans are not convertible into fixed-rate loans.
67
<PAGE>
In order to remain competitive in our market areas, we currently
originate ARM loans at initial rates below the fully indexed rate, and qualify
borrowers based on this initial discounted rate for our three and five year ARMs
and at 2% over the initial rate for one-year ARMs.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality -- Non-Performing
Assets" and "-Asset Quality -- Classified Assets." At September 30, 1998, our
one- to four-family ARM loan portfolio totaled $1.49 billion, or 39.9% of our
gross loan portfolio. At that date the fixed-rate one- to four-family mortgage
loan portfolio totaled $2.01 billion, or 53.6% of our gross loan portfolio.
Multi-family and Commercial Real Estate Lending. We offer a variety of
multi-family and commercial real estate loans. These loans are secured primarily
by multi-family dwellings, small retail establishments and small office
buildings located in our market areas. At September 30, 1998, multi-family and
commercial real estate loans totaled $49.4 million or 1.3% of our gross loan
portfolio.
Our loans secured by multi-family and commercial real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indexes, generally determined
through negotiation with the borrower. Loan-to-value ratios on our multi-family
and commercial real estate loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments and have maximum maturities of 25 years. While maximum maturities may
extend to 30 years, loans frequently have shorter maturities and may not be
fully amortizing, requiring balloon payments of unamortized principal at
maturity.
Loans secured by multi-family and commercial real estate are granted
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income (the income derived from the
operation of the property less all operating expenses) must be sufficient to
cover the payments related to the outstanding debt. We generally require
personal guarantees of the borrowers covering a portion of the debt in addition
to the security property as collateral for such loans. We generally require an
assignment of rents or leases in order to be assured that the cash flow from the
project will be used to repay the debt. Appraisals on properties securing
multi-family and commercial real estate loans are performed by independent state
certified fee appraisers approved by the Board of Directors. See "- Loan
Originations, Purchases, Sales and Repayments."
The Bank does not generally maintain a tax or insurance escrow account
for its loans secured by multi-family and commercial real estate. In order to
monitor the adequacy of cash flows on income-producing properties of $1.0
million or more, the borrower is notified annually to provide financial
information including rental rates and income, maintenance costs and an update
of real estate property tax payments, as well as personal financial information.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such
68
<PAGE>
loans typically involve large balances to single borrowers or groups of related
borrowers. Because payments on loans secured by multi-family and commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. If the cash flow from the project is
reduced (e.g., if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. See "- Asset Quality -- Non-performing Loans."
Construction and Development Lending. We originate construction loans
primarily secured by existing commercial real estate or building lots. The Bank
also makes a limited number of construction loans to individuals for the
construction of their residences. Presently, all of these loans are secured by
property located within our market areas. At September 30, 1998, we had $35.5
million in construction loans outstanding, representing 1.0% of our gross loan
portfolio.
Construction loans are obtained principally through continued business
with builders who have previously borrowed from the Bank. The application
process includes submission of accurate plans, specifications and costs of the
project to be constructed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building). We
also conduct regular inspections of the construction project being financed.
We occasionally originate acquisition and development loans, primarily
to borrowers having significant experience and longstanding relationships with
the Bank. At September 30, 1998, the Bank had four acquisition and development
loans totaling $16.6 million, representing 0.4% of our gross loan portfolio.
Loans secured by building lots or raw land held for development are
generally granted with terms of up to five years and are available with either
fixed or adjustable interest rates and on individually negotiated terms. During
the development or construction phase, the borrower pays interest only, which
payments may be funded from the loan proceeds. These loans may require monthly
payments or may be established as line of credit loans with no fixed repayment
schedule. On line of credit loans, repayment is required as building lots are
sold. In addition to the agreed upon interest rate on these loans, we may
negotiate a contingent interest payment based on the profitability of the
project.
Loan-to-value ratios on our construction and development loans
typically do not exceed 80% of the appraised value of the project on an as
completed basis, although the Bank's largest acquisition and development loan
was originated with a 100% loan-to-value ratio and a 25% contingent interest
payment based on net profits of the project, if any. See "- Lending Activities
General."
Loans secured by building lots or raw land for development are granted
based on both the financial strength of the borrower and the value of the
underlying property. We generally obtain phase 1 environmental reports on
construction loans and acquisition and development loans of $1.0 million or
more, and require personal guarantees from the borrowers for all or a portion of
the debt. We also require updated financial statements from the borrowers on an
ongoing basis.
69
<PAGE>
Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans. In addition, payment of interest from loan proceeds can make it difficult
to monitor the progress of a project.
Consumer Lending. Consumer loans generally have shorter terms to
maturity (thus reducing our exposure to changes in interest rates) and carry
higher rates of interest than do one- to four-family residential mortgage loans.
In addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities. At
September 30, 1998, our consumer loan portfolio totaled $143.3 million, or 3.8%
of our gross loan portfolio.
The Bank offers a variety of secured consumer loans, including home
equity loans and lines of credit, home improvement loans, auto loans, student
loans and loans secured by savings deposits. We also offer a very limited amount
of unsecured loans. We currently originate all of our consumer loans in our
market areas. The Bank's home equity loans, including lines of credit, and home
improvement loans comprised approximately 70.2% of our total consumer loan
portfolio at September 30, 1998. These loans may be originated in amounts,
together with the amount of the existing first mortgage, of up to 100% of the
value of the property securing the loan. In order to minimize risk of loss, home
equity loans in excess of 80% of the value of the property are partially insured
against loss. The term to maturity on our home equity and home improvement loans
may be up to 15 years. Home equity lines of credit have no stated term to
maturity and require the payment of 2% of the outstanding loan balance per
month, which amount may be reborrowed at any time. Other consumer loan terms
vary according to the type of collateral, length of contract and
creditworthiness of the borrower. The majority of the Bank's consumer loan
portfolio is comprised of home equity lines of credit, which have interest rates
that adjust based upon changes in the prime rate.
We do not originate any consumer loans on an indirect basis (i.e.,
where loan contracts are purchased from retailers of goods or services which
have extended credit to their customers).
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles.
70
<PAGE>
Loan Originations, Purchases, Sales and Repayments
We originate loans through referrals from real estate brokers and
builders, our marketing efforts, and our existing and walk-in customers. While
we originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon customer demand for loans in our market areas. Demand is
affected by local competition and the interest rate environment. During the last
several years, our dollar volume of fixed-rate, one- to four-family loans has
exceeded the dollar volume of the same type of adjustable-rate loans. While our
primary business is the origination of one- to four-family mortgage loans,
competition from other lenders in our market areas limits, to a certain extent,
the volume of loans we have been able to originate and place in our portfolio.
As a result we have purchased mortgage loans and investment and mortgage-related
securities to supplement our portfolios. Such whole loan purchases also serve to
reduce our risk of geographic concentration. We sell a limited amount of loans
and some of our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, we, like many other
financial institutions, have experienced significant prepayments on loans and
mortgage-related securities due to the low interest rate environment prevailing
in the United States.
Purchased whole loans are originated by one or two lenders who have a
regional or national presence. By contractual agreement, the loan product is
originated for us to our specifications. Each loan is underwritten by a third
party contract underwriter who is under contract with the Bank. We set prices
for the loan product once each week. Mortgage servicing for purchased whole
loans is retained by the originating lender.
In periods of economic uncertainty, the ability of financial
institutions, including the Bank, to originate or purchase large dollar volumes
of real estate loans may be substantially reduced or restricted, with a
resultant decrease in interest income.
71
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
Year Ended September 30,
-----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ..... $ 198,857 $ 315,314 $ 253,596
- multi-family ....................... -- 6,240 18,000
- commercial ......................... -- -- --
Non-real estate - consumer ............ 86,848 71,536 58,808
- commercial business ................ 10 -- --
---------- ---------- ----------
Total adjustable-rate .......... 285,715 393,090 330,404
---------- ---------- ----------
Fixed rate:
Real estate - one- to four-family ..... 878,567 412,960 384,842
- multi-family ....................... -- 250 2,600
- commercial ......................... 350 -- 264
Non-real estate - consumer ............ 26,312 26,514 20,554
---------- ---------- ----------
Total fixed-rate ............... 905,229 439,724 408,260
---------- ---------- ----------
Total loans originated ......... 1,190,944 832,814 738,664
---------- ---------- ----------
Purchases:
Real estate - one- to four-family ..... 124,725 106,403 38,086
- multi-family ....................... -- -- --
- commercial ......................... -- -- --
Non-real estate - consumer ............ 30 -- --
---------- ---------- ----------
Total loans purchased .......... 124,755 106,403 38,086
Mortgage-related securities
(excluding
REMICs and CMOs) ...................... 256,076 245,102 --
REMICs and CMOs ....................... 363,068 112,442 --
---------- ---------- ----------
Total purchased ................ 743,899 463,947 38,086
---------- ---------- ----------
Sales and Repayments:
Real estate - one- to four-family ..... 23,160 4,563 15,588
Non-real estate - consumer
(student loans) ...................... 13,620 15,059 20,168
---------- ---------- ----------
Total loans sold ............... 36,780 19,622 35,756
Mortgage-backed securities ............ -- -- --
---------- ---------- ----------
Total sales .................... 36,780 19,622 35,756
Principal repayments .................. 1,113,628 558,990 588,565
---------- ---------- ----------
Total reductions ............... 1,150,408 578,612 624,321
---------- ---------- ----------
Increase in other items, net ............ 202,101 91,511 105,576
---------- ---------- ----------
Net increase ................... $ 582,334 $ 626,638 $ 46,853
========== ========== ==========
Asset Quality
When a borrower fails to make a payment on a loan on or before the
default date, a late charge notice is mailed 15 days after the due date. When
the loan is 30 days past due, we mail a delinquent notice to the borrower. All
delinquent accounts are reviewed by a collection officer, who attempts to cause
the delinquency to be cured by contacting the borrower. If the loan becomes 60
days delinquent, the collection officer will generally send a personal letter to
the borrower requesting payment of the delinquent amount in full, or the
establishment of an acceptable repayment plan to
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<PAGE>
bring the loan current within the next 90 days. If the account becomes 90 days
delinquent, and an acceptable repayment plan has not been agreed upon, the
collection officer will generally refer the account to legal counsel, with
instructions to prepare a notice of intent to foreclose. The notice of intent to
foreclose allows the borrower up to 30 days to bring the account current. During
this 30 day period, the collection officer may accept a written repayment plan
from the borrower which would bring the account current within the next 90 days.
Once the loan becomes 120 days delinquent, and an acceptable repayment plan has
not been agreed upon, the collection officer, after receiving approval from the
appropriate officer as designated by the Bank's Board of Directors, will turn
over the account to our legal counsel with instructions to initiate foreclosure.
Delinquent Loans. The following table sets forth our loans delinquent
30 - 89 days by type, number, amount and percentage of type at September 30,
1998.
Loans Delinquent for
30-89 Days
---------------------------------------
Percent of
Total Delinquent
Number Amount Loans
------ ------ -----
(Dollars in Thousands)
Real Estate:
One- to four-family ............ 312 $18,669 98%
Multi-family ................... -- -- --
Commercial ..................... -- -- --
Construction or development .... -- -- --
Consumer ......................... 34 316 2
Commercial business .............. -- -- --
------- ------- -------
Total ....................... 346 $18,985 100%
======= ======= =======
73
<PAGE>
Non-performing Assets. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. At all dates presented, we had no troubled debt restructurings (which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Real estate owned
include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C> <C>
One- to four-family ........ $ 6,048 $ 4,989 $ 3,889 $ 3,950 $ 5,150
Multi-family ............... -- -- -- -- 477
Commercial real estate ..... -- 1,042 -- -- --
Construction or development -- -- 100 228 288
Consumer ................... 181 78 1 23 15
Commercial business ........ -- -- -- -- --
------- ------- ------- ------- -------
Total ................... 6,229 6,109 3,990 4,201 5,930
------- ------- ------- ------- -------
Accruing loans delinquent more
than 90 days:
One- to four-family ........ -- -- -- -- --
Multi-family ............... -- -- -- -- --
Commercial real estate ..... -- -- -- -- --
Construction or development -- -- -- -- --
Consumer ................... -- -- -- -- --
Commercial business ........ -- -- -- -- --
------- ------- ------- ------- -------
Total ................... -- -- -- -- --
------- ------- ------- ------- -------
Real estate owned:
One- to four-family ........ 1,964 2,435 3,552 1,864 2,054
Multi-family ............... -- -- -- 11,852 --
Commercial real estate ..... -- -- -- -- --
Construction or development -- -- -- -- --
Consumer ................... -- -- -- -- --
Commercial business ........ -- -- -- -- --
------- ------- ------- ------- -------
Total ................... 1,964 2,435 3,552 13,716 2,054
------- ------- ------- ------- -------
Total non-performing assets .. $ 8,193 $ 8,544 $ 7,542 $17,917 $ 7,984
======= ======= ======= ======= =======
Total as a percentage of total
assets ...................... 0.15% 0.17% 0.17% 0.41% 0.20%
======= ======= ======= ======= =======
</TABLE>
For the year ended September 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $227,000. The amount that was included in
interest income on such loans was $64,700 for the year ended September 30, 1998.
Non-performing Loans. At September 30, 1998, we had $6.2 million in
non-performing loans, which constituted 0.2% of our gross loan portfolio. At
that date, there were no non-performing loans to any one borrower or group of
related borrowers that exceeded either individually or in the aggregate $1.0
million.
74
<PAGE>
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of September 30, 1998, there was also an aggregate
of $373,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. These loans have been considered in
management's determination of the adequacy of our allowance for loan losses.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the Board of Directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the FDIC,
which may order the establishment of additional general or specific loss
allowances.
In connection with the filing of our periodic reports with the OTS and
in accordance with our classification of assets policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets, at September 30, 1998, we had classified $8.6
million of our assets as substandard, none as doubtful and none as loss. The
amount classified substandard represented 1.3% of our retained earnings and 0.2%
of our assets at September 30, 1998.
Allowance for Loan Losses. During each of the periods presented below,
the allowance for loan losses has been established through a provision for loan
losses which is based on management's evaluation of past loss experience,
current trends in the level of delinquent and specific problem loans, loan
concentrations to single borrowers, types of loans, adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, current and anticipated economic conditions in our market areas and
other relevant factors. Substantially all of our loan portfolio is concentrated
in one- to four-family mortgage loans which, historically, have not led to any
significant loan losses. Management prepares monthly analyses of loans
classified as
75
<PAGE>
substandard and non-performing, and evaluates these loans in connection with its
determination of the appropriate provision for loan losses to be recorded for
the period. Management also analyzes borrowers with significant outstanding
balances to reevaluate credit risk, the quality of the loan and factors that may
affect the borrowers' ability to pay. Accordingly, the allowance represents
management's estimate of losses inherent in our loan portfolio as of a specified
date.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future changes to our allowance will be the result of periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At September 30, 1998, we had a total allowance for loan losses of $5.0 million,
or approximately 80.0% of non-performing loans. See Note 6 of the Notes to
Consolidated Financial Statements.
The following table sets forth an analysis of our allowance for loan
losses.
Year Ended September 30,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $1,639 $1,583 $1,359 $3,878 $6,935
Charge offs:
One- to four-family ......... 20 -- -- -- --
Multi-family ................ -- -- 641 2,519 1,071
Commercial real estate ...... -- -- -- -- --
Construction or development . -- -- -- -- --
Consumer .................... -- -- -- -- --
Commercial business ......... -- -- -- -- --
------ ------ ------ ------ ------
Total charge-offs ......... 20 -- 641 2,519 1,071
------ ------ ------ ------ ------
Recoveries .................... -- -- -- -- --
Net charge-offs ............... 20 -- 641 2,519 1,071
Provisions (recoveries)
charged to operations ........ 3,362 56 865 -- (1,986)
------ ------ ------ ------ ------
Balance at end of period .... $4,981 $1,639 $1,583 $1,359 $3,878
====== ====== ====== ====== ======
Ratio of net charge-offs
during the period to
average loans outstanding
during the period ............ --% --% 0.02% 0.10% 0.04%
====== ====== ====== ====== ======
Ratio of net charge-offs
during the period to
average non-performing assets 0.06% --% 1.26% 4.86% 2.58%
====== ====== ====== ====== ======
Allowance as a percentage
of non-performing loans ...... 79.96% 26.83% 39.67% 32.35% 65.40%
====== ====== ====== ====== ======
Allowance as a percentage
of total loans (end of period) 0.13% 0.05% 0.05% 0.05% 0.17%
====== ====== ====== ====== ======
76
<PAGE>
The distribution of our allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ---------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Amount of Loan Category Amount of Loan Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance by Category Loans Allowance by Category Loans Allowance by Category Loans
--------- ------------- ------- --------- ------------- ------- --------- ------------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .. $ 1,355 $3,496,699 94.12% $ 1,208 $3,137,101 94.38% $ 1,011 $2,784,247 94.49%
Multi-family ......... 100 40,091 1.08 66 26,416 0.79 427 29,341 1.00
Commercial real estate 23 9,006 0.24 18 5,864 0.18 9 4,999 0.17
Construction or
development ........ 69 31,610 0.85 67 30,900 0.93 85 17,547 0.60
Consumer ............. 169 137,817 3.71 41 123,460 3.71 42 110,355 3.75
Commercial business .. -- 10 -- -- -- -- -- -- --
Unallocated .......... 3,265 -- -- 239 -- -- 9 -- --
---------- ---------- ------ ------- ---------- ------ ------- ---------- ------
Total ........... $ 4,981 $3,715,233 100.00% $ 1,639 $3,323,741 100.00% $ 1,583 $2,946,489 100.00%
========== ========== ====== ======= ========== ====== ======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1995 1994
------------------------------------- ------------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Amount of Loan Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance by Category Loans Allowance by Category Loans
--------- ------------- ------- --------- ------------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family .. $ 994 $2,602,296 94.53% $ 947 $2,144,988 93.57%
Multi-family ......... 63 32,795 1.19 79 44,082 1.92
Commercial real estate 17 4,646 0.17 19 5,223 0.23
Construction or
development ........ 29 8,333 0.30 21 3,130 0.14
Consumer ............. 21 104,923 3.81 15 94,927 4.14
Commercial business .. -- -- -- -- -- --
Unallocated .......... 234 -- -- 2,797 -- --
-------- ---------- ------ ------- ---------- ------
Total ........... $ 1,358 $2,752,993 100.00% $ 3,878 $2,292,350 100.00%
======== ========== ====== ======= ========== ======
</TABLE>
77
<PAGE>
Investment Activities
We are required to maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, we have maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and above levels believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At September 30, 1998, our regulatory liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and current borrowings) was
45.3%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies (including callable agency securities),
certain certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds. Subject
to various restrictions, federally chartered savings institutions may also
invest their assets in investment grade commercial paper and corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. See "Regulation - The Bank and - Qualified Thrift Lender Test" for a
discussion of additional restrictions on our investment activities.
The Chief Financial Officer has the basic responsibility for the
management of the Bank's investment portfolio, subject to the direction and
guidance of the ALCO. The Chief Financial Officer considers various factors when
making decisions, including the marketability, maturity and tax consequences of
the proposed investment. The maturity structure of investments will be affected
by various market conditions, including the current and anticipated slope of the
yield curve, the level of interest rates, the trend of new deposit inflows, and
the anticipated demand for funds via deposit withdrawals and loan originations
and purchases.
The general objectives of our investment portfolio are to: (i) provide
liquidity when loan demand is high and to assist in maintaining earnings when
loan demand is low; and (ii) maximize earnings while satisfactorily managing
risk, including credit risk, reinvestment risk, liquidity risk and interest rate
risk. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management."
Our investment securities currently consist of U.S. Government and
Agency securities and securities purchased under agreements to resell which are
fully collateralized short-term investments. See Note 5 of the Notes to
Consolidated Financial Statements. Our mortgage-related securities portfolio
currently consists of securities issued under government-sponsored agency
programs. A portion of this portfolio consists of collateralized mortgage
obligations ("CMOs"). CMOs are special types of pass-through debt securities in
which the stream of principal and interest payments on the underlying mortgages
or mortgage-backed securities is used to create classes with different
maturities and, in some cases, amortization schedules, as well as a residual
interest, with each such class possessing different risk characteristics.
78
<PAGE>
Our policy is to purchase only CMOs that are Agency backed. The
expected life of our CMOs is typically under five years at the time of purchase.
Premiums associated with CMOs purchased are not significant; therefore, the risk
of significant yield adjustments because of accelerated prepayments is limited.
Yield adjustments are encountered as interest rates rise or decline, which in
turn slows or increases prepayment rates and affects the average lives of the
CMOs. At September 30, 1998, we held CMOs totaling $320.4 million, all of which
were secured by underlying collateral issued under government agency-sponsored
programs. All of our CMOs are currently classified as held to maturity. At
September 30, 1998, our CMOs did not qualify as high risk mortgage securities as
defined under OTS regulations. The Bank does not invest in residual interests of
CMOs.
While mortgage-backed and mortgage-related securities (such as CMOs and
REMICs) carry a reduced credit risk as compared to whole loans, such securities
remain subject to the risk that a fluctuating interest rate environment, along
with other factors such as the geographic distribution of the underlying
mortgage loans, may alter the prepayment rate of such mortgage loans and so
affect both the prepayment speed, and value, of such securities.
The following table sets forth the composition of our investment and
mortgage-backed and related securities portfolio at the dates indicated. Our
investment securities portfolio at September 30, 1998, contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of our retained earnings, excluding those issued by the United
States Government or its agencies.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities available for sale, at fair value:
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities................. $747,991 100.00% $754,179 100.00% $607,738 100.00%
U.S. government and agency securities...... --- --- --- --- --- ---
-------- ------ -------- ------ -------- ------
Total securities available for sale..... $747,991 100.00% $754,179 100.00% $607,738 100.00%
======== ====== ======== ====== ======== ======
Investment securities, at amortized cost:
U.S. Government and Agency securities...... $160,469 33.37 $585,294 82.97 $717,248 97.67
Collateralized mortgage obligations
and REMICs............................... 320,379 66.61 120,007 17.01 17,006 2.32
Other investment securities................ 100 0.02 100 0.02 100 0.01
-------- ------ -------- ------ -------- ------
Total investment securities............. $480,948 100.00% $705,401 100.00% $734,354 100.00%
======== ====== ======== ====== ======== ======
Investment securities, at fair value......... $479,840 99.77% $704,935 99.93% $718,393 97.83%
======== ====== ======== ====== ======== ======
</TABLE>
79
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years
---------------- -------------- --------------- ------------------
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and
Agency securities........................ $ 20,825 5.50% $30,981 6.65% $ 3,729 8.08% $670,569 6.81%
-------- ---- ------- ---- ------- ------ -------- -----
Total securities available for sale..... $ 20,825 5.50% $30,981 6.65% $ 3,729 8.08% $670,569 6.81%
======== ==== ======= ==== ======= ===== ======== =====
Investment securities:
U.S. Government and Agency securities...... $135,469 5.48% $25,000 5.93% $ --- ---% $ --- ---%
Securities purchased under agreement
to resell................................. 235,000 5.51 --- --- --- --- --- ---
Collateralized mortgage obligations and
REMICs................................... 192 4.75 --- --- --- 320,187 6.40
Other investment securities................ --- --- 100 1.50 --- --- --- ---
-------- ---- ------- ---- ------- ------ ------- --------
Total investment securities............ $370,661 5.50% $25,100 5.91% $ --- ---% $320,187 6.40%
======== ==== ======= ==== ======= ======= ======== =====
</TABLE>
Total Securities
----------------------------
(Dollars in Thousands)
Securities available for sale:
U.S. Government and
Agency securities........................ $726,104 6.77% $747,991
-------- ---- --------
Total securities available for sale..... $726,104 6.77% $747,991
======== ===== ========
Investment securities:
U.S. Government and Agency securities...... $160,469 5.55% $160,612
Securities purchased under agreement
to resell................................. 235,000 5.51 235,000
Collateralized mortgage obligations and
REMICs................................... 320,379 6.40 319,128
Other investment securities................ 100 1.50 100
--------- ----- --------
Total investment securities............ $715,948 5.92% $714,840
======== ===== ========
80
<PAGE>
Sources of Funds
General. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.
Deposits. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and passcard savings
accounts, money market deposit accounts, NOW accounts, non-interest bearing
checking accounts and certificates of deposit. We only solicit deposits in our
market areas and have not accepted brokered deposits. We primarily rely on
competitive pricing policies, marketing and customer service to attract and
retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We
endeavor to manage the pricing of our deposits in keeping with our
asset/liability management, liquidity and profitability objectives. Based on our
experience, we believe that our deposits are relatively stable sources of funds.
Despite this stability, our ability to attract and maintain these deposits and
the rates paid on them has been and will continue to be significantly affected
by market conditions.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Year Ended September 30,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands)
Opening balance........... $3,787,123 $3,740,718 $3,673,630
Deposits.................. 4,725,985 4,367,361 4,134,148
Withdrawals............... 4,795,516 4,496,198 4,235,171
Interest credited......... 176,588 175,242 168,111
---------- ---------- ----------
Ending balance............ $3,894,180 $3,787,123 $3,740,718
========== ========== ==========
Net increase.............. $ 107,057 $ 46,405 $ 67,088
========== ========== ==========
Percent increase.......... 2.83% 1.24% 1.83%
==== ==== ====
81
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
<S> <C> <C> <C> <C> <C> <C>
Demand deposits............ $ 260,440 6.68% $ 249,585 6.58% $ 235,542 6.29%
Passbook and Passcard...... 129,180 3.31 131,854 3.48 130,493 3.48
Money market select........ 213,181 5.47 30,405 0.80 --- ---
Cash fund.................. 225,356 5.78 293,108 7.73 326,435 8.71
---------- ----- ---------- ------ ---------- ------
Total non-certificates..... $ 828,157 21.24 704,952 18.59 692,470 18.48
---------- ------ ---------- ------ ---------- ------
Certificates (by rate):
3.00 - 3.99%.............. 5,900 0.15 7,866 0.21 8,193 0.22
4.00 - 4.99%.............. 429,108 11.01 25,822 0.68 76,961 2.05
5.00 - 5.99%.............. 1,684,996 43.22 2,224,325 58.67 1,568,715 41.89
6.00 - 6.99%.............. 715,234 18.34 598,005 15.77 997,695 26.63
7.00 - 7.99%.............. 227,695 5.84 220,048 5.80 375,960 10.04
8.00 - 8.99%.............. 2,405 0.06 5,398 0.14 14,715 0.39
9.00 - 9.99%.............. 685 0.02 707 0.02 6,009 0.16
---------- ------ ---------- ------ ---------- ------
Total certificates......... 3,066,023 78.64 3,082,171 81.29 3,048,248 81.38
---------- ------ ---------- ------ ---------- ------
Accrued interest........... 4,674 0.12 4,718 0.12 5,413 0.14
---------- ------ ---------- ------ ---------- ------
Total deposits............. $3,898,854 100.00% $3,791,841 100.00% $3,746,131 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
82
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
3.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
-------- -------- -------- -------- ---------- --------
(Dollars in Thousands)
Certificate accounts
maturing in quarter ending:
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998........... $5,852 $ 428,326 $ 18,064 $ 363 $ 452,605 14.77%
March 31, 1999.............. 48 322,704 9,637 1,578 333,967 10.89
June 30, 1999............... --- 311,289 23,289 359 334,937 10.92
September 30, 1999.......... --- 278,241 151,073 219 429,533 14.01
December 31, 1999........... --- 108,430 144,097 302 252,829 8.25
March 31, 2000.............. --- 231,790 130,809 43 362,642 11.83
June 30, 2000............... --- 124,860 154,706 37 279,603 9.12
September 30, 2000.......... --- 63,522 107,064 172 170,758 5.57
December 31, 2000........... --- 46,583 132 12 46,727 1.52
March 31, 2001.............. --- 68,358 79 --- 68,437 2.23
June 30, 2001............... --- 37,068 133 --- 37,201 1.21
September 30, 2001.......... --- 29,251 42,800 --- 72,051 2.35
Thereafter.................. --- 63,682 161,046 5 224,733 7.33
--------------------- --------- --------- ---------- -------
Total.................... $5,900 $2,114,104 $942,929 $3,090 $3,066,023 100.00%
====== ========== ======== ====== ========== ======
Percent of total......... 0.19% 68.96% 30.75% 0.10%
===== ====== ===== ====
</TABLE>
The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000... $411,948 $310,565 $690,590 $1,353,444 $2,766,547
Certificates of deposit of $100,000 or more.. 40,657 23,099 73,880 161,537 299,173
Public Funds................................. --- 303 --- --- 303
-------- -------- -------- ---------- ----------
Total certificates of deposit................ $452,605 $333,967 $764,470 $1,514,981 $3,066,023
======== ======== ======== ========== ==========
</TABLE>
Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to fund loan demand or when they meet our asset/liability management goals. Our
borrowings historically have consisted of advances from the FHLB of
83
<PAGE>
Topeka and securities sold under agreement to repurchase. See Notes 11 and 12 of
the Notes to Consolidated Financial Statements.
We may obtain advances from the FHLB of Topeka upon the security of
certain of our mortgage loans and mortgage-related securities. Such advances may
be made pursuant to several different credit programs, each of which has its own
interest rate, range of maturities and call features. At September 30, 1998, the
Bank had $500.0 million in FHLB advances outstanding.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and securities sold under agreements to
repurchase for the periods indicated.
Year Ended September 30,
-----------------------------
1998 1997 1996
-------- -------- -------
(In Thousands)
Maximum Balance:
FHLB advances................................... $500,000 $275,000 $35,000
Securities sold under agreement to repurchase... 175,000 175,000 75,000
Average Balance:
FHLB advances................................... $365,000 $ 24,167 $ 2,917
Securities sold under agreement to repurchase... 175,000 82,692 75,000
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
September 30,
------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
FHLB advances.................................... $500,000 $275,000 $ ---
Securities sold under agreement to repurchase.... 175,000 175,000 75,000
-------- -------- -------
Total borrowings............................ $675,000 $450,000 $75,000
======== ======== =======
Weighted average interest rate of FHLB advances.. 5.73% 5.76% 6.09%
Weighted average interest rate of securities
sold under agreement to repurchase.............. 5.73% 5.73% 5.78%
Subsidiary and Other Activities
As a federally chartered savings association, we are permitted by OTS
regulations to invest up to 2% of our assets, or $106.3 million at September 30,
1998, in the stock of, or unsecured loans to, service corporation subsidiaries.
We may invest an additional 1% of our assets in service corporations where such
additional funds are used for inner-city or community development purposes.
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At September 30, 1998, we had one subsidiary, Capitol Funds, Inc.,
which has one line of credit loan outstanding for $14.0 million for the
acquisition and development of land for construction of single-family homes in
Overland Park, Kansas described under "- Lending Activities - General." As of
September 30, 1998, our total investment in this subsidiary was $11.4 million.
During fiscal 1998, Capitol Funds, Inc. reported net income of $586,000, which
consisted of interest funded from loan proceeds, net of income taxes.
Competition
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our branch office system.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions located in the same community, as well as
mutual funds and other alternative investments. We compete for these deposits by
offering superior service and a variety of deposit accounts at competitive
rates.
Employees
At September 30, 1998, we had a total of 766 employees, including 150
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Properties
The Bank owns the office building in which its home office and
executive offices are located. At September 30, 1998, the Bank owned 21 of its
other branch offices and the remaining seven branch offices (including four
supermarket locations) and a warehouse were leased. As of September 30, 1998,
the net book value of the Bank's investment in premises, equipment and
leaseholds, excluding computer equipment, was approximately $21.0 million.
The Bank believes that is current facilities are adequate to meet the
present and immediately foreseeable needs of the Bank and the Stock Holding
Company.
The Bank maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment utilized by the Bank at September 30, 1998 was $1.8 million.
Legal Proceedings
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. The Bank does not
anticipate incurring any material liability as a result of such litigation.
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REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the MHC, Stock Holding Company and the Bank. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States
Congress that may affect the operations of the MHC, the Stock Holding Company
and the Bank. In addition, the regulations governing the MHC, the Stock Holding
Company and the Bank may be amended from time to time by the OTS. Any such
legislation or regulatory changes in the future could adversely affect the MHC,
the Stock Holding Company or the Bank. No assurance can be given as to whether
or in what form any such changes may occur.
General
The Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the FDIC,
which insures the deposits of the Bank to the maximum extent permitted by law,
and requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders. This regulatory oversight will continue
to apply to the Bank following the Reorganization.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that it may
find in the Bank's operations. The FDIC also has the authority to examine the
Bank in its role as the administrator of the SAIF. The Bank's relationship with
its depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage requirements. Any change in such
regulations, whether by the FDIC, OTS or Congress, could have a material adverse
impact on the MHC, the Stock Holding Company and the Bank and their operations.
The Mutual Holding Company
Upon completion of the Reorganization and Stock Issuance, the MHC will
become a federal mutual holding company within the meaning of Section 10(o) of
the HOLA. As such, the MHC will be required to register with and be subject to
OTS examination and supervision as well as certain reporting requirements. In
addition, the OTS has enforcement authority over the MHC and its non-savings
institution subsidiaries, if any. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the financial safety, soundness or stability of a subsidiary savings bank.
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A mutual holding company is permitted to, among other things: (i)
invest in the stock of a savings institution; (ii) acquire a mutual institution
through the merger of such institution into a savings institution subsidiary of
such mutual holding company or an interim savings institution of such mutual
holding company; (iii) merge with or acquire another mutual holding company, one
of whose subsidiaries is a savings institution; (iv) acquire non-controlling
amounts of the stock of savings institutions and savings institution holding
companies, subject to certain restrictions; (v) invest in a corporation the
capital stock of which is available for purchase by a savings institution under
Federal law or under the law of any state where the subsidiary savings
institution or institutions have their home offices; (vi) furnish or perform
management services for a savings institution subsidiary of such company; (vi)
hold, manage or liquidate assets owned or acquired from a savings institution
subsidiary of such company; (viii) hold or manage properties used or occupied by
a savings institution subsidiary of such company; and (ix) act as a trustee
under deed or trust.
In addition, a mutual holding company may engage in the activities of a
multiple savings and loan holding company which are permissible by statute and
OTS regulations and to the activities of bank holding companies which the
Federal Reserve Board has deemed permissible by regulation under Section 4(c)(8)
of the Bank Holding Company Act of 1956, as amended (the "BHCA"), subject to
prior approval by the OTS.
The Stock Holding Company
Pursuant to regulations of the OTS and the terms of the Stock Holding
Company's federal stock charter, the purpose and powers of the Stock Holding
Company is to pursue any or all of the lawful objectives of a federal mutual
holding company and to exercise any of the powers accorded to a mutual holding
company.
If the Bank fails the QTL test, the Stock Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the MHC and the Stock Holding Company
must register as, and will become subject to, the restrictions applicable to
bank holding companies. The activities authorized for a bank holding company are
more limited than are the activities authorized for a unitary or multiple
savings and loan holding company. See "--Qualified Thrift Lender Test."
The MHC and the Stock Holding Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured institution. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings institutions in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings institution.
The Bank
The OTS has extensive authority over the operations of savings
institutions. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of the Bank was as of
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June 30, 1998. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the fourth quarter of 1999. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
the Bank to provide for higher general or specific loan loss reserves. All
savings institutions are subject to a semi-annual assessment, based upon the
savings institution's total assets, to fund the operations of the OTS. The
Bank's OTS assessment for the fiscal year ended September 30, 1998 was $695,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank, the Stock Holding
Company and the MHC. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings institutions are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998, the Bank's lending limit under this restriction was $97.6
million.
The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to the applicable limits by the FDIC and such insurance
is backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the SAIF or
the BIF. The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the OTS an opportunity to
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take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for an explanation on the special SAIF
assessment amount paid by the Bank.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.00 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.00 basis point for each $100 in domestic deposits. The
assessment is expected to be reduced to about 2.00 basis points no later than
January 1, 2000, when BIF insured institutions fully participate in the
assessment. These assessments, which may be revised based upon the level of BIF
and SAIF deposits will continue until the bonds mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings institutions, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights,
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must be deducted from tangible capital for calculating compliance with the
requirement. At September 30, 1998, the Bank did not have any intangible assets.
At September 30, 1998, the Bank had tangible capital of $649.2 million,
or 12.1% of adjusted total assets, which is approximately $569.5 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1998, the
Bank had no intangibles which were subject to these tests.
At September 30, 1998, the Bank had core capital equal to $649.2
million, or 12.1% of adjusted total assets, which is $489.7 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings institutions to have
total capital of at least 8.0% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1998, the Bank had
$5.0 million of general loan loss reserves, which was less than 1.25% of
risk-weighted assets.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
On September 30, 1998, the Bank had total risk-based capital of $650.6
million (including $649.2 million in core capital and $1.4 million in qualifying
supplementary capital) and risk- weighted assets of $2.38 billion; or total
capital of 27.3% of risk-weighted assets. This amount was $459.4 million above
the 8.0% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8.0% risk-based capital ratio). Any such
institution must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire
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another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an institution into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on its operations and profitability.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings institutions
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings institution from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the institution
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings institutions, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
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Savings institutions proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings institutions that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "-- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings institutions that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings institution may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings institutions, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. For a discussion of what the Bank includes in liquid assets,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Commitments." This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings institutions. At the present time, the minimum
liquid asset ratio is 4%.
Penalties may be imposed upon institutions for violations of the liquid
asset ratio requirement. At September 30, 1998, the Bank was in compliance with
the requirement, with an overall liquid asset ratio of 45.3%.
Qualified Thrift Lender Test
All savings institutions, including the Bank, are required to meet a
QTL test to avoid certain restrictions on their operations. This test requires a
savings institution to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings institution
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At September 30, 1998, the
Bank met the test and has always met the test since its effectiveness.
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Any savings institution that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such an institution
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
institution that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "--The Stock Holding Company."
Community Reinvestment Act
Under the CRA, every FDIC insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the CRA in the past few years, the Bank may
be required to devote additional funds for investment and lending in its local
community. The Bank was examined for CRA compliance in October 28, 1996, and
received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of the Bank include the Stock Holding
Company and any company which is under common control with the Bank. In
addition, a savings institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things,
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such loans must generally be made on terms substantially the same as for loans
to unaffiliated individuals.
Federal Securities Law
The stock of the Stock Holding Company will be registered with the SEC
under the Securities Exchange Act of 1934, as amended. The Company will be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
The Stock Holding Company stock held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Stock Holding
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Stock Holding Company meets specified
current public information requirements, each affiliate of the Stock Holding
Company is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1998, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Topeka, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Topeka. For the year ended September 30, 1998, the Bank had an average
outstanding balance of $41.6 million in FHLB stock, which was in compliance with
this requirement. In past years, the Bank has
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received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 6.71% and were 7.66% for fiscal year 1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate- income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended September 30, 1998, dividends paid by the FHLB of
Topeka to the Bank totaled $3.2 million, which was an increase over the amount
of dividends received in fiscal year 1997.
TAXATION
Federal Taxation
General. The Stock Holding Company and the Bank will be subject to
federal income taxation in the same general manner as other corporations with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Stock Holding
Company or the Bank. The Bank's federal income tax returns have been closed
without audit by the IRS through its fiscal year ended September 30, 1995.
Following the Reorganization, the Stock Holding Company anticipates
that it will file a consolidated federal income tax return with the Bank
commencing with the first taxable year after consummation of the Reorganization.
Accordingly, it is anticipated that any cash distributions made by the Stock
Holding Company to its stockholders would be considered to be taxable dividends
and not as a non-taxable return of capital to stockholders for federal and state
tax purposes.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending on September 30, for filing its federal income tax
return.
Bad Debt Reserves. Prior to the Small Business Job Protection Act (the
"1996 Act"), the Bank was permitted to establish a reserve for bad debts and to
make annual additions to the reserve. These additions could, within specified
formula limits, be deducted in arriving at taxable income. As a result of the
1996 Act, savings associations must now use the specific chargeoff method in
computing bad debt deductions beginning with their 1996 Federal tax return. In
addition, federal legislation requires the Bank to recapture (over a six year
period) the excess of tax bad debt reserves at September 30, 1997 over those
established as of the base year reserve balance as of September 30, 1989. The
amount of such reserve subject to recapture as of September 30, 1998 for the
Bank is
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approximately $97.1 million. The Bank continues to utilize the reserve method in
recalculating its privilege tax obligations to the State of Kansas.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to the year ended September 30, 1997, were subject to
recapture into taxable income should the Bank fail to meet certain thrift asset
and definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Bank make certain non-dividend distributions or cease to
maintain a thrift charter.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax nor does the Bank have any such
amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carryback
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years prior to August 6, 1997, the carryback period was three years and the
carryforward period was 15 years. At September 30, 1998, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Stock Holding Company may
eliminate from its income dividends received from the Bank as a wholly-owned
subsidiary of the Stock Holding Company if it elects to file a consolidated
return with the Bank. The corporate dividends-received deduction is 100% or 80%
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, dependent on the level of
stock ownership of the payor of the dividend. Corporations which own less than
20% of the stock of a corporation distributing a dividend may deduct 70% of
dividends received or accrued on their behalf.
State Taxation
The Bank files Kansas privilege tax returns. For Kansas privilege tax
purposes, for taxable years beginning after 1997, the minimum tax rate is 4.5%
of earnings, which is calculated based on federal taxable income, subject to
certain adjustments. The earnings of the Stock Holding Company may be combined
with the Bank for purposes of the Kansas Privilege Tax. If it is not, the Stock
Holding Company will file Kansas income tax returns with non-thrift members of
the affiliated group.
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MANAGEMENT
Management of the Stock Holding Company
The Board of Directors of the Stock Holding Company will consist of the
same individuals who serve as directors of the Bank. The Board of Directors of
the Stock Holding Company is divided into three classes, each of which contains
approximately one-third of the Board. The directors shall be elected by the
stockholders of the Stock Holding Company for staggered three year terms, or
until their successors are elected. One class of directors, consisting of B.B.
Andersen and John C. Dicus, has a term of office expiring at the first annual
meeting of stockholders, a second class, consisting of John B. Dicus and
Frederick P. Reynolds, has a term of office expiring at the second annual
meeting of stockholders and a third class, consisting of Robert B. Maupin, Carl
W. Quarnstrom, and Marilyn S. Ward, has a term of office expiring at the third
annual meeting of stockholders.
The following individuals are executive officers of the Stock Holding
Company and hold the offices set forth below opposite their names.
Executive Position Held with Stock Holding Company
- --------- ----------------------------------------
John C. Dicus ......... Chairman and Chief Executive Officer
John B. Dicus ......... President and Chief Operating Officer
Neil F.M. McKay ....... Executive Vice President,
Chief Financial Officer and Treasurer
Kent G. Townsend ...... First Vice President and Controller
The executive officers of the Stock Holding Company are elected
annually and hold office until their respective successors have been elected or
until death, resignation or removal by the Board of Directors.
Information concerning the principal occupations, employment and
compensation of the directors and officers of the Stock Holding Company is set
forth under "- Management of the Bank" and "- Executive Officers Who Are Not
Directors." Directors of the Stock Holding Company initially will not be
compensated by the Stock Holding Company but will serve and be compensated by
the Bank. It is not anticipated that separate compensation will be paid to
directors of the Stock Holding Company until such time as these persons devote
significant time to the separate management of the Stock Holding Company's
affairs, which is not expected to occur until the Stock Holding Company becomes
actively engaged in additional businesses other than holding the stock of the
Bank. The Stock Holding Company may determine that such compensation is
appropriate in the future.
Management of the Bank
Because the Bank is a mutual savings association, its members have
elected its Board of Directors. Upon completion of the Reorganization and Stock
Issuance, the directors of the Bank immediately prior to the Stock Issuance will
continue to serve as directors of the Bank in stock form. The Board of Directors
of the Bank in stock form will consist of seven directors divided into three
classes, with approximately one-third of the directors elected at each annual
meeting of stockholders.
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Because the Stock Holding Company will own all the issued and outstanding
capital stock of the Bank following the Reorganization and Stock Issuance, the
Board of Directors of the Stock Holding Company will elect the directors of the
Bank. The persons who are serving as directors of the Bank will also serve as
directors of the MHC and the Stock Holding Company upon consummation of the
Reorganization and Stock Issuance.
The following table sets forth certain information regarding the Board
of Directors of the Bank.
Term of
Director Office
Name Age(1) Positions Held With the Bank Since Expires
---- ------ ---------------------------- -------- -------
B.B. Andersen 62 Director 1981 1999
John B. Dicus 37 President, Chief Operating 1989 2000
Officer and Director
John C. Dicus 65 Chairman, Chief Executive 1963 1999
Officer and Director
Robert B. Maupin 73 Director 1973 2001
Carl W. Quarnstrom 69 Director 1985 2001
Frederick P. Reynolds 74 Director 1979 2000
Marilyn S. Ward 59 Director 1977 2001
- ------------
(1) As of September 30, 1998.
The business experience of each director for at least the past five
years is set forth below.
B.B. Andersen. Mr. Andersen had a life long career in construction and
development activities. He is currently involved in various real estate
development projects in Colorado.
John B. Dicus. Mr. Dicus is President and Chief Operating Officer of
the Bank, positions he has held since1996. Prior to that, he served as the
Executive Vice President of Corporate Services for the Bank for four years. He
has been with the Bank in various other positions since 1985. Mr. John B. Dicus
is the son of Mr. John C. Dicus.
John C. Dicus. Mr. Dicus is Chairman of the Board of Directors and
Chief Executive Officer of the Bank, positions he has held since 1989. He has
served the Bank in various capacities since 1959. He also served as President of
the Bank from 1969 until 1996.
Robert B. Maupin. Mr. Maupin is currently retired. Previously, he
worked for the Bank for over forty years. He retired in 1991 as the Bank's
Senior Executive Vice President and Chief Lending Officer.
Carl W. Quarnstrom. Mr. Quarnstrom is a partner in the law firm of
Shaw, Hergenreter, Quarnstrom & Kocher, L.L.P., located in Topeka, Kansas. The
firm serves as general counsel for the Bank.
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Frederick P. Reynolds. Mr. Reynolds is currently the Chairman of the
Board of Sound Products, Inc., a music and sound system company located in
Kansas City. Over the last forty years, Mr. Reynolds has been an owner, operator
and investor in radio stations (on both a local Topeka and national level) and
cable television (in eastern Missouri).
Marilyn S. Ward. Since 1985, Ms. Ward has been Executive Director of
ERC/Resource & Referral, a family resource center located in Topeka, Kansas.
Executive Officers Who Are Not Directors
Each of the executive officers of the Bank will retain his office
following the Reorganization. Officers are elected annually by the Board of
Directors of the Bank. The business experience of each director for at least the
past five years for the four executive officers of the Bank who do not serve as
directors is set forth below.
Stanley F. Mick. Age 59 years. Mr. Mick has served as Executive Vice
President and Chief Lending Officer of the Bank since 1991. Since 1994, he has
also served as President of Capitol Funds Inc., a subsidiary of the Bank.
Neil F.M. McKay. Age 57 years. Mr. McKay serves as Executive Vice
President, Chief Financial Officer and Treasurer of the Bank, positions he has
held since 1994. Prior to that, he served as the Chief Operating Officer and
Chief Financial Officer of another savings institution for five years.
Larry K. Brubaker. Age 51 years. Mr. Brubaker has been employed with
the Bank since 1971 and currently serves as Executive Vice President for
Corporate Services of the Bank, a position he has held since 1997. Prior to
that, he was employed by the Bank as the Eastern Region Manager for seven years.
R. Joe Aleshire. Age 51 years. Mr. Aleshire has been employed with the
Bank since 1973 and currently serves as Executive Vice President for Retail
Operations of the Bank, a position he has held since 1997. Prior to that, he was
employed by the Bank as the Wichita Area Manager for 17 years.
Meeting and Committees of the Board of Directors
Our Board of Directors meets on a monthly basis. During the year ended
September 30, 1998, the Board of Directors held 12 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and
committees on which such Board member served during this period.
We currently have standing Executive and Audit Committees. We do not
have a standing Compensation or Nominating Committee; rather, the entire Board
of Directors performs these functions.
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The Executive Committee is comprised of John C. Dicus (Chairman) and
Directors John B. Dicus, Andersen and Maupin. The Executive Committee meets on
an as needed basis and exercises the power of the Board of Directors between
Board meetings, to the extent permitted by applicable law. The Executive
Committee did not meet during fiscal 1998.
The Audit Committee is comprised of Director Ward (Chairman) and
Directors Andersen, Maupin, Quarnstrom and Reynolds. The Audit Committee
oversees the audit program for the Bank and meets periodically with the Bank's
accounting firm in order to review the annual audit. This committee met three
times in fiscal 1998.
The entire Board of Directors of the Bank is responsible for
determining salaries to be paid to officers and employees of the Bank, based on
recommendations of John C. Dicus and John B. Dicus, who excuse themselves from
Board discussions concerning their salaries as Chairman and Chief Executive
Officer, and President and Chief Operating Officer, respectively. The Board of
Directors met twice during fiscal 1998 to discuss compensation matters.
Directors' Compensation
Since January 1, 1998, each director receives a $1,000 monthly
retainer, plus $1,000 for each meeting attended. From July 1, 1997 through
December 31, 1997, each director received an $800 monthly retainer, plus $1,000
for each board meeting attended. In addition, since January 1, 1998, each
non-employee director receives $500 per committee meeting attended. From July 1,
1997 through December 31, 1997, each non-employee director received $400 per
committee meeting. See "- Benefits - Other Stock Benefit Plans."
Mr. Quarnstrom, a director of the Bank, is a partner in the law firm of
Shaw, Hergenreter, Quarnstrom & Kocher, L.L.P. The firm receives a retainer fee
to serve as general counsel for the Bank regarding real estate and litigation
issues. The legal fees received by the law firm for professional services
rendered to the Association during the year ending September 30, 1998 did not
exceed 5% of the firm's gross revenues.
Executive Compensation
The following table sets forth a summary of certain information
concerning the compensation paid by the Bank (including amounts deferred to
future periods by the officers) for services rendered in all capacities during
the fiscal year ended September 30, 1998 to the Chairman and Chief Executive
Officer of the Bank and the four other highest compensated executive officers of
the Bank.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1) Compensation Awards
------------------------------------- -------------------------------------
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) (#)(2) sation
--------------------------- ---- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
John C. Dicus, Chairman and Chief 1998 $622,800(3) $ 95,355 109,620(4) --- --- $219,630(5)
Executive Officer
John B. Dicus, President and Chief 1998 312,800(3) 40,096 19,292(4) --- --- 76,650(5)
Operating Officer
Stanley F. Mick, Executive Vice President 1998 256,000 45,149 8,148(4) --- --- 41,850(5)
and Chief Lending Officer
Neil F. M. McKay, Executive Vice 1998 203,500 31,410 5,086(4) --- --- 29,250(5)
President, Chief Financial Officer and
Treasurer
Larry K. Brubaker, Executive Vice 1998 186,500 38,938 --- --- --- 8,250(6)
President for Corporate Services
</TABLE>
- -------------
(1) Does not include perquisites, which did not exceed the lesser of $50,000 or
10% of the named individuals' salary and bonus.
(2) As a mutual institution, the Bank does not have any stock options or
restricted stock plans. The Bank does, however, intend to adopt such plans
following the Reorganization. See "-- Benefits - Other Stock Benefit
Plans."
(3) Includes director fees of $22,800 for service on the Board of Directors.
(4) Represents the amount reimbursed for all or part of the tax liability
resulting from the payment of premiums on life insurance policies pursuant
to Executive Bonus Agreements.
(5) Amounts represent allocations under the Bank's Profit Sharing Plan and
premiums on universal life insurance policies pursuant to Executive Bonus
Agreements. These amounts, respectively, include $8,250 and $211,380 for
Mr. John C. Dicus; $8,250 and $68,400 for Mr. John B. Dicus; $8,250 and
$33,600 for Mr. Mick; $8,250 and $21,000 for Mr. McKay.
(6) Amount represents the allocation under the Bank's Profit Sharing Plan for
Mr. Brubaker.
Benefits
General. The Bank currently provides health and welfare benefits to its
employees, including hospitalization, major medical, dental, life and long-term
disability insurance, subject to certain deductibles and copayments by
employees.
Employees' Pension Plan. The Bank sponsors a defined benefit pension
plan for its employees (the "Pension Plan"). Such employees are eligible to
participate in the Pension Plan on the next June 1st or December 1st following
the completion of one year of service (1,000 hours of
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service during a continuous 12-month period) and attainment of age 21. A
participant must be credited with 5 years of service before attaining a vested
interest in his or her retirement benefits, after which such participant is 100%
vested. The Pension Plan is funded solely through contributions made by the
Bank.
The benefit provided to a participant at normal retirement age
(generally the later of age 65 or the fifth anniversary of the year in which the
participant commenced participation in the Pension Plan) is based on the average
of the participant's annual compensation during the five plan years (June 1st to
the following May 31st) of a participant's service which yields the highest
average compensation ("average annual compensation"). Compensation for this
purpose equals the participant's base salary, including any contributions
through a salary reduction arrangement to a plan described under Section 125 or
401(k) of the Code, but exclusive of overtime, discretionary bonuses, excess
commissions, severance pay, or any special payments or other deferred
compensation arrangements.
The following table sets forth, as of May 31, 1998 (the fiscal year end
for this plan), estimated annual pension benefits for individuals at age 65
payable in the form of a life annuity under the most advantageous plan
provisions for various levels of compensation and years of service. The figures
in this table are based upon the assumption that the Pension Plan continues in
its present form. At May 31, 1998, the estimated years of credited service of
Messrs. John C. Dicus, John B. Dicus, Stanley F. Mick, Neil F.M. McKay and Larry
K. Brubaker were 39, 13, 37, 4 and 27 years, respectively.
Years of Credited Service
- --------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ------- ------- ------- ------- --------
$50,000 $9,290 $12,387 $15,483 $18,580 $21,677
$75,000 $14,694 $19,592 $24,490 $29,388 $34,285
$100,000 $20,098 $26,797 $33,496 $40,195 $46,894
$125,000 $25,501 $34,002 $42,502 $51,003 $59,503
$150,000 $30,905 $41,207 $51,508 $61,810 $72,112
$175,000 $33,067 $44,089 $55,111 $66,133 $77,155
$200,000 $33,067 $44,089 $55,111 $66,133 $77,155
The Bank intends to terminate the Pension Plan, effective May 31, 1999,
and to cease the accrual of any further benefits and the contribution of any
further amounts under the Pension Plan. Following the approval of the Pension
Plan's termination by the IRS and the Pension Benefit Guaranty Corporation, the
Bank intends to distribute the plan's assets to participants in accordance with
their accrued benefits and the requirements of applicable law.
Retirement Program. The Bank has purchased a key man life insurance
policy to fund a retirement program for John C. Dicus. The policy is designed to
pay monthly installments to the Bank for a period of twenty years following the
retirement of Mr. Dicus. A portion of the amount received by the Bank will be
paid to Mr. Dicus. Upon retirement, Mr. Dicus will receive $2,083 monthly under
this program.
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Employees' Profit Sharing Plan. The Bank has a qualified, tax-exempt
profit sharing thrift plan (the "Profit Sharing Plan"). All employees who have
completed two years of service during which they are credited with at least
1,000 hours of service are eligible to participate on the next October 1st or
April 1st.
The Bank makes two types of discretionary contributions to the Profit
Sharing Plan- profit sharing contributions of between .5% and 5% of
participants' compensation, and thrift contributions of between .5% and 10% of
participants' compensation. Thrift contributions may not be more than 5
percentage points over the percentage of participants' compensation that the
Bank makes in profit sharing contributions for the plan year (October 1st to the
following September 30th).
Participants are required to make a thrift contribution on an after-tax
basis equal to 50% of the Bank's thrift contribution for the plan year, not to
exceed 5% of their annual compensation. Participants are permitted to make
voluntary after-tax contributions which, when added to the participant's thrift
contribution shall not exceed the sum of the participant's profit sharing
contribution and the Bank's thrift contribution allocated for the participant
for the Plan Year, and, in no event, shall exceed 10% of the participant's
compensation for the Plan Year.
The Bank directs the trustees of the Profit Sharing Plan regarding the
investment of participants' accounts under the Profit Sharing Plan. Each
participant receives an annual statement which provides information regarding,
among other things, the market value of the participant's accounts and
contributions made to the Profit Sharing Plan either by the participant or on
behalf of the participant. Plan distributions are made in the form of an annuity
contract, installments or a lump sum. Participants are not permitted to borrow
against their account balance or to receive in-service withdrawals from the
Profit Sharing Plan. In the year ended September 30, 1998, the Bank's
contributions to the Profit Sharing Plan on behalf of Messrs. John C. Dicus,
John B. Dicus, Stanley F. Mick, Neil F.M. McKay and Larry K. Brubaker were
$8,250 each.
Employee Stock Ownership Plan. The Stock Holding Company intends to
adopt an ESOP for employees of the Stock Holding Company and the Bank to become
effective upon the Reorganization and Stock Issuance. Employees of the Stock
Holding Company and the Bank who have been credited with a year of service (at
least 1,000 hours of service during a twelve month period) are eligible to
participate in the ESOP.
As part of the Reorganization and Stock Issuance, it is anticipated
that the ESOP will borrow funds from the Stock Holding Company. The ESOP will
purchase up to 8.0% of the Common Stock sold in the stock offering. It is
anticipated that such loan will equal 100% of the aggregate purchase price of
the Common Stock acquired by the ESOP. The loan to the ESOP will be repaid
principally from the Bank's contributions to the ESOP over a period of 15 years,
and the collateral for the loan will be the Common Stock purchased by the ESOP.
The interest rate for the ESOP loan is expected to be the minimum rate
prescribed by the Code. The Stock Holding Company may, in any plan year, make
additional discretionary contributions for the benefit of plan participants in
either cash or shares of Common Stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
upon the original issuance of additional shares by the Stock Holding Company or
upon the sale of treasury shares by the Stock Holding Company. Such purchases,
if made, would be funded through additional borrowings by the ESOP or additional
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contributions from the Stock Holding Company. The timing, amount and manner of
future contributions to the ESOP will be affected by various factors, including
prevailing regulatory policies, the requirements of applicable laws and
regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released to participants' accounts as debt service
payments are made. Shares released from the ESOP will be allocated to each
eligible participant's ESOP account based on the ratio of each such
participant's compensation to the total compensation of all eligible ESOP
participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Stock Holding Company might otherwise
have contributed to the ESOP. The account balances of participants within the
ESOP will become 20% vested after three years of service, with an additional 20%
per year until full vesting after seven years of service. Credit for eligibility
and vesting is given for years of service with the Bank prior to adoption of the
ESOP. In the case of a "change in control," as defined, which triggers a
termination of the ESOP, participants will become immediately fully vested in
their account balances. Benefits are payable upon retirement or other separation
from service. The Stock Holding Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
Intrust Bank, N.A. will serve as trustee of the ESOP. Under the ESOP,
the trustee must vote all allocated shares held in the ESOP in accordance with
the instructions of the participating employees, and unallocated shares will be
voted in the same ratio on any matter as those allocated shares for which
instructions are given.
GAAP requires that any third party borrowing by the ESOP be reflected
as a liability on the Stock Holding Company's statement of financial condition.
Since the ESOP is borrowing from the Stock Holding Company, such obligation is
not treated as a liability, but will be excluded from stockholders' equity. If
the ESOP purchases newly issued shares from the Stock Holding Company, total
stockholders' equity would neither increase nor decrease, but per share
stockholders' equity and per share net earnings would decrease as the newly
issued shares are allocated to the ESOP participants.
The ESOP will be subject to the requirements of the ERISA, and the
regulations of the IRS and the Department of Labor thereunder.
Other Stock Benefit Plans. In the future, we may consider the
implementation of a stock option plan and a restricted stock plan for the
benefit of selected directors, officers and employees. We anticipate that the
Stock Option Plan and restricted stock plan will have reserved a number of
shares equal to 10% and 4%, respectively, of the Stock Holding Company Common
Stock sold in the Stock Issuance. Grants of Common Stock pursuant to the
restricted stock plan will be issued without cost to the recipient. If a
determination is made to implement a Stock Option Plan or restricted stock plan,
it is anticipated that any such plans will be submitted to stockholders for
their consideration at which time stockholders would be provided with detailed
information regarding such plan. If such plans are approved, and effected, they
will have a dilutive effect on the Stock Holding Company's stockholders as well
as affect the Stock Holding Company's net income and stockholders' equity,
although the actual results cannot be determined until such plans are
implemented. Any such Stock Option Plan or restricted stock plan will not be
implemented less than
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six months after the date of the consummation of the Reorganization, subject to
continuing OTS jurisdiction.
Certain Transactions
The Bank has followed a policy of granting loans to officers and
directors. Loans to directors and executive officers are made in the ordinary
course of business and on the same terms and conditions as those of comparable
transactions with the general public prevailing at the time, in accordance with
our underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans we make to our directors and executive officers are subject
to OTS regulations restricting loan and other transactions with affiliated
persons of the Bank. Loans to all directors and executive officers and their
associates totaled approximately $1.4 million at September 30, 1998, which was
0.2% of our equity at that date. All loans to directors and executive officers
were performing in accordance with their terms at September 30, 1998.
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of the Bank's directors and
for all of the directors and senior officers as a group, the proposed purchases
of Common Stock, assuming sufficient shares are available to satisfy their
subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates.
At the Minimum of the At the Maximum of
Estimated Offering Range Estimated Offering Range
------------------------ ------------------------
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ---- ---------- -------- ---------- -------- -----------
B.B. Andersen $ 500,000 50,000 * 50,000 *
John B. Dicus 500,000 50,000 * 50,000 *
John C. Dicus 500,000 50,000 * 50,000 *
Robert B. Maupin 500,000 50,000 * 50,000 *
Carl W. Quarnstrom 100,000 10,000 * 10,000 *
Frederick P. Reynolds 500,000 50,000 * 50,000 *
Marilyn S. Ward 100,000 10,000 * 10,000 *
All directors and 3,505,000 350,500 1.1% 350,500 *
senior officers as
a group (15 persons)
- ------------------
* Less than 1.0%
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THE REORGANIZATION AND STOCK ISSUANCE
General
The Board of Directors of the Bank adopted the Plan, pursuant to which
the Bank will reorganize into the federal mutual holding company structure as a
wholly owned subsidiary of the Stock Holding Company, which in turn will be a
majority-owned subsidiary of the MHC. Following receipt of all required
regulatory approvals, the approval of the members of the Bank entitled to vote
on the Plan, and the satisfaction of all other conditions precedent to the
Reorganization, the Bank will consummate the Reorganization. Following
completion of the Reorganization, the Bank in its stock form will continue to
conduct its business and operations from the same offices with the same
personnel as the Bank conducted prior to the Reorganization. The Reorganization
will not affect the balances, interest rates or other terms of the Bank's loans
or deposit accounts, and the deposit accounts will continue to be issued by the
FDIC to the same extent as they were prior to the Reorganization. The MHC
initially will be capitalized with $100,000. Upon consummation of the
Reorganization, such capital will be used for general corporate purposes.
Pursuant to the Plan, the Reorganization will be effected as follows or
in any other manner that is consistent with applicable federal law and
regulations and the intent of the Plan:
(1) the Bank will organize an interim stock savings bank as a wholly-owned
subsidiary ("Interim One");
(2) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(3) Interim One will organize the Stock Holding Company as a wholly-owned
subsidiary;
(4) the Bank will exchange its charter for a federal stock savings bank
charter to become the Bank and Interim One will exchange its charter
for a federal mutual holding company charter to become the MHC;
(5) simultaneously with step (4), Interim Two will merge with and into the
Bank with the Bank as the resulting institution;
(6) all of the initially issued stock of the Bank will be transferred to
the MHC in exchange for membership interests in the MHC;
(7) the MHC will contribute the capital stock of the Bank to the Stock
Holding Company, and the Bank will become a wholly-owned subsidiary of
the Stock Holding Company; and
(8) contemporaneously with the Reorganization, the Stock Holding Company
will offer for sale in the Stock Offering shares of Common Stock based
on the pro forma market value of the Stock Holding Company and the
Bank.
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The Stock Holding Company expects to receive the approval of the OTS to
become a savings and loan holding company and to own all of the common stock of
the Bank. The Stock Holding Company intends to retain $50 million of the net
proceeds of the Stock Offering. The Reorganization will be effected only upon
completion of the sale of all of the shares of Common Stock to be issued
pursuant to the Plan.
The discussion herein provides a brief summary of material aspects of
the Reorganization and Stock Issuance. The summary is qualified in its entirety
by reference to the provisions of the Plan of Reorganization and Stock Issuance
Plan. Copies of the Plan of Reorganization and Stock Issuance Plan are available
for inspection at any office of the Bank and at the OTS. The Plan of
Reorganization and Stock Issuance Plan are also filed as an exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
The Board of Directors of the Bank and the OTS have approved the Plan,
subject to approval by the members of the Bank entitled to vote on the matter
and the satisfaction of certain other conditions. Such OTS approval, however,
does not constitute a recommendation or endorsement of the Plan by such agency.
Purposes of the Reorganization
As a mutual institution, the Bank has no authority to issue shares of
capital stock and consequently has no access to market sources of equity
capital. Only by generating and retaining earnings from year to year is the Bank
able to enhance its capital position.
As a stock corporation upon consummation of the Reorganization, the
Bank will be organized in the form used by commercial banks, most major
corporations and a majority of savings institutions. The ability to raise new
equity capital through the issuance and sale of the Bank's or Stock Holding
Company's capital stock will allow the Bank the flexibility to enhance its
capital position more rapidly than by accumulating earnings and at times deemed
advantageous by the Board of Directors of the Bank, thereby supporting future
growth and expanded operations (including increased lending and investment
activities) as business and regulatory needs dictate. The ability to attract new
capital also will assist in increasing the capabilities of the Bank to address
the needs of the communities it serves and enhance its ability to effect
acquisitions or pursue business diversification opportunities. Thus, whereas the
acquisition alternatives available to the Bank are quite limited as a mutual
institution (because of a requirement in OTS regulations that the surviving
institution in a merger involving a mutual institution generally must be in
mutual form), upon consummation of the Reorganization, the Bank will have
increased ability to merge with other mutual and stock institutions and the
Stock Holding Company may acquire control of other mutual or stock savings
associations and retain the acquired institution as a separate subsidiary of the
Stock Holding Company. Finally, the ability to issue capital stock will enable
the Bank to establish stock compensation plans for directors, officers and
employees, thereby granting them equity interests in the Bank and greater
incentive to improve its performance. For a description of the stock
compensation plans which will be adopted by the Bank in connection with the
Reorganization, see "Management." Although the Bank's ability to raise capital
and general business flexibility will be enhanced by organizing as a subsidiary
of a stock subsidiary of a mutual holding company, such
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advantages will be limited by (i) the requirement in applicable laws and
regulations that a mutual holding company maintain a majority ownership interest
in its savings bank holding company subsidiary and (ii) the Stock Holding
Company's offering of up to 49.9% of its to-be-outstanding Common Stock (prior
to the proposed issuance of shares to the Foundation), which will affect the
Stock Holding Company's ability to issue additional shares of Common Stock in
the future absent additional issuances of such stock to the MHC.
The advantages of the Reorganization also could be achieved if the Bank
were to reorganize into a wholly-owned subsidiary of a stock form holding
company (a "standard conversion") rather than as a second-tier subsidiary of a
mutual holding company. A standard conversion also would free the Bank from the
restrictions on its ability to raise capital which result from the requirement
that its mutual holding company maintain a majority ownership interest in the
Stock Holding Company. Nevertheless, the Board of Directors of the Bank
unanimously believes that the Reorganization is in the best interests of the
Bank and its account holders. Because OTS regulations require that savings
institutions converting to stock form in a standard conversion sell all of their
to-be-outstanding capital stock rather than a minority interest in such capital
stock, however, the amount of equity capital that would be raised in a standard
conversion would be substantially more than that which could be raised in a
minority stock offering by a subsidiary of a mutual holding company, which would
make it more difficult for the Bank to maximize the return on its equity.
Finally, such a reorganization also would eliminate all aspects of the mutual
form of organization. Consummation of the Reorganization does not foreclose the
possibility of the MHC converting from mutual to stock form in the future;
however, no such action is contemplated at this time. See "Conversion of the MHC
to Stock Form."
After considering the advantages and disadvantages of the
Reorganization, as well as applicable fiduciary duties and alternative
transactions, including a reorganization into a wholly-owned subsidiary of a
stock form holding company rather than as a second-tier subsidiary of a mutual
holding company, the Board of Directors of the Bank unanimously approved the
Reorganization as being in the best interests of the Bank and equitable to its
account holders.
Effects of the Reorganization
General. The Reorganization will have no effect on the Bank's present
business of accepting deposits and investing its funds in loans and other
investments permitted by law. The Reorganization will not result in any change
in the existing services provided to depositors and borrowers, or in existing
offices, management and staff. The Bank will continue to be subject to
regulation, supervision and examination by the OTS and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Bank at the
time of the Reorganization will continue as an account holder in the Bank after
the Reorganization, and the Reorganization will not affect the deposit balance,
interest rate or other terms of such accounts. Each account will be insured by
the FDIC to the same extent as before the Reorganization. Depositors in the Bank
will continue to hold their existing certificates, passbooks and other evidence
of their accounts. The Reorganization will not affect the loans of any borrower
from the Bank. The amount, interest rate, maturity, security for and obligations
under each loan will remain contractually fixed as they existed prior to the
Reorganization. See "-- Voting Rights" and "-- Liquidation Rights" below
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for a discussion of the effects of the Reorganization on the voting and
liquidation rights of the depositors of the Bank.
Continuity. During the Reorganization and Stock Issuance process, the
normal business of the Bank of accepting deposits and making loans will continue
without interruption. Following consummation of the Reorganization and Stock
Issuance, the Bank will continue to be subject to regulation by the OTS, and
FDIC insurance of accounts will continue without interruption. After the
Reorganization and Stock Issuance, the Bank will continue to provide services
for depositors and borrowers under current policies and by its present
management and staff.
The Board of Directors presently serving the Bank will serve as the
Board of Directors of the Bank after the Reorganization and Stock Issuance. The
initial members of the Board of Directors of the Stock Holding Company and the
MHC will consist of the individuals currently serving on the Board of Directors
of the Bank. Thereafter, the voting stockholders of the Stock Holding Company
will elect approximately one-third of the Stock Holding Company's directors
annually, and approximately one-third of the directors of the MHC will be
elected annually by the members of the MHC who will consist of certain of the
former Members of the Bank and all persons who become Depositors of the Bank
after the Reorganization. All current officers of the Bank will retain their
positions with the Bank after the Reorganization and Stock Issuance.
Voting Rights. Upon the completion of the Reorganization and Stock
Issuance, depositor and borrower members as such will have no voting rights in
the Bank or the Stock Holding Company and, therefore, will not be able to elect
directors of the Bank or the Stock Holding Company or to control their affairs.
Currently these rights are accorded to depositors and certain borrowers of the
Bank. Subsequent to the Reorganization and Stock Issuance, voting rights will be
vested exclusively in the stockholders of the Stock Holding Company which, in
turn, will own all of the stock of the Bank. Each holder of Common Stock shall
be entitled to vote on any matter to be considered by the stockholders of the
Stock Holding Company, subject to the provisions of the Stock Holding Company's
Charter.
As a federally-chartered mutual holding company, the MHC will have no
authorized capital stock and, thus, no stockholders. The MHC will be controlled
by members of the Bank (i.e., depositors and certain borrowers), and such
members have granted proxies in favor of the Bank's management. According to
regulations of the OTS, the revocable proxies that members of the Bank have
granted to the Board of Directors of the Bank, which confer on the Board of
Directors of the Bank general authority to cast a member's vote on any and all
matters presented to the members, shall be deemed to cover the member's votes as
members of the MHC, and such authority shall be conferred on the Board of
Directors of the MHC. The Plan also provides for the transfer of proxy rights to
the Board of Directors of the MHC. Accordingly, the Board of Directors of the
Bank will, in effect, be able to govern the operations of the MHC, and hence the
Stock Holding Company, notwithstanding objections raised by members of the MHC
or stockholders of the Stock Holding Company, respectively, so long as the Board
of Directors has been appointed proxy for a majority of the outstanding votes of
members of the MHC and such proxies have not been revoked. In addition, all
persons who become depositors of the Bank following the Reorganization will have
membership rights with respect to the MHC. Borrowers who were borrowers of the
Bank under its existing charter immediately prior to the Reorganization and
whose loans continue in existence are
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members of the Bank and will have membership rights in the MHC; all other
borrowers are not members of the Bank and, thus, will not receive membership
rights in the MHC.
Liquidation Rights. In the event of a voluntary liquidation of the Bank
prior to the Reorganization, holders of deposit accounts in the Bank would be
entitled to distribution of any assets of the Bank remaining after the claims of
such depositors (to the extent of their deposit balances) and all other
creditors are satisfied. Following the Reorganization, the holder of the Bank's
Common Stock, i.e., the Stock Holding Company, would be entitled to any assets
remaining upon a liquidation, dissolution or winding up of the Bank and, except
through their liquidation interests in the MHC, discussed below, holders of
deposit accounts in the Bank would not have interest in any such assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the MHC following consummation of the Reorganization, holders of
deposit accounts in the Bank would be entitled, pro rata to the value of their
accounts, to distribution of any assets of the MHC remaining after the claims of
all creditors of the MHC are satisfied. Stockholders of the Stock Holding
Company will have no liquidation or other rights with respect to the MHC in
their capacities as such.
In the event of a liquidation, dissolution or winding up of the Stock
Holding Company, each holder of shares of the Common Stock would be entitled to
receive, after payment of all debts and liabilities of the Stock Holding
Company, a pro rata portion of all assets of the Stock Holding Company available
for distribution to holders of the Common Stock.
There currently are no plans to liquidate the Bank, the Stock Holding
Company or the MHC in the future.
Tax Effects. The Bank has received an opinion from its special counsel,
Silver, Freedman, & Taff L.L.P., Washington, D.C., as to the material federal
income tax consequences of the Reorganization and Stock Issuance to the Bank,
the Stock Holding Company and the MHC, and as to the generally applicable
material federal income tax consequences of the Reorganization and Stock
Issuance to the Bank's account holders and to persons who purchase Common Stock
in the Offering. In the following discussion, "Stock Bank" refers to the Bank
after the Reorganization and Stock Issuance.
The opinion provides that, among other things, (i) the Bank's adoption
of a charter in stock form (the "Bank Conversion") will qualify as a tax-free
reorganization under Internal Revenue Code of 1986, as amended, Section
368(a)(1)(F); (ii) the conversion of the Bank's wholly-owned subsidiary
("Interim 1") into the MHC will qualify as a tax-free reorganization under Code
Section 368(a)(1)(F); (iii) the merger of the wholly-owned subsidiary of Interim
1 ("Interim 2") into the Stock Bank with the Stock Bank as the survivor will
qualify as a tax-free reorganization under Code Section 368(a)(1)(A); (iv) no
gain or loss will be recognized by the Bank in the Bank Conversion; (v) neither
the Stock Bank nor the MHC will recognize gain or loss upon the receipt by the
Stock Bank of substantially all of the assets of the Bank in exchange for equity
interests in the MHC and the Stock Bank's assumption of the Bank's
liabilities;(vi) the MHC's basis in the stock of the Stock Bank will represent
the Bank's net basis in the property transferred to the Stock Bank; (vii) the
Stock Bank's basis in the property received from the Bank will be the same as
the basis of such property
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in the hands of the Bank immediately prior to the Reorganization and Stock
Issuance; (viii) the Stock Bank's holding period for the property received from
the Bank will include the period during which such property was held by the
Bank; (ix) subject to the conditions and limitations set forth in Code Sections
381, 382, 383, and 384 and the Treasury regulations promulgated thereunder, the
Stock Bank will succeed to and take into account the items of the Bank described
in Code Section 381(c); (x) no gain or loss will be recognized by the depositors
of the Bank on the receipt of equity interests with respect to the MHC in
exchange for their equity interests surrendered therefor; (xi) the receipt of
stock by depositors for equity interests in the MHC will constitute a tax-free
exchange of property solely for voting "stock" pursuant to Code Section 351;
(xii) each Bank depositor's aggregate basis, if any, in the MHC equity interest
received in the exchange will equal the aggregate basis, if any, of each
depositor's equity interest in the Bank; (xiii) the holding period of the MHC
equity interests received by the depositors of Bank will include the period
during which the Bank equity interests surrendered in exchange therefor were
held; (xiv) the MHC will recognize no gain or loss upon the transfer of the
Stock Bank stock to the Stock Holding Company in exchange for Common Stock
pursuant to Code Section 351; (xv) the Stock Holding Company will recognize no
gain or loss upon its receipt of Stock Bank stock from the MHC in exchange for
Common Stock; (xvi) the MHC will have a basis in its shares of the Common Stock
in an amount representing the MHC's basis in its Stock Bank stock; (xvii) the
Stock Holding Company will recognize no gain or loss upon the receipt of money
in exchange for shares of Common Stock; (xviii) no gain or loss will be
recognized by the Bank's account holders upon the issuance to them of accounts
in the Stock Bank in stock form immediately after the Reorganization and Stock
Issuance, in the same dollar amounts and on the same terms and conditions as
their accounts at the Bank immediately prior to the Reorganization and Stock
Issuance; (xix) the tax basis of the Common Stock purchased in the
Reorganization and Stock Issuance will be equal to the amount paid therefor
increased, in the case of the Common Stock acquired to the exercise of
Subscription Rights, by the fair market value, if any, of the Subscription
Rights exercised; (xx) the holding period for the Common Stock purchased in the
Reorganization and Stock Issuance will commence upon the exercise of such
holder's Subscription Rights and otherwise on the day following the date of such
purchase; (xxi) gain or loss will be recognized to account holders upon the
receipt or exercise of Subscription Rights in the Reorganization and Stock
Issuance, but only to the extent such Subscription Rights are deemed to have
value, as discussed below.
The opinion of Silver, Freedman & Taff, L.L.P. is based in part upon,
and subject to the continuing validity in all material respects through the date
of the Reorganization and Stock Issuance of various representations of the Bank
and upon certain assumptions and qualifications, including that the
Reorganization and Stock Issuance are consummated in the manner and according to
the terms provided in the Plan of Reorganization and Stock Issuance Plan. Such
opinion is also based upon the Code, regulations now in effect or proposed
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change and such change may be made with retroactive
effect. Unlike private letter rulings received from the IRS, an opinion is not
binding upon the IRS and there can be no assurance that the IRS will not take a
position contrary to the positions reflected in such opinion, or that such
opinion will be upheld by the courts if challenged by the IRS.
The Bank has also obtained an opinion from Deloitte & Touche LLP, that
the income tax effects of the Reorganization and Stock Issuance under Kansas tax
laws will be substantially the same as described above with respect to federal
income tax laws.
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The Stock Holding Company and the Bank have received a letter from RP
Financial, stating its belief that the subscription rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration, and afford the recipients the
right only to purchase the Common Stock at a price equal to its estimated fair
market value, which will be the same price as the Purchase Price for the
unsubscribed shares of Common Stock. If the subscription rights granted to
eligible subscribers are deemed to have an ascertainable value, receipt of such
rights would be taxable probably only to those eligible subscribers who exercise
the subscription rights (either as a capital gain or ordinary income ) in an
amount equal to such value, and the Stock Holding Company and the Bank could
recognize gain on such distribution. Eligible subscribers are encouraged to
consult with their own tax advisor as to the tax consequences in the event that
such subscription rights are deemed to have an ascertainable value. Unlike
private rulings, the letter of RP Financial is not binding on the IRS, and the
IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Establishment of the Foundation
General. Continuing the Bank's commitment to the communities that it
serves, the Plan provides that the Bank and the Stock Holding Company will
establish the Foundation, which will be incorporated under Kansas law as a
non-stock corporation, and will fund the Foundation with cash and Common Stock
in an amount up to 8.0% of the aggregate value of shares of Common Stock sold in
the Offerings. By increasing the Bank's visibility and reputation in the
communities that it serves, the Bank believes that the Foundation will enhance
the long-term value of the Bank's community banking franchise. The Foundation
will be dedicated to the promotion of charitable purposes within the Bank's
market areas.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes including education, affordable housing
activities, the United Way and other charitable purposes within the communities
served by the Bank. Traditionally, the Bank has emphasized community lending and
community development activities within the communities that it serves. The
Foundation is being formed as a complement to the Bank's existing community
activities. The Bank believes that the Foundation will enable the Stock Holding
Company and the Bank to assist their local communities in areas beyond community
development and lending. The Bank believes the establishment of the Foundation
will enhance its activities in the affordable housing area. In this regard, the
Board of Directors believes the establishment of a charitable foundation is
consistent with the Bank's commitment to community service. The Board further
believes that the funding of the Foundation with Common Stock of the Stock
Holding Company is a means of enabling the communities served by the Bank to
share in the growth and success of the Stock Holding Company long after
completion of the Reorganization. The Foundation will accomplish that goal by
providing for continued ties between the Foundation and Bank, thereby forming a
partnership with the Bank's communities. The establishment of the Foundation
will also enable the Stock Holding Company and the Bank to develop a unified
charitable donation strategy. The Bank, however, does not expect the
contribution to the Foundation to take the place of the Bank's traditional
community lending activities. In this respect, subsequent to the Reorganization,
the Bank may continue to make contributions to other charitable organizations
and/or it may make additional contributions to the Foundation.
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Structure of the Foundation. The Foundation will be incorporated under
Kansas law as a non-stock corporation. Pursuant to the Foundation's Bylaws, the
Foundation's initial Board of Directors will be comprised of two members of the
Stock Holding Company and the Bank's Boards of Directors (Messrs. John C. Dicus
and John B. Dicus) and three other individuals chosen in light of their
commitment and service to charitable and community purposes. The other persons
expected to serve as directors of the Foundation are Nancy J. Perry (President
and C.E.O. of the United Way of Greater Topeka), Rick C. Jackson (First Vice
President - Community Development Director of the Bank) and Ronald W. Roskens
(President, Global Connections, Inc., former president of the University of
Nebraska and former Administrator of the Agency for International Development,
Washington, D.C.). Mr. Roskens is the father-in-law of Mr. John B. Dicus. There
are no plans to change the size of the Foundation's Board of Directors during
the one-year period subsequent to consummation of the Reorganization. The Bank
currently intends that less than a majority of the Bank's directors will also
serve as directors of the Foundation. A Nominating Committee of the Foundation's
Board will nominate individuals eligible for election to the Board of Directors.
The members of the Foundation, who are comprised of its Board members, will
elect the Directors at the annual meeting of the Foundation from those nominated
by the Nominating Committee. Only persons serving as Directors of the Foundation
qualify as members of the Foundation, with voting authority. Directors will be
divided into three classes with each class appointed for three-year terms. No
determination has been made what, if any, compensation the Foundation directors
will receive. The articles of incorporation of the Foundation provides that the
corporation is organized exclusively for charitable purposes, including
community development, as set forth in Section 501(c)(3) of the Code. The
Foundation's articles of incorporation further provide that no part of the net
earnings of the Foundation will inure to the benefit of, or be distributable to
its directors, officers or members. No award, grant or distribution shall be
made by the Foundation to any director, officer or employee of the Stock Holding
Company or the Bank or any affiliate thereof. In addition, any of such persons,
to the extent that they serve as an officer, director or employee of the
Foundation will be subject to the conflict of interest regulations of the OTS.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purposes for which the Foundation is established. The directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Stock Holding
Company held by the Foundation. However, it is expected that as a condition to
receiving the approval of the OTS to the Bank's Reorganization, the Foundation
will be required to commit to the OTS that all shares of Common Stock held by
the Foundation will be voted in the same ratio as all other shares of the Stock
Holding Company's Common Stock on all proposals considered by stockholders of
the Stock Holding Company; provided, however, that, consistent with such
expected condition, the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (i) cause a
violation of the law of the State of Kansas and the OTS determines that federal
law would not preempt the application of the laws of Kansas to the
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Foundation; (ii) would cause the Foundation to lose its tax-exempt status, or
cause the IRS to deny the Foundation's request for a determination that it is an
exempt organization or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Stock Holding Company's or the Foundation's legal counsel would
be required to render an opinion satisfactory to the OTS that compliance with
the voting requirement would have the effect described in clauses (i), (ii) or
(iii) above. Under those circumstances, the OTS would grant a waiver of the
voting restriction upon submission of such legal opinions(s) by the Stock
Holding Company or the Foundation that are satisfactory to the OTS. In the event
that the OTS were to waive the voting requirement, the Directors would direct
the voting of the Common Stock held by the Foundation.
The Foundation's place of business is expected to initially be located
at the Bank's executive offices and initially the Foundation is expected to have
no separate employees but will utilize the staff of the Bank for which the Bank
will be reimbursed. The Board of Directors of the Foundation expects to hire a
full time executive director. The Board of Directors of the Foundation will
appoint such officers as may be necessary to manage the operations of the
Foundation. In this regard, it is expected that the Bank will be required to
provide the OTS with a commitment that, to the extent applicable, the Bank will
comply with the affiliate restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act with respect to any transactions between the Bank and the
Foundation.
The Stock Holding Company intends to capitalize the Foundation with an
amount equal to 8.0% of the aggregate value of shares of Common Stock sold in
the Offerings, 50% in Common Stock and 50% in cash, which would have a total
market value of $25.7 million to $34.8 million ($40.0 million at the maximum, as
adjusted), based on the Purchase Price of $10.00 per share. Messrs. John C. and
John B. Dicus, who will serve as initial directors of the Foundation, and their
affiliates intend to purchase, subject to availability, an aggregate of 100,000
shares of Common Stock. The other directors of the Foundation expect to purchase
shares of Common Stock as follows: Perry - 1,000 shares; Jackson - 4,000 shares
and Roskens - 1,000 shares. The shares of Common Stock to be acquired by the
Foundation, when combined with the proposed purchases of shares of Common Stock
by all Foundation directors and their affiliates will total 1.8 million shares
or 1.7% of the total number of shares of Common Stock to be issued and
outstanding (assuming the sale of 43.5 million shares of Common Stock).
The Foundation will receive working capital from any dividends that may
be paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. Failure to distribute such a
minimum return will require substantial federal taxes to be paid. One of the
conditions imposed on the gift of Common Stock by the Stock Holding Company is
that the amount of Common Stock that may be sold by the Foundation in any one
year shall not exceed 5% of the average market value of the assets held by the
Foundation, except where the Board of Directors of the Foundation determines
that the failure to sell an amount of Common Stock greater than such amount
would result in a longer term reduction of the value of the
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Foundation's assets and as such would jeopardize the Foundation's capacity to
carry out its charitable purposes. Upon completion of the Reorganization and the
Stock Issuance and the contribution of shares of Common Stock to the Foundation,
the Stock Holding Company would have 77,785,444, 91,512,288, 105,239,130 and
128,025,000 shares issued and outstanding based on the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Offering Range. Because the
Stock Holding Company will have an increased number of shares outstanding, the
voting and ownership interests of Minority Stockholders in the Stock Holding
Company's Common Stock would be diluted to 41.31% as compared to a 42.01%
interest in the Stock Holding Company if the Foundation was not established. For
additional discussion of the dilutive effect, see "Pro Forma Data."
Tax Considerations. The Stock Holding Company and the Bank have been
advised by their independent tax advisors that an organization created and
operated for the above charitable purposes would generally qualify as a Section
501(c)(3) exempt organization under the Code, and further that such an
organization should be classified as a private foundation as defined in Section
509 of the Code. The Foundation will submit a timely request to the IRS to be
recognized as an exempt organization. As long as the Foundation files its
application for recognition of tax-exempt status within 15 months from the date
of its organization, and provided the IRS approves the application, the
effective date of the Foundation's status as a Section 501(c)(3) organization
will be the date of its organization. The Stock Holding Company's and the Bank's
independent tax advisor, however, has not rendered any advice on the regulatory
condition to the contribution which is expected to require that all shares of
Common Stock of the Stock Holding Company held by the Foundation must be voted
in the same ratio as all other outstanding shares of Common Stock of the Stock
Holding Company on all proposals considered by stockholders of the Stock Holding
Company. Consistent with the expected condition, in the event that the Stock
Holding Company or the Foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation, or subject the Foundation to an
excise tax under Section 4941 of the Code, it is expected that the OTS would
waive such voting restriction upon submission of a legal opinion(s) by the Stock
Holding Company or the Foundation satisfactory to the OTS. See "-- Regulatory
Conditions Imposed on the Foundation."
Under the Code, the Stock Holding Company is generally allowed a
deduction for charitable contributions made to qualifying donees within the
taxable year of up to 10% of the combined taxable income of the consolidated
groups of corporations (with certain modifications) for such year. Charitable
contributions made by the Stock Holding Company in excess of the annual
deductible amount will be deductible over each of the five succeeding taxable
years, subject to certain limitations. The Stock Holding Company and the Bank
believe that the Reorganization presents a unique opportunity to establish and
fund a charitable foundation given the substantial amount of additional capital
being raised in the Reorganization. In making such a determination, the Stock
Holding Company and the Bank considered the dilutive impact of the contribution
of Common Stock to the Foundation on the amount of Common Stock available to be
offered for sale in the Reorganization. Based on such consideration, the Stock
Holding Company and Bank believe that the contribution to the Foundation in
excess of the 10% annual deduction limitation is justified given the Bank's
capital position and its earnings, the substantial additional capital being
raised in the Stock Issuance and the potential benefits of the Foundation to the
communities served by the Bank. In this regard, assuming the sale of shares at
the maximum of the Estimated Offering Range, the
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Stock Holding Company would have pro forma stockholders' equity of $1.03 billion
or 18.18% of pro forma consolidated assets and the Bank's pro forma tangible,
core and total risk-based capital ratios would be 16.67%, 16.67% and 38.93%,
respectively. See "Regulatory Capital," "Capitalization," "Comparison of
Valuation and Pro Forma Information with No Foundation" and "Pro Forma Data."
The Stock Holding Company and the Bank believe that the amount of the charitable
contribution is reasonable given the Stock Holding Company's and the Bank's pro
forma capital positions. As such, the Stock Holding Company and the Bank believe
that the contribution does not raise safety and soundness concerns.
The Stock Holding Company and the Bank have received an opinion from
their independent tax advisors that the Stock Holding Company's contribution of
its own stock and cash to the Foundation would not constitute an act of
self-dealing, and that the Stock Holding Company will be entitled to a deduction
in the amount of the cash and potentially a deduction for the fair market value
of the stock contributions to the Foundation such fair market value at the time
of the contribution less any nominal par value that the Foundation may be
required to pay to the Stock Holding Company for such stock, subject to the
annual deduction limitation described above. The Stock Holding Company, however,
would be able to carryforward any unused portion of the deduction for five years
following the contribution, subject to certain limitations. The Stock Holding
Company's and the Bank's independent tax advisor, however, has not rendered
advice as to fair market value for purposes of determining the amount of the tax
deduction. If the Foundation would have been established in fiscal 1998, the
Stock Holding Company would have received tax benefits of approximately $13.2
million (based on the Bank's pre-tax income for fiscal 1998, an assumed tax rate
of 38.0% and a deduction for the contribution of cash and Common Stock equal to
$34.8 million). Assuming the close of the Offerings at the maximum of the
Estimated Price Range, the Stock Holding Company estimates that all of the
contribution should be deductible over the six-year period. The Stock Holding
Company and/or the Bank may make further contributions to the Foundation
following the initial contribution. In addition, the Bank and the Stock Holding
Company also may continue to make charitable contributions to other qualifying
organizations. Any such decisions would be based on an assessment of, among
other factors, the financial condition of the Stock Holding Company and the Bank
at that time, the interests of stockholders and depositors of the Stock Holding
Company and the Bank, and the financial condition and operations of the
Foundation.
Although the Stock Holding Company and the Bank have received an
opinion of their independent tax advisors that the Stock Holding Company will
more likely than not be entitled to an income tax deduction for the stock
portion of the charitable contribution, there can be no assurances that the IRS
will recognize the Foundation as a Section 501(c)(3) exempt organization or that
a deduction for the charitable contribution will be allowed. See "Risk
Factors-Establishment of the Foundation."
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year. The Foundation will be required to publish a
notice that the annual information return will be available for public
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inspection for a period of 180 days after the date of such public notice. The
information return for a private foundation must include, among other things, an
itemized list of all grants made or approved, showing the amount of each grant,
the recipient, any relationship between a grant recipient and the Foundation's
managers and a concise statement of the purpose of each grant. Numerous other
requirements exist in the operation of the Foundation including transactions
with related entities, level of investments and distributions for charitable
purposes.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is expected to be subject to the following conditions being agreed to
by the Foundation in writing as a condition to receiving the OTS' approval of
the Reorganization: (i) the Foundation will be subject to examination by the
OTS; (ii) the Foundation must comply with supervisory directives imposed by the
OTS; (iii) the Foundation will operate in accordance with written policies
adopted by its Board of Directors, including a conflict of interest policy; (iv)
any shares of Common Stock held by the Foundation must be voted in the same
ratio as all other shares of Common Stock voting on all proposals considered by
stockholders of the Stock Holding Company; provided, however, that, consistent
with the condition, the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (a) cause a
violation of the law of the State of Kansas, and the OTS determines that federal
law would not preempt the application of the laws of Kansas to the Foundation;
(b) would cause the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation; or (c) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code; and
(v) any shares of Common Stock subsequently purchased by the Foundation will be
aggregated with any shares repurchased by the Stock Holding Company or the Bank
for purposes of calculating the number of shares which may be repurchased during
the three-year period subsequent to Reorganization. In order for the OTS to
waive such voting restriction, the Stock Holding Company's or the Foundation's
legal counsel would be required to render an opinion satisfactory to the OTS.
While there is no current intention for the Stock Holding Company or the
Foundation to seek a waiver from the OTS from such restrictions, there can be no
assurances that a legal opinion addressing these issues could be rendered, or if
rendered, that the OTS would grant an unconditional waiver of the voting
restriction. If the voting restriction is waived or becomes unenforceable, the
OTS may either impose a condition that provides a certain portion of the members
of the Foundation's Board of Directors shall be persons who are not directors,
officers or employees of the Stock Holding Company, the Bank or any affiliate or
impose such other conditions relating to control of the Foundation's Common
Stock as is determined by the OTS to be appropriate at the time. In no event
would the voting restriction survive the sale of shares of the Common Stock held
by the Foundation.
Various OTS regulations may be deemed to apply to the Foundation
including regulations regarding (i) transactions with affiliates, (ii) conflicts
of interest, (iii) capital distributions and (iv) repurchases of capital stock
within the three-year period subsequent to the Stock Issuance. Because only two
of the directors of the Stock Holding Company and the Bank are expected to serve
as directors of the Foundation, the Stock Holding Company and the Bank do not
believe that the Foundation should be deemed an affiliate of the Bank. The Stock
Holding Company and the Bank anticipate that the Foundation's affairs will be
conducted in a manner consistent with the OTS' conflict of interest regulations.
The Bank has provided information to the OTS demonstrating that the initial
contribution of Common Stock to the Foundation would be within the amount which
the
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Bank would be permitted to make as a capital distribution assuming such
contribution is deemed to have been made by the Bank.
Stock Pricing and Number of Shares to be Issued
The Plan requires that the purchase price of the Common Stock must be
based on the appraised pro forma market value of the Stock Holding Company and
Bank, as determined on the basis of an independent valuation. The Bank has
retained RP Financial to make such valuation. For its services in making such
appraisal, RP Financial's fees and out-of-pocket expenses are estimated to be
$117,500. The Bank has agreed to indemnify RP Financial and any employees of RP
Financial who act for or on behalf of RP Financial in connection with the
appraisal against any and all loss, cost, damage, claim, liability or expense of
any kind (including claims under federal and state securities laws) arising out
of any misstatement or untrue statement of a material fact or an omission to
state a material fact in the information supplied by the Bank to RP Financial,
unless RP Financial is determined to be negligent or otherwise at fault.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Stock Holding Company
and the Bank and the economic and demographic conditions in the Bank's existing
marketing areas; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other similarly situated publicly traded mutual holding
companies; the aggregate size of the offering of the Common Stock; the impact of
the Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Stock Holding Company and the Bank; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities. In its review of the appraisal provided by RP
Financial, the Board of Directors reviewed the methodologies and the
appropriateness of the assumptions used by RP Financial in addition to the
factors enumerated above, and the Board of Directors believes that such
assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised the Stock
Holding Company and the Bank that in its opinion, dated November 20, 1998, the
estimated pro forma market value of the Common Stock on a fully converted basis,
assuming a contribution to a charitable foundation in an amount equal to 8.0% of
the shares sold, ranged from a minimum of $795.6 million to a maximum of $1.08
billion with a midpoint of $936.0 million. The Board of Directors of the Bank
determined that the Common Stock should be sold at $10.00 per share and that
42.01% of the to-be-outstanding shares (prior to the contribution to the
Foundation) should be offered to Minority Stockholders. Based on the Estimated
Valuation Range and the Purchase Price, the number of shares of Common Stock
that the Stock Holding Company will issue will range from between 32,136,106
shares to 43,478,261 shares, with a midpoint of 37,807,183 shares. The
anticipated issuance of a number of shares equal to 4.0% of the shares of Common
Stock sold in the Offering to the Foundation as part of the Stock Issuance will
result in shareholders other than the MHC and the Foundation owning 41.31% of
the shares of the Common Stock outstanding at the conclusion of the
Reorganization and Stock Issuance. The remaining shares of the Stock Holding
Company's Common Stock that are not sold in the Offerings or contributed to the
Foundation will be issued to the MHC. The Estimated
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Valuation Range may be amended with the approval of the OTS, if required, or if
necessitated by subsequent developments in the financial condition of the Stock
Holding Company and the Bank or market conditions generally, or to fill the
order of the ESOP. In the event the Estimated Valuation Range is updated to
amend the value of the Common Stock below $795.6 million or above $1.08 billion
(the maximum of the Estimated Valuation Range, as adjusted by 15%), the new
appraisal will be filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Stock Holding Company receives orders
for Common Stock in excess of $434.8 million (the maximum of the Estimated
Offering Range) and up to $500.0 million (the maximum of the Estimated Offering
Range, as adjusted by 15%), the Stock Holding Company may be required by the OTS
to accept all such orders. No assurances, however, can be made that the Stock
Holding Company will receive orders for Common Stock in excess of the maximum of
the Estimated Offering Range or that, if such orders are received, that all such
orders will be accepted because the Stock Holding Company's final valuation and
number of shares to be issued are subject to the receipt of an updated appraisal
from RP Financial which reflects such an increase in the valuation and the
approval of such increase by the OTS. In addition, an increase in the number of
shares above 43,478,261 shares will first be used, if necessary, to fill the
order of the ESOP. There is no obligation or understanding on the part of
management to take and/or pay for any shares in order to complete the
Reorganization.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the consolidated financial statements
and other information provided by the Bank, nor did RP Financial value
independently the assets or liabilities of the Bank. The valuation considers the
Bank as a going concern and should not be considered as an indication of the
liquidation value of the Bank. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing Common Stock in the Offerings will thereafter be able to sell such
shares at prices at or above the Purchase Price or in the range of the foregoing
valuation of the pro forma market value thereof.
Prior to completion of the Reorganization, the maximum of the Estimated
Offering Range may be increased up to 15% and the number of shares of Common
Stock may be increased to 50,000,000 shares to reflect changes in market and
financial conditions or to fill the order of the ESOP, without the
resolicitation of subscribers. See "- Limitations on Stock Holding Company
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
Estimated Offering Range to fill unfilled orders in the Subscription Offering.
No sale of shares of Common Stock in the Reorganization may be
consummated unless prior to such consummation RP Financial confirms that nothing
of a material nature has occurred which, taking into account all relevant
factors, would cause it to conclude that the aggregate value of the Common Stock
to be issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of the Stock Holding Company and Bank. If
such confirmation is not received, the Stock Holding Company may cancel the
Offerings, extend the Offerings and
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establish a new estimated valuation range and/or estimated price range, extend,
reopen or hold a new Offering or take such other action as the OTS may permit.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of Common
Stock may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares times the Purchase Price
is not below the minimum or more than 15% above the maximum of the Estimated
Offering Range. In the event market or financial conditions change so as to
cause the aggregate Purchase Price of the shares to be below the minimum of the
Estimated Offering Range or more than 15% above the maximum of such range,
purchasers will be resolicited (i.e., permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to modify or rescind their subscriptions). Any change in the
Estimated Offering Range must be approved by the OTS. If the number of shares of
Common Stock issued in the Reorganization is increased due to an increase of up
to 15% in the Estimated Offering Range to reflect changes in market or financial
conditions or to fill the order of the ESOP, persons who subscribed for the
maximum number of shares will be given the opportunity to subscribe for the
adjusted maximum number of shares. See "- Limitations on Stock Holding Company
Common Stock Purchases."
An increase in the number of shares of Common Stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Stock Holding Company's pro forma net
income and stockholders' equity on a per share basis while increasing pro forma
net income and stockholders' equity on an aggregate basis. A decrease in the
number of shares of Common Stock would increase both a subscriber's ownership
interest and the Stock Holding Company's pro forma net income and stockholders'
equity on a per share basis while decreasing pro forma net income and
stockholders' equity on an aggregate basis. See "Risk Factors - Possible
Increase in Number of Shares of Common Stock Issued in the Reorganization" and
"Pro Forma Data."
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed report of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of the Bank and the other locations specified under "Additional
Information."
Subscription Offering and Subscription Rights
In accordance with the Plan of Reorganization and Stock Issuance Plan,
rights to subscribe for the purchase of Common Stock have been granted under the
Plan to the following persons in the following order of descending priority: (1)
Eligible Account Holders, (2) Tax-Qualified Employee Plans, (3) Supplemental
Eligible Account Holders, (4) Other Members and (5) Directors, Officers and
Employees of the Bank. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan and as described below under
"- Limitations on Stock Holding Company Common Stock Purchases."
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Preference Category No.1: Eligible Account Holders. Each Eligible
Account Holder shall receive, without payment therefor, first priority,
nontransferable subscription rights to subscribe for shares of Common Stock in
an amount equal to the greater of (i) $500,000 or 50,000 shares of Common Stock,
(ii) one-tenth of one percent (0.10%) of the total offering of shares of Common
Stock or (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction, of which the numerator is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders in the converting Bank in
each case as of the close of business on June 30, 1997 (the "Eligibility Record
Date"), subject to the overall purchase limitations. See "- Limitations on Stock
Holding Company Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining after each subscribing Eligible Account Holder
has been allocated the lesser of the number of shares subscribed for or 100
shares will be allocated among the subscribing Eligible Account Holders pro rata
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all subscribing Eligible Account Holders whose subscriptions remain unfilled.
Subscription Rights of Eligible Account Holders will be subordinated to the
priority rights of Tax-Qualified Employee Stock Benefit Plans to purchase shares
in excess of the maximum of the Estimated Offering Range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding June 30, 1997.
Preference Category No. 2: Tax-Qualified Employee Plans. Each
Tax-Qualified Employee Plan, including the ESOP shall be entitled to receive,
without payment therefor, second priority, nontransferable subscription rights
to purchase up to 10% of Common Stock, provided that individually or in the
aggregate such plans (other than that portion of such plans which is self-
directed) shall not purchase more than 10% of the shares of Common Stock,
including any increase in the number of shares of Common Stock after the date
hereof as a result of an increase of up to 15% in the maximum of the Estimated
Offering Range. The ESOP intends to purchase 8.0% of the shares of Common Stock
sold in the Offering, or 2,570,888 shares and 3,478,261 shares based on the
minimum and maximum of the Estimated Offering Range, respectively. Subscriptions
by any of the Tax-Qualified Employee Plans will not be aggregated with shares of
Common Stock purchased directly by or which are otherwise attributable to any
other participants in the Subscription and Direct Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. Subscription rights received pursuant to this Category shall be
subordinated to all rights received by Eligible Account Holders to purchase
shares pursuant to Category No.1; provided, however, that notwithstanding any
other provision of the Plan to the contrary, the Tax-Qualified Employee Plans
shall have a first priority subscription right to the extent
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that the total number of shares of Common Stock sold in the Stock Offering
exceeds the maximum of the estimated valuation range as set forth in this
Prospectus. In the event that the total number of shares offered in the
Offerings is increased to an amount greater than the number of shares
representing the maximum of the Estimated Offering Range ("Maximum Shares"),
each Tax- Qualified Employee Plan will have a priority right to purchase any
such shares exceeding the Maximum Shares up to an aggregate of 10% of the Common
Stock sold in the Offerings. See "Management - Benefits - Employee Stock
Ownership Plan."
Preference Category No. 3: Supplemental Eligible Account Holders. To
the extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the Tax-Qualified Employee Plans,
each Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of Common Stock in an amount equal to the greater of (i)
$500,000 or 50,000 shares of Common Stock, (ii) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Common Stock to be issued by a fraction, of which the numerator is
the amount of the qualifying deposit of the Supplemental Eligible Account Holder
and the denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders in the converting Bank in each case on the
close of business on December 31, 1998 (the "Supplemental Eligibility Record
Date"), subject to the overall purchase limitations. See "- Limitations on Stock
Holding Company Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No.1) equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders pro rata whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.
Preference Category No. 4: Other Members. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible
Account Holders, each Other Member shall receive, without payment therefor,
fourth priority, nontransferable subscription rights to subscribe for shares of
Stock Holding Company Common Stock, up to the greater of: (i) $500,000 or 50,000
shares of Common Stock or (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock in the Stock Offering, subject to the overall
purchase limitations. See "- Limitations on Stock Holding Company Common Stock
Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in
excess of the total number of shares of Common Stock offered in the Stock
Offering, available shares will be allocated among the subscribing Other
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Members pro rata in the same proportion that his number of votes on the Voting
Record Date bears to the total number of votes on the Voting Record Date of all
subscribing Other Members on such date. Such number of votes shall be determined
based on the Bank's mutual Charter and bylaws in effect on the date of approval
by members of the Plan.
Preference Category No. 5 : Directors, Officers and Employees. To the
extent that there are sufficient shares remaining after satisfaction of all
subscriptions by Eligible Account Holders, the Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders and Other Members, then Directors,
Officers and Employees of the Bank as of the date of the commencement of the
Subscription Offering shall be entitled to receive, without payment therefor,
fifth priority, nontransferable subscription rights to purchase shares, in this
Category, an aggregate of up to 15% of Common Stock. The maximum amount of
shares which may be purchased under this Category by any Person is $500,000 of
Common Stock. The ability of Directors, Officers and Employees to purchase
Common Stock under this category is in addition to rights which are otherwise
available to them under the Plan as they may fall within higher priority
categories, and the Plan generally allows such persons to purchase in the
aggregate up to 25% of Common Stock sold in the Offering. See "- Limitations on
Stock Holding Company Common Stock Purchases."
In the event of an oversubscription in this Category, the shares
available shall be allocated pro rata among all of the subscribing Directors,
Officers and Employees in this Category.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at noon, Topeka, Kansas Time, on __________, 1999 (the
"Subscription Expiration Date"), unless extended for up to 45 days or for such
additional periods by the Stock Holding Company and the Bank as may be approved
by the OTS. The Subscription Offering may not be extended beyond _________,
2001. Subscription rights which have not been exercised prior to the
Subscription Expiration Date (unless extended) will become void.
The Stock Holding Company and the Bank will not execute orders until at
least the minimum number of shares of Common Stock (32,136,106 shares) have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Subscription Expiration Date, unless such period
is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled. If
an extension beyond the 45-day period following the Subscription Expiration Date
is granted, the Stock Holding Company and the Bank will notify subscribers of
the extension of time and of any rights of subscribers to modify or rescind
their subscriptions.
Direct Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, the Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members and
Directors, Officers and Employees of the Bank, the Stock Holding Company and the
Bank anticipate that they will offer shares pursuant to the Plan to certain
members of the general public, with preference given to natural persons residing
in the counties in which the Bank has offices (such natural persons referred to
as "Preferred Subscribers"). Such persons, together
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with an Associate or group of Persons acting in concert with such persons, may
not subscribe for or purchase more than $500,000 of Common Stock in the Direct
Community Offering, if any. Further the Stock Holding Company and the Bank may
limit total subscriptions under this Section so as to assure that the number of
shares available for the Public Offering may be up to a specified percentage of
the number of shares of Common Stock. Finally, the Stock Holding Company and the
Bank may reserve shares offered in the Direct Community Offering for sales to
institutional investors. The opportunity to subscribe for shares of Common Stock
in any Direct Community Offering will be subject to the right of the Stock
Holding Company and the Bank, in their sole discretion, to accept or reject any
such orders in whole or in part from any Person either at the time of receipt of
an order or as soon as practicable following the Expiration Date. The Direct
Community Offering, if any, shall be for a period of not less than 20 days nor
more than 45 days unless extended by the Stock Holding Company and the Bank, and
shall commence concurrently with, during or promptly after the Subscription
Offering.
In the event of an oversubscription for shares in the Direct Community
Offering, shares may be allocated (to the extent shares remain available) first
to each Preferred Subscriber whose order is accepted by the Stock Holding
Company. Thereafter, shares may be allocated to cover the orders of any other
person subscribing for shares in the Direct Community Offering so that each such
person subscribing for shares may receive 1,000 shares, if available, and
thereafter on a pro rata basis to such person based on the amount of their
respective subscriptions.
Public Offering
As a final step in the Offerings, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Direct
Community Offerings may be offered for sale to selected members of the general
public in the Public Offering through the underwriter. It is expected that the
Public Offering will commence as soon as practicable after termination of the
Subscription Offering and the Direct Community Offering, if any. The Stock
Holding Company and the Bank, in their sole discretion, have the right to reject
orders in whole or in part received in the Public Offering. Neither Webb nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of Common Stock in the Public Offering; however, Webb has agreed to use
its best efforts in the sale of shares in the Public Offering.
The price at which Common Stock is sold in the Public Offering will be
the same price at which shares are offered and sold in the Subscription and
Direct Community Offerings. No person, by himself or herself, or with an
Associate or group of Persons acting in concert, may purchase more than $500,000
of Common Stock in the Public Offering, subject to the maximum purchase
limitations. See "- Limitations on Stock Holding Company Common Stock
Purchases."
Webb may enter into agreements with broker-dealers ("Selected Dealers")
to assist in the sale of the shares in the Public Offering, although no such
agreements exist as of the date of this Prospectus. No orders may be placed or
filled by or for a Selected Dealer during the Subscription Offering. After the
close of the Subscription Offering, Webb will instruct Selected Dealers as to
the number of shares to be allocated to each Selected Dealer. Only after the
close of the Subscription Offering and upon allocation of shares to Selected
Dealers may Selected Dealers take orders from their customers. During the
Subscription and Direct Community Offerings, Selected Dealers may
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only solicit indications of interest from their customers to place orders with
the Stock Holding Company as of a certain date ("Order Date") for the purchase
of shares of the Stock Holding Company Common Stock. When, and if, Webb and the
Bank believe that enough indications of interest and orders have not been
received in the Subscription and Direct Community Offerings to consummate the
Reorganization, Webb will request, as of the Order Date, Selected Dealers to
submit orders to purchase shares for which they have previously received
indications of interest from their customers. Selected Dealers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected Dealers will debit the accounts of their customers on the
"Settlement Date" which date will be three business days from the Order Date.
Customers who authorize Selected Dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, Selected Dealers will remit funds to
the account established by the Bank for each Selected Dealer. Each customer's
funds so forwarded to the Bank, along with all other accounts held in the same
title, will be insured by the FDIC up to $100,000 in accordance with applicable
FDIC regulations. After payment has been received by the Bank from Selected
Dealers, funds will earn interest at the Bank's passbook rate until the
consummation or termination of the Reorganization. Funds will be promptly
returned, with interest, in the event the Reorganization is not consummated as
described above.
The Public Offering will be completed within 90 days after the
termination of the Subscription Offering, unless extended by the Bank with the
approval of the OTS. See "- Stock Pricing and Number of Shares to be Issued"
above for a discussion of rights of subscribers, if any, in the event an
extension is granted.
Persons in Non-qualified States or Foreign Countries
The Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan reside. However, the Bank is not required to
offer stock in the Subscription Offering to any person who resides in a foreign
country or resides in a state of the United States with respect to which: (a)
the number of persons otherwise eligible to subscribe for shares under the Plan
who reside in such jurisdiction is small; (b) the granting of subscription
rights or the offer or sale of shares of Common Stock to such persons would
require any of the Stock Holding Company and the Bank or their officers,
directors or employees, under the laws of such jurisdiction, to register as a
broker, dealer, salesman or selling agent or to register or otherwise qualify
its securities for sale in such jurisdiction or to qualify as a foreign
corporation or file a consent to service of process in such jurisdiction; and
(c) such registration, qualification or filing in the judgment of the Bank would
be impracticable or unduly burdensome for reasons of cost or otherwise. Where
the number of persons eligible to subscribe for shares in one state is small,
the Bank will base its decision as to whether or not to offer the Common Stock
in such state on a number of factors, including but not limited to the size of
accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register the Bank, its officers, directors
or employees as brokers, dealers or salesmen.
Limitations on Stock Holding Company Common Stock Purchases
The Plan includes the following limitations on the number of shares of
the Stock Holding Company Common Stock which may be purchased in the Stock
Offering:
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(1) No fewer than 25 shares of Common Stock may be purchased, to the
extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of (i) $500,000 or 50,000
shares of Common Stock, (ii) one-tenth of one percent (0.10%) of the
total offering of shares of Common Stock or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction, of
which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders in the converting
Bank in each case as of the close of business on the Eligibility
Record Date, subject to the overall limitation in clause (7) below;
(3) The Tax-Qualified Employee Plans, including an ESOP, may purchase in
the aggregate up to 10% of the shares of Common Stock sold in the
Stock Issuance, including any additional shares issued in the event of
an increase in the Estimated Offering Range; although at this time the
ESOP intends to purchase only 8.0% of such shares;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i)
$500,000 or 50,000 shares of Common Stock, (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock or
(iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to
be issued by a fraction, of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders in the Bank in each case as of
the close of business on the Supplemental Eligibility Record Date,
subject to the overall limitation in clause (7) below;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering or Direct Community Offering, as the case may be, up to the
greater of (i) $500,000 or 50,000 shares of Common Stock or (ii)
one-tenth of one percent (0.10%) of the total offering of shares of
Common Stock, subject to the overall limitation in clause (7) below;
(6) Persons purchasing shares of Common Stock in the Direct Community
Offering or Public Offering may purchase in the Direct Community
Offering or Public Offering up to $500,000 or 50,000 shares of Common
Stock, subject to the overall limitation in clause (7) below;
(7) Except for the Tax-Qualified Employee Plans and certain Eligible
Account Holders and Supplemental Eligible Account Holders whose
subscription
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rights are based upon the amount of their deposits, the maximum number
of shares of Stock Holding Company Common Stock subscribed for or
purchased in all categories of the Stock Offering by any person,
together with associates of and groups of persons acting in concert
with such persons, shall not exceed $5,000,000 or 500,000 shares of
Common Stock offered in the Stock Offering; and
(8) No more than 15% of the total number of shares offered for sale in the
Subscription Offering may be purchased by directors and officers of
the Bank in the fifth priority category in the Subscription Offering.
No more than 25% of the total number of shares offered for sale in the
Stock Offering may be purchased by directors and officers of the Bank
and their associates in the aggregate, excluding purchases by the
Tax-Qualified Employee Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, the Boards of Directors of the Stock Holding Company and the Bank may,
in their sole discretion, increase the individual amount permitted to be
subscribed for to a maximum of 9.99% of the number of shares sold in the Stock
Offerings provided that orders for shares exceeding 5% of the shares being
offered in the Stock Offerings shall not exceed, in the aggregate, 10% of the
shares being offered in the Stock Offerings. Requests to purchase additional
shares of Common Stock will be allocated by the Boards of Directors on a pro
rata basis giving priority in accordance with the preference categories set
forth in this Prospectus.
The term "associate" when used to indicate a relationship with any
Person means: (i) any corporation or organization (other than the Bank, Stock
Holding Company, MHC or a majority-owned subsidiary of any of them) of which
such Person is a director, officer or partner or is directly or indirectly the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such Person has a substantial beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary capacity;
(iii) any relative or spouse of such Person, or any relative of such spouse, who
has the same home as such Person or who is a Director or Officer of the
Association, the MHC, the Stock Holding Company or any subsidiary of the MHC or
the Stock Holding Company or any affiliate thereof; and (iv) any person acting
in concert with any of the person or entities specified in clauses (i) through
(iii) above; provided, however, that Tax-Qualified or Non-Tax Qualified Employee
Plans shall not be deemed to be an associate of any Director or Officer of the
Bank, the Stock Holding Company or the MHC, to the extent provided in the Plan.
When used to refer to a Person other than an Officer or Director of the
Association, the Association in its sole discretion may determine the Persons
that are Associates of other Persons.
The term "acting in concert" is defined to mean (1) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement, or (2) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A
person or company which acts in concert with another person or company ("other
party") shall also be deemed to be acting in concert with any person or company
who is also acting in concert with that other party, except that the
Tax-Qualified
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Employee Plans will not be deemed to be acting in concert with its trustee or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by each plan will be
aggregated. The determination of whether a group is acting in concert shall be
made solely by the Board of Directors of the Bank or officers delegated by such
Board of Directors and may be based on any evidence upon which such board or
delegatee chooses to rely.
Marketing Arrangements
The Stock Holding Company and the Bank have retained Webb to consult
with and to advise the Bank, and to assist the Stock Holding Company, on a best
efforts basis, in the distribution of the shares of Common Stock in the
Subscription and Direct Community Offerings. The services that Webb will provide
include, but are not limited to (i) training the employees of the Bank who will
perform certain ministerial functions in the Subscription and Community
Offerings regarding the mechanics and regulatory requirements of the stock
offering process, (ii) managing the Stock Information Center by assisting
interested stock subscribers and by keeping records of all stock orders, (iii)
preparing marketing materials, and (iv) assisting in the solicitation of proxies
from the Bank's members for use at the special meeting. For its services, Webb
will receive a management fee of $100,000 and a success fee of 1.25% of the
aggregate Purchase Price of the shares of Stock Holding Company Common Stock
sold in the Subscription Offering and Direct Community Offering excluding shares
purchased by the Tax-Qualified Employee Plans, and Officers, Directors and
Employees of the Bank and members of their immediate families as well as shares
issued to the Foundation. The success fee paid to Webb will be reduced by the
amount of the management fee. In the event that selected dealers are used to
assist in the sale of shares of the Stock Holding Company Common Stock in the
Direct Community Offering, such dealers will be paid a fee of up to 5.5% of the
aggregate Purchase Price of the shares sold by such dealers. The Bank has agreed
to indemnify Webb against certain claims or liabilities, including certain
liabilities under the Securities Act, and will contribute to payments Webb may
be required to make in connection with any such claims or liabilities.
Sales of shares of Stock Holding Company Common Stock will be made by
registered representatives affiliated with Webb or by the broker-dealers managed
by Webb. Webb has undertaken that the shares of Stock Holding Company Common
Stock will be sold in a manner which will ensure that the distribution standards
of the Nasdaq Stock Market will be met. A Stock Information Center will be
established at the main office of the Bank and in the Kansas City metropolitan
area. The Stock Holding Company will rely on Rule 3a4-1 of the Exchange Act and
sales of Stock Holding Company Common Stock will be conducted within the
requirements of such Rule, so as to permit officers, directors and employees to
participate in the sale of the Stock Holding Company Common Stock in those
states where the law so permits. No officer, director or employee of the Stock
Holding Company or the Bank will be compensated directly or indirectly by the
payment of commissions or other remuneration in connection with his or her
participation in the sale of Common Stock.
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Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date (unless extended) in accordance with
Rule 15c2-8 of the Exchange Act, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the Order Form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
Prospectus.
To purchase shares in the Subscription Offering, an executed Order Form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank by __:__ _____, Kansas Time, on the Subscription Expiration Date
(unless extended). In addition, the Stock Holding Company and the Bank will
require a prospective purchaser to execute a certification in the form required
by applicable OTS regulations in connection with any sale of Common Stock. Order
Forms which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank will not accept orders submitted
on photocopied or facsimiled order forms nor order forms unaccompanied by an
executed certification form. The Bank has the right to waive or permit the
correction of incomplete or improperly executed forms, but does not represent
that it will do so. Once received, an executed Order Form may not be modified,
amended or rescinded without the consent of the Bank, unless the Reorganization
has not been completed within 45 days after the end of the Subscription
Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members and
Directors, Officers and Employees are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (June 30, 1997) or the Supplemental Eligibility Record Date
(December 31, 1998) and depositors as of the close of business on the Voting
Record Date (_________, 1999) must list all accounts on the stock order form
giving all names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
Person, (ii) by check or money order or (iii) by authorization of withdrawal
from deposit accounts maintained with the Bank (including a certificate of
deposit). No wire transfers will be accepted. Interest will be paid on payments
made by cash, check or money order at the then-current Bank passbook rate of
interest from the date payment is received until consummation of the Stock
Offering. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rate, but may not be used by the
subscriber until all of the Stock Holding Company Common Stock has been sold or
the Plan is terminated, whichever is earlier.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Reorganization. The Bank will waive any applicable penalties for
early withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds actually are transferred under the authorization, the
certificate will be canceled
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at the time of the withdrawal, without penalty, and the remaining balance will
earn interest at the passbook rate.
In the event of an unfilled amount of any subscription order, the Bank
will make an appropriate refund or cancel an appropriate portion of the related
withdrawal authorization, after consummation of the Stock Offering. If for any
reason the Stock Offering is not consummated, purchasers will have refunded to
them all payments made and all withdrawal authorizations will be canceled in the
case of subscription payments authorized from accounts at the Bank.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for such shares of Common Stock subscribed for by it at the
Purchase Price upon consummation of the Subscription and Direct Community
Offerings, if all shares are sold, or upon consummation of the Public Offering
if shares remain to be sold in such offering. In the event that, after the
completion of the Subscription Offering, the amount of shares to be issued is
increased above the maximum of the estimated valuation range included in this
Prospectus, the Tax-Qualified and Non-Tax-Qualified Employee Plans will be
entitled to increase their subscriptions by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Stock Holding Company Common Stock in the Subscription and
Direct Community Offerings. ERISA provisions and IRS regulations require that
officers, directors and 10% stockholders who use self-directed IRA funds to
purchase shares of Common Stock in the Offerings make such purchases for the
exclusive benefit of the IRAs. IRAs maintained at the Bank are not self-directed
IRAs and any interested parties wishing to use IRA funds for stock purchases are
advised to contact the Stock Information Center at (800) ___- ____ for
additional information.
The records of the Bank will be deemed to control with respect to all
matters related to the existence of subscription rights and/or one's ability to
purchase shares of Common Stock in the Subscription Offering.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for such person's account. Each person exercising such subscription rights
will be required to certify that the person is purchasing shares solely for the
person's own account and that such person has no agreement or understanding
regarding the sale or transfer of such shares. Federal regulations also prohibit
any person from offering or making an announcement of an offer or intent to make
an offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Reorganization.
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The Bank will refer to the OTS any situations that it believes may
involve a transfer of subscription rights and will not honor orders believed by
it to involve the transfer of such rights.
Delivery of Certificates
Certificates representing Common Stock issued in the Stock Issuance
will be mailed by the Stock Holding Company's transfer agent to the persons
entitled thereto at the addresses of such persons appearing on the stock order
form as soon as practicable following consummation of the Reorganization. Any
certificates returned as undeliverable will be held by the Stock Holding Company
until claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for Common Stock are
available and delivered to subscribers, such subscribers may not be able to sell
the shares of Common Stock for which they have subscribed, even though trading
of the Common Stock may have commenced.
Required Approvals
Various approvals of the OTS are required in order to consummate the
Reorganization. The OTS has approved the Plan, subject to approval by the Bank's
members and other standard conditions. The Stock Holding Company's holding
company application is currently pending.
The Stock Holding Company is required to make certain filings with
state securities regulatory authorities in connection with the issuance of Stock
Holding Company Common Stock in the Offering.
Judicial Review
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of reorganization may obtain review
of such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located, or
in the United States Court of Appeals for the District of Columbia, a written
petition praying that the final action of the OTS be modified, terminated or set
aside. Such petition must be filed within 30 days after the publication of
notice of such final action in the Federal Register, or 30 days after the
mailing by the applicant of the notice to members as provided for in 12 C.F.R.
ss.563b.6(c), whichever is later. The further procedure for review is as
follows: A copy of the petition is forthwith transmitted to the OTS by the clerk
of the court and thereupon the OTS files in the court the record in the
proceeding, as provided in Section 2112 of Title 28 of the United States Code.
Upon the filing of the petition, the court has jurisdiction, which upon the
filing of the record is exclusive, to affirm, modify, terminate, or set aside in
whole or in part, the final action of the OTS. Review of such proceedings is as
provided in Chapter 7 of Title 5 of the United States Code. The judgment and
decree of the court is final, except that they are subject to review by the
Supreme Court upon certiorari as provided in Section 1254 of Title 28 of the
United States Code.
Certain Restrictions on Purchase or Transfer of Shares After the Reorganization
All shares of Common Stock purchased in connection with the
Reorganization by a director or an executive officer of the Stock Holding
Company and the Bank will be subject to a restriction
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that the shares not be sold for a period of one year following the
Reorganization except in the event of the death of such director or officer or
pursuant to a merger or similar transaction approved by the OTS. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that any
transfer within such time period of any certificate or record ownership of such
shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued at a later date within this one year period as a
stock dividend, stock split or otherwise with respect to such restricted stock
will be subject to the same restrictions.
Purchases of Common Stock of the Stock Holding Company by directors,
executive officers and their associates during the three-year period following
completion of the Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Stock Holding Company's outstanding Common Stock or to certain
purchases of stock pursuant to an employee stock benefit plan.
Pursuant to OTS regulations, the Stock Holding Company will generally
be prohibited from repurchasing any shares of the Common Stock for a period of
three years following the Reorganization other than pursuant to (i) an offer to
all stockholders on a pro rata basis which is approved by the OTS (provided,
however, that the MHC may be excluded with the approval of the OTS) or (ii) the
repurchase of qualifying shares of a director, if any; although the OTS under
its current policies may approve a request to repurchase shares of Common Stock
following the six-month anniversary of the Reorganization. Furthermore, the
Stock Holding Company may not repurchase any of its stock (i) if the result
would be to reduce the regulatory capital of the Bank below the amount required
for liquidation account to be established pursuant OTS regulations and (ii)
except in compliance with the requirements of the OTS' capital distribution
rule.
The above limitations are subject to OTS rules which generally provide
that the Stock Holding Company may repurchase its capital stock provided (i) no
repurchases occur within one year following the Reorganization (subject to
certain exceptions), (ii) repurchases during the second and third years
following consummation of the Reorganization are part of an open-market stock
repurchase program not involving more than 5% of its outstanding capital stock
during a 12-month period, (iii) if the repurchases do not cause the Bank to
become undercapitalized and (iv) the Bank provides to the Regional Director of
the OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. The OTS may permit
stock repurchases in excess of such amounts prior to the third anniversary of
the Reorganization if exceptional circumstances are shown to exist.
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CERTAIN RESTRICTIONS ON ACQUISITION
OF THE STOCK HOLDING COMPANY AND THE BANK
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire the Stock Holding Company, the Bank or
their respective capital stock are described below. Also discussed are certain
provisions in the Stock Holding Company's Charter and Bylaws which may be deemed
to affect the ability of a person, firm or entity to acquire the Stock Holding
Company.
Federal Law
The Change in the Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings institutuion unless the OTS has been given 60
days prior written notice. The HOLA provides that no company may acquire
"control" of a savings institution without the prior approval of the OTS. Any
company that acquires such control becomes a savings and loan holding company
subject to registration, examination and regulation by the OTS. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition. The OTS may prohibit an acquisition of control
if (i) it would result in a monopoly or substantially lessen competition, (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the institution, or (iii) the competence, experience or integrity
of the acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the savings
institution.
For a period of three years following consummation of the Stock
Issuance, OTS regulations generally prohibit, among other things, any person
from acquiring or making an offer to acquire, directly or indirectly, beneficial
ownership of more than 10% of the stock of the Stock Holding Company or the Bank
without OTS approval.
Mutual Holding Company Structure and the Stock Holding Company's Ownership of a
Majority of the Common Stock
For information relating to the mutual holding company form of
organization and the MHC's ownership of a majority of the Common Stock that
could discourage certain transactions which involve an actual or threatened
change in control of the Stock Holding Company or the Bank and perpetuate
existing management, see "Risk Factors - Control of the Stock Holding Company by
the MHC" and "The Reorganization and Stock Issuance."
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Charter and Bylaws of the Stock Holding Company
The following discussion is a summary of certain provisions of the
Charter and Bylaws of the Stock Holding Company that relate to corporate
governance. The description is necessarily general and qualified by reference to
the Charter and Bylaws.
Classified Board of Directors. The Board of Directors of the Stock
Holding Company is required by the Charter and Bylaws to be divided into three
classes which are as equal in size as is possible, and one of such classes is
required to be elected annually by stockholders of the Stock Holding Company for
three-year terms. A classified Board of Directors promotes continuity and
stability of management of the Stock Holding Company but makes it more difficult
for stockholders to change a majority of the directors because it generally
takes at least two annual elections of directors for this to occur.
Authorized but Unissued Shares of Capital Stock. Following the
Offerings, the Stock Holding Company will have authorized but unissued shares of
Preferred Stock and Common Stock. See "Description of Capital Stock of the Stock
Holding Company." Although such shares could be used by the Board of Directors
of the Stock Holding Company to render more difficult or to discourage an
attempt to obtain control of the Stock Holding Company by means of a merger,
tender offer, proxy contest or otherwise, it is anticipated that such uses will
be unlikely given the MHC's ownership of a majority of the Common Stock.
Special Meetings of Stockholders. The Stock Holding Company's Charter
provides that for a period of five years following consummation of the
Reorganization, special meetings of stockholders may be called only upon
direction of the Stock Holding Company's Board of Directors, for matters
relating to changes in control of the Stock Holding Company or amendments to its
charter.
Absence of Cumulative Voting. The Stock Holding Company's Charter
provides that there shall not be cumulative voting by stockholders for the
election of the Stock Holding Company's directors. The absence of cumulative
voting rights effectively means that the holders of a majority of the shares
voted at a meeting of stockholders (i.e., the MHC) may, if they so choose, elect
all directors of the Stock Holding Company to be elected at that meeting, thus
precluding minority stockholder representation on the Stock Holding Company's
Board of Directors.
Restrictions on Acquisitions of Securities. The Stock Holding Company's
Charter provides that for a period of five years from the effective date of the
Stock Issuance, no person other than the MHC may directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Stock Holding Company. This provision does not apply to
any tax-qualified employee stock benefit plan of the Stock Holding Company or to
an underwriter or member of an underwriting or selling group involving the
public sale or resale of securities of the Stock Holding Company or a subsidiary
thereof; provided, that upon completion of the sale or resale, no such
underwriter or member of the selling group is a beneficial owner of more than
10% of any class of equity securities of the Stock Holding Company. In addition,
during such five-year period, no shares beneficially owned in violation of the
foregoing percentage limitation shall be entitled to vote in connection with any
matter submitted to stockholders for a vote.
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Procedures for Stockholder Nominations. The Stock Holding Company's
Bylaws provide that any stockholder desiring to make a nomination for the
election of directors or a proposal for new business at a meeting of
stockholders must submit written notice to the Secretary of the Stock Holding
Company at least five days before the date of the annual meeting. The Bylaws
further provide that if a stockholder seeking to make a nomination or a proposal
for new business fails to follow the prescribed procedures, such proposal shall
be laid over for action at an adjourned, special, or annual meeting of the
shareholders taking place 30 days or more thereafter. Management believes that
it is in the best interests of the Stock Holding Company and its stockholders to
provide sufficient time to enable management to disclose to stockholders
information about a dissident slate of nominations for directors. This advance
notice requirement may also give management time to solicit its own proxies in
an attempt to defeat any dissident slate of nominations should management
determine that doing so is in the best interest of stockholders generally.
Similarly, adequate advance notice of stockholder proposals will give management
time to study such proposals and to determine whether to recommend to the
stockholders that such proposals be adopted.
Benefit Plans
In addition to the provisions of the Stock Holding Company's Charter
and Bylaws described above, certain benefit plans of the Stock Holding Company
and the Bank adopted in connection with the Reorganization and Stock Issuance
contain provisions which also may discourage hostile takeover attempts which the
Boards of Directors of the Bank might conclude are not in the best interests of
the Stock Holding Company, the Stock Holding Company and the Bank or the Stock
Holding Company's stockholders. For a description of the benefit plans and the
provisions of such plans relating to changes in control of the Stock Holding
Company or the Bank, see "Management - Benefits."
DESCRIPTION OF CAPITAL STOCK OF THE STOCK HOLDING COMPANY
General
The Stock Holding Company is authorized to issue 450 million shares of
Common Stock having a par value of $0.01 per share and 50 million shares of
preferred stock having a par value of $0.01 per share (the "Preferred Stock").
The Stock Holding Company currently expects to issue up to a maximum of
105,239,131 shares (121,025,011 shares in the event that the maximum of the
Estimated Offering Range is increased by 15%) of Common Stock and no shares of
Preferred Stock in the Stock Issuance. Each share of the Stock Holding Company's
Common Stock will have the same relative rights as, and will be identical in all
respects with, each other share of Common Stock. Upon payment of the Purchase
Price for the Common Stock in accordance with the Plan, all such stock will be
duly authorized, fully paid and nonassessable. Presented below is a description
of all aspects of the Stock Holding Company's capital stock which are deemed
material to an investment decision with respect to the Stock Issuance.
The Common Stock of the Stock Holding Company will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
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Common Stock
Distributions. The Stock Holding Company can pay dividends if, as and
when declared by its Board of Directors, subject to compliance with limitations
which are imposed by law. See "Dividend Policy" and "Waiver of Dividends by the
MHC." The holders of Common Stock of the Stock Holding Company will be entitled
to receive and share equally in such dividends as may be declared by the Board
of Directors of the Stock Holding Company out of funds legally available
therefor. If the Stock Holding Company issues Preferred Stock, the holders
thereof may have a priority over the holders of the Common Stock with respect to
dividends.
Voting Rights. Upon the effective date of the Reorganization, the
holders of Common Stock of the Stock Holding Company will possess exclusive
voting rights in the Stock Holding Company. Each holder of Common Stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. Under certain circumstances, shares in excess of 10%
of the issued and outstanding shares of Common Stock may be considered "Excess
Shares" and, accordingly, not be entitled to vote. See "Certain Restrictions on
Acquisition of the Stock Holding Company and the Bank." If the Stock Holding
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Stock Holding Company, as holder of the Bank's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Bank (including all deposit accounts and accrued
interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Reorganization and Stock Issuance - Effects of the
Reorganization - Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Stock Holding Company, the holders of its Common Stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Stock Holding Company available for
distribution. If Preferred Stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution.
Preemptive Rights. Holders of the Common Stock of the Stock Holding
Company will not be entitled to preemptive rights with respect to any shares
which may be issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Stock Holding Company's authorized Preferred
Stock will be issued in the Stock Issuance. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Stock Holding Company has no present plans to issue Preferred
Stock.
136
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Stock Holding Company's Common
Stock is --------.
EXPERTS
The financial statements of the Bank as of September 30, 1998 and 1997
and for each of the three years in the period ended September 30, 1998 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
registration statement, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Bank setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Reorganization and its letter with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Reorganization will be passed upon for the Bank by Silver
Freedman & Taff, L.L.P., Washington, D.C., special counsel to the Bank and the
Stock Holding Company. The Kansas income tax consequences of the Reorganization
will be passed upon for the Bank by Deloitte & Touche LLP The federal income tax
consequences of certain matters relating to establishment of the Foundation will
be passed upon for the Bank by Deloitte & Touche LLP. Certain legal matters will
be passed upon for Charles Webb & Company by Elias, Matz, Tiernan & Herrick,
L.L.P., Washington, D.C.
ADDITIONAL INFORMATION
The Stock Holding Company has filed with the SEC a Registration
Statement under the Securities Act with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the SEC, this Prospectus
does not contain all the information set forth in the Registration Statement.
Such information, including the Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Stock Holding
Company. The statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
137
<PAGE>
The Bank has filed Applications on Form MHC-1 and Form MHC-2 and an
Application H-(e)1 with the OTS with respect to the Reorganization and Stock
Issuance. This Prospectus omits certain information contained in those
applications. The Applications may be examined at the principal office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the Midwest Regional
Office of the OTS located at 122 West John Carpenter Freeway, Suite 600, Irving,
Texas, 75261-9027.
In connection with the Reorganization, the Stock Holding Company will
register its Common Stock with the SEC under Section 12 of the Exchange Act,
and, upon such registration, the Stock Holding Company and the holders of its
stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the Stock
Holding Company has undertaken that it will not terminate such registration for
a period of at least three years following the Reorganization.
A copy of the Plan of Reorganization and Plan of Stock Issuance and the
Charter and Bylaws of the Stock Holding Company, the Bank and the MHC are
available without charge from the Bank. Requests for such information should be
directed to: Stockholder Relations, Capitol Federal Savings, 700 Kansas Avenue,
Topeka, Kansas 66603.
138
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997........ F-3-F-4
Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996................................... 44
Consolidated Statements of Equity for the Years Ended
September 30, 1998, 1997 and 1996................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996................................... F-6-F-7
Notes to Consolidated Financial Statements for the Years Ended
September 30, 1998, 1997 and 1996................................... F-8-F-30
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of the Stock Holding Company have been omitted
because the Stock Holding Company has not yet issued any stock, has no assets or
liabilities, and has not conducted any business other than that of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Capitol Federal Savings and Loan Association and Subsidiary
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of Capitol Federal
Savings and Loan Association and Subsidiary (the "Bank") as of September 30,
1998 and 1997, and the related consolidated statements of income, equity and
cash flows for each of the three years in the period ended September 30, 1998.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Bank as of September 30, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
November 17, 1998
Kansas City, Missouri
F-2
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997 (in thousands)
- --------------------------------------------------------------------------------
ASSETS 1998 1997
- ------ ---- ----
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 12,454 $ 15,188
Interest bearing deposits in other banks ........ 12,000 16,000
---------- ----------
Total cash and cash equivalents ........ 24,454 31,188
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL .... 235,000
INVESTMENT SECURITIES, Held-to-maturity
(Market value of $160,712 and $585,979).......... 160,569 585,394
CAPITAL STOCK OF FEDERAL HOME LOAN BANK, At cost .. 43,584 40,398
MORTGAGE-RELATED SECURITIES:
Available-for-sale, At market value
(Amortized cost of $726,104 and $738,216) ...... 747,991 754,179
Held-to-maturity (Market value of $319,128
and $118,956) .................................. 320,379 120,007
LOANS HELD FOR SALE, Net (Market value of
$14,901 and $9,590) .............................. 14,578 9,590
LOANS RECEIVABLE, Net (Less allowance for
loan losses of $4,981 and $1,639) ................ 3,710,252 3,322,102
PREMISES AND EQUIPMENT, Net ....................... 22,785 20,113
REAL ESTATE OWNED, Net (Less allowance for
losses of $139 and $166) ......................... 1,964 2,435
ACCRUED INTEREST RECEIVABLE:
Loans receivable ................................ 18,399 17,192
Mortgage-related securities ..................... 6,823 11,199
Investment securities ........................... 2,776 3,523
OTHER ASSETS ...................................... 5,347 6,337
---------- ----------
TOTAL ............................................. $5,314,901 $4,923,657
========== ==========
(Continued)
F-3
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997 (in thousands)
- --------------------------------------------------------------------------------
LIABILITIES AND EQUITY 1998 1997
- ---------------------- ---- ----
LIABILITIES:
Deposits ......................................... $3,894,180 $3,787,123
Advances from Federal Home Loan Bank ............. 500,000 275,000
Securities sold under agreement to repurchase .... 175,000 175,000
Advance payments by borrowers for taxes and
insurance ....................................... 37,426 37,884
Income taxes payable ............................. 227 3,378
Deferred income taxes ............................ 28,995 26,658
Accounts payable and accrued expenses ............ 16,741 13,828
---------- ----------
4,652,569 4,318,871
COMMITMENTS AND CONTINGENCIES (NOTE 16)
EQUITY:
Retained earnings ................................ 649,199 595,208
Unrealized gains on mortgage-related
securities available-for-sale (net
of deferred income taxes of $8,755
and $6,385) ..................................... 13,133 9,578
---------- ----------
662,332 604,786
---------- ----------
TOTAL .............................................. $5,314,901 $4,923,657
========== ==========
See notes to consolidated financial statements. (Concluded)
F-4
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
Unrealized
Gains on
Available-
Retained for-Sale Total
Earnings Securities Equity
-------- ---------- ------
BALANCE, October 1, 1995 ...................... $515,882 $515,882
Net income .................................. 26,622 26,622
Change in accounting resulting from
implementation of Financial Accounting
Standards Board Special Report on SFAS
No. 115, net of deferred income taxes
of $2,333 .................................. $ 3,650 3,650
Change in unrealized gains on mortgage-
related securities available-for-sale,
net of deferred income taxes of $945 ....... 1,268 1,268
-------- -------- --------
BALANCE, September 30, 1996 ................... 542,504 4,918 547,422
Net income .................................. 52,704 52,704
Change in unrealized gains on
mortgage-related securities
available-for-sale, net of
deferred income taxes of $3,107 ............ 4,660 4,660
-------- -------- --------
BALANCE, September 30, 1997 ................... 595,208 9,578 604,786
Net income .................................. 53,991 53,991
Change in unrealized gains on
mortgage-related securities
available-for-sale, net of
deferred income taxes of $2,370 ............ 3,555 3,555
-------- -------- --------
BALANCE, September 30, 1998 ................... $649,199 $ 13,133 $662,332
======== ======== ========
See notes to consolidated financial statements.
F-5
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .......................................................... $ 53,991 $ 52,704 $ 26,622
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends ............................ (3,186) (2,646) (2,337)
Amortization of net deferred loan origination fees ................ (8,115) (7,048) (6,239)
Provision for loan losses ......................................... 3,362 56 865
Provision for losses on real estate owned ......................... 216 424 415
Net loan origination fees capitalized ............................. 8,849 7,266 7,120
Gain on sales of real estate owned, net ........................... (382) (438) (766)
Gain on sale of loans ............................................. (172) (253) (292)
Originations of loans held for sale ............................... (23,760) (3,560) (3,062)
Proceeds from sales of loans held for sale ........................ 18,782 4,251 15,588
Amortization and accretion of premiums and discounts on
mortgage-related securities and investment securities ........... 1,039 (1,770) (2,100)
Depreciation and amortization on premises and equipment ........... 2,960 2,816 2,769
Provision (benefit) for deferred income taxes ..................... (33) 10,637 (5,131)
Changes in:
Accrued interest receivable ..................................... 3,916 334 (4,742)
Other assets .................................................... 990 (297) 1,003
Income taxes payable ............................................ (3,151) 1,972 (1,377)
Accounts payable and accrued expenses ........................... 2,913 (24,682) 22,673
------------ ------------ ------------
Net cash provided by operating activities ................. 58,219 39,766 51,009
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities ................... 850,060 196,992 267,860
Purchases of investment securities .................................. (425,000) (64,992) (313,672)
Purchases of securities under agreement to resell ................... (235,000)
Principal collected on mortgage-related securities available-for-sale 255,352 112,900 171,916
Purchases of mortgage-related securities available-for-sale ......... (244,027) (249,850) (26,519)
Principal collected on mortgage-related securities held-to-maturity . 138,934 10,115 11,259
Purchases of mortgage-related securities held-to-maturity ........... (339,792) (113,117)
Loan originations net of principal collected on loans receivable .... (273,624) (266,024) (164,083)
Purchases of loans receivable ....................................... (124,724) (117,425) (38,085)
Purchases of premises and equipment, net ............................ (5,632) (4,504) (1,926)
Proceeds from sales of real estate owned ............................ 6,901 7,364 5,138
------------ ------------ ------------
Net cash used in investing activities ..................... (396,552) (488,541) (88,112)
------------ ------------ ------------
(Continued)
</TABLE>
F-6
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Deposits, net of payments ................ $ 107,057 $ 46,405 $ 67,088
Proceeds from advances from Federal
Home Loan Bank .......................... 255,000 337,000 116,000
Repayments on advances from Federal
Home Loan Bank .......................... (30,000) (62,000) (116,000)
Proceeds from securities sold under
agreement to repurchase ................. 175,000
Repayments of securities sold under
agreement to repurchase ................. (75,000)
Advance payments by borrowers for
taxes and insurance ..................... (458) 182 (14,692)
----------- ----------- -----------
Net cash provided by
financing activities ........... 331,599 421,587 52,396
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................... (6,734) (27,188) 15,293
CASH AND CASH EQUIVALENTS:
Beginning of year ........................ 31,188 58,376 43,083
----------- ----------- -----------
End of year .............................. $ 24,454 $ 31,188 $ 58,376
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income tax payments, net of refunds of
$24 and $6 in 1997 and 1996,
respectively ........................... $ 37,910 $ 39,987 $ 24,901
=========== =========== ===========
Interest payments, net of interest
credited to deposits of $176,588,
$175,242 and $168,111 .................. $ 58,280 $ 31,510 $ 31,334
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Loans transferred to real estate owned ... $ 5,664 $ 6,425 $ 7,442
=========== =========== ===========
Loans made upon the sale of
real estate owned ....................... $ 600 $ 193 $ 419
=========== =========== ===========
Mortgage-related securities transferred
from held to maturity to available-
for-sale ................................ $ $ $ 720,804
=========== =========== ===========
(Concluded)
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (Amounts in thousands)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES AND PROCEDURES
Nature of Operations - Capitol Federal Savings and Loan Association (the
"Bank") is a federally chartered mutually-held thrift. The Bank has over
twenty branches throughout the State of Kansas. The Bank principally
engages in the origination of single family mortgages and attracting
consumer deposits in the State of Kansas.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Bank, and its wholly owned subsidiary, Capitol
Funds, Inc. Capitol Funds, Inc. has one loan outstanding for the
acquisition and development of land for the construction of single-family
residential homes. Significant intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from banks and interest bearing deposits with an
original maturity of three months or less. The Bank has acknowledged
informal agreements with banks where they maintain deposits. Under these
agreements, service fees charged to the Bank are waived provided certain
average compensating balances are maintained throughout each month.
The Bank is required by regulation to maintain liquid assets in the form
of cash and securities approved by federal regulations, at a quarterly
average of not less than 4% of customer deposits and short-term
borrowings.
Investment Securities, Securities Purchased Under Agreement to Resell and
Mortgage-Related Securities, Held-to-Maturity - Investment securities,
securities purchased under agreement to resell and mortgage-related
securities are held-to-maturity and are stated at cost, adjusted for
amortization of premium and discounts which are recognized as adjustments
to interest income over the life of the securities using the level-yield
method.
To the extent management determines a decline in value in an investment or
mortgage-related security held-to-maturity to be other than temporary, the
Bank will adjust the carrying value and include such expense in the
consolidated statements of income.
Capital Stock of Federal Home Loan Bank - Capital Stock of Federal Home
Loan Bank is carried at cost. Dividends received on such stock are
reflected as interest and dividend income in the consolidated statements
of income.
Mortgage-Related Securities, Available-for-Sale - Mortgage-related
securities available-for-sale are recorded at their current fair value.
Unrealized gains or losses on mortgage-related securities
available-for-sale are included as a separate component of equity, net of
deferred income taxes. Gains or losses on the disposition of
mortgage-related securities available-for-sale, are recognized using the
specific identification method.
F-8
<PAGE>
During 1995, the Financial Accounting Standards Board ("FASB") issued a
report entitled "A Guide to Implementation of Statement No. 115, on
Accounting for Certain Investments in Debt and Equity Securities" (the
"Guide"). The Guide allows a Company a one time reclassification of
securities from held-to-maturity to available-for-sale without adverse
accounting consequences for the remainder of the portfolio. On November
30, 1995, the Bank elected to reclassify mortgage-related securities
held-to-maturity with a carrying value of approximately $720,804 and a
market value of approximately $726,787 to available-for-sale. As a result
of the transfer, equity increased by approximately $3,650 to reflect the
net unrealized gain on the securities.
Loans Held for Sale - The Bank's management designates certain loans as
held for sale as management does not intend to hold such loans to
maturity. Accordingly, such loans are carried at the lower of amortized
cost (outstanding principal adjusted for deferred loan fees) or market
value. Market values for such loans are determined based on sales
commitments or dealer quotations. Gains or losses on such sales are
recognized utilizing the specific identification method. Interest,
including amortization and accretion of deferred loan fees, is included in
interest income on loans receivable.
Loans Receivable, net - Loans are stated at the amount of unpaid principal
less an allowance for loan losses, undisbursed loan funds and unearned
discounts and loan fees, net of certain direct loan origination costs.
Interest on loans is credited to income as earned and accrued only if
deemed collectible. Loans are placed on nonaccrual status when, in the
opinion of management, the full timely collection of principal or interest
is in doubt. As a general rule, the accrual of interest is discontinued
when principal or interest payments become doubtful. When a loan is placed
on nonaccrual status, previously accrued but unpaid interest is reversed
against current income. Subsequent collections of cash may be applied as
reductions to the principal balance, interest in arrears or recorded as
income, depending on management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to accrual
status when principal and interest become current and full payment of
principal and interest is expected.
Net loan origination and commitment fees are amortized as a yield
adjustment to interest income using the level-yield method over the
contractual lives of the related loans.
Provision for Loan Losses - The Bank considers a loan to be impaired when
management believes it is probable that it will be unable to collect all
principal and interest due according to the contractual terms of the loan.
If a loan is impaired, the Bank records a loss valuation equal to the
excess of the loan's carrying value over the present value of the
estimated future cash flows discounted at the loan's effective rate based
on the loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. One-to-four family residential loans
and consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units and loans on
construction and development and commercial properties are evaluated for
impairment on a loan by loan basis. The allowance for loan losses in
increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount
and timing of future cash flows expected to be received on impaired loans,
that may be susceptible to significant change. In the opinion of
management, the allowance when taken as a whole, is adequate to absorb
reasonable estimated loan losses inherent in the Bank's loan portfolios.
F-9
<PAGE>
Premises and Equipment - Land is carried at cost. Buildings and
improvements, furniture, fixtures and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on straight-line or
accelerated methods over the estimated useful lives of the related assets.
The estimated useful lives of the assets are as follows:
Buildings and improvements 20-40 years
Furniture, fixtures and equipment 5-10 years
Real Estate Owned - Real estate owned represents foreclosed assets held
for sale and is recorded at fair value as of the date of foreclosure less
estimated disposal costs (the new basis) and is subsequently carried at
the lower of the new basis or fair value less selling costs on the current
measurement date. Adjustments for estimated losses are charged to
operations when any significant decline reduces the fair value to less
than carrying value. Costs and expenses related to major additions and
improvements are capitalized while maintenance and repairs which do not
improve or extend the lives of the respective assets are expensed
currently. Gains on the sale of real estate owned are recognized upon
disposition of the property to the extent allowable considering the
adequacy of the down payment and other requirements.
Income Taxes - The Bank files a consolidated income tax return using the
accrual basis of accounting.
The Bank provides for income taxes using the asset/liability method of
accounting for income taxes. Deferred income taxes are recognized for the
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
In years prior to September 30, 1997, thrift institutions were permitted
under the Internal Revenue Code to deduct an annual addition to a reserve
for bad debts in determining taxable income, subject to certain
limitations. This addition differs from the bad debt experience used for
financial accounting purposes. Bad debt deductions for income tax purposes
are included in taxable income of later years only if the bad debt reserve
is used subsequently for purposes other than to absorb bad debt losses. A
deferred tax liability is provided only to the extent the tax bad debt
reserve exceeds the base year reserve. The base year reserve is the tax
bad debt reserve as of September 30, 1988. Retained earnings as of
September 30, 1998 includes approximately $97,108 representing such bad
debt reserve as of the base year for which no deferred income taxes have
been provided.
The Small Business Job Protection Act of 1996 (the "Act") repealed the
special bad debt reserve method for thrift institutions. The Act requires
thrifts to recapture any reserves accumulated after 1987 but forgives
taxes owed on reserves accumulated prior to 1988. Thrift institutions will
be given six years to account for the recaptured excess reserves. The Bank
must recapture excess reserves beginning with the year ended September 30,
1997. Thrift institutions will be permitted to delay the timing of this
recapture for up to two years depending upon whether they meet certain
residential loan tests. A deferred tax liability has been provided on the
amount of bad debt reserve that exceeds the base year reserve.
Revenue Recognition - Interest income, loan fees, checking account
transaction fees, insurance commissions, automated teller and debit card
transaction fees, and other ancillary income related to the Bank's
deposits and lending activities are accrued as earned.
F-10
<PAGE>
Estimates - The preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates include the
loan loss reserve and fair values of financial instruments. Actual results
could differ from those estimates.
New Statements of Financial Accounting Standards - In February 1997, the
FASB issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". The Statement establishes standards for computing
and presenting earnings per share ("EPS"). It replaces the presentation of
primary EPS with a presentation of basic EPS. The Statement is effective
for the Bank's financial statements as of September 30, 1999. The Bank
will compute earnings per share under the new standard upon completion of
its proposed stock offering (Note 20).
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". The Statement establishes standards for
disclosing information about an entity's capital structure. The Statement
is effective for the Bank's financial statements as of September 30, 1999.
The Bank is prepared to comply with the additional reporting requirements
of this Statement and does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that the Bank (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. The Statement is
effective for the Bank's financial statements for the fiscal year ending
September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Statement is effective for the Bank's
financial statements for the fiscal year ending September 30, 1999. The
Bank is prepared to comply with the additional reporting requirements of
this Statement and does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
F-11
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers" Disclosures
about Pensions and Other Postretirement Benefits'. The Statement revises
employers' disclosures about pensions and other post-retirement benefit
plans. The Statement does not change the measurement or recognition of
those plans. The Statement is effective for the Bank's financial
statements for the fiscal year ending September 30, 1999. The Bank is
prepared to comply with the additional reporting requirements of this
Statement and does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting
and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and hedging activities. The Statement requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Statement is effective for the Bank's financial statements for
the fiscal year ending September 30, 2000. The adoption of this Statement
is not expected to have a material impact on the Bank's consolidated
financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise". The Statement
changes the way mortgage banking firms account for certain securities and
other interests they retain after securitizing mortgage loans that were
held for sale. The Statement is effective for the Bank's financial
statements as of January 1, 1999. The Bank does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
Reclassifications - Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements in order to conform with the
1998 presentation.
2. INVESTMENT SECURITIES HELD-TO-MATURITY
September 30, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Certificate of deposit ........... $ 100 $ $ $ 100
Federal Home Loan Bank notes ..... 55,000 45 55,045
U.S. Government agencies:
Federal Home Loan Mortgage
Corporation notes ............... 9,999 9 10,008
Federal National Mortgage
Association notes ................ 95,470 89 95,559
-------- -------- -------- --------
Total ........................ $160,569 $ 143 $ $160,712
======== ======== ======== ========
F-12
<PAGE>
September 30, 1997
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Certificate of deposit ........... $ 100 $ $ $ 100
Federal Home Loan Bank notes ..... 230,175 1,402 369 231,208
U.S. Government agencies:
Federal Home Loan Mortgage
Corporation notes ............ 53,123 88 53,035
Federal National Mortgage
Association notes ............ 301,996 167 527 301,636
-------- -------- -------- --------
Total .................. $585,394 $ 1,569 $ 984 $585,979
======== ======== ======== ========
The amortized cost and estimated fair value of investment securities by
contractual maturity are as follows:
September 30, 1998 September 30, 1997
-------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
One year or less ................... $135,469 $135,596 $ 77,372 $ 77,312
One year through five years ........ 25,100 25,116 209,440 208,863
Five years through ten years ....... 4,996 5,072
Ten years and thereafter ........... 293,586 294,732
-------- -------- -------- --------
$160,569 $160,712 $585,394 $585,979
======== ======== ======== ========
As of September 30, 1998 and 1997, the Bank held callable notes with
aggregate carrying values of $160,469 and $585,294, respectively. As of
September 30, 1998, the notes bear interest at rates ranging from 4.98% to
5.93% with stated maturity dates ranging from 1999 to 2001. The bonds are
callable on specified dates. The maturities stated above reflect the
contractual maturities of the securities and not the call dates.
During 1996, the Bank sold investment securities with carrying values
aggregating $20,000 within three months of maturity. All other
dispositions of investment securities during 1998, 1997 and 1996 were the
result of maturities or calls.
As of September 30, 1998, the Bank has pledged securities as collateral
with amortized cost of $11,000 and estimated market value of $11,017 to
the Federal Reserve for treasury, tax and loan requirements.
F-13
<PAGE>
3. MORTGAGE-RELATED SECURITIES, AVAILABLE-FOR-SALE
September 30, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Pass through certificates:
Federal National Mortgage
Association ................. $260,291 $ 7,753 $ 61 $267,983
Federal Home Loan Mortgage
Corporation ................. 465,813 14,288 93 480,008
-------- -------- -------- --------
$726,104 $ 22,041 $ 154 $747,991
======== ======== ======== ========
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Pass through certificates:
Federal National Mortgage
Association ................ $239,445 $ 4,048 $ $243,493
Federal Home Loan Mortgage
Corporation ................ 498,771 12,492 577 510,686
-------- -------- -------- --------
$738,216 $ 16,540 $ 577 $754,179
======== ======== ======== ========
There were no sales of mortgage-related securities available-for-sale in
fiscal years 1998, 1997 and 1996.
The amortized cost and estimated market value of mortgage-related
securities available-for-sale by contractual maturity are as follows:
September 30, 1998 September 30, 1997
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
One year or less ............. $ 20,825 $ 20,764 $ 10,715 $ 10,665
One year through five years .. 30,981 31,260 57,418 57,360
Five years through ten years . 3,729 3,874 5,821 6,085
Ten years and thereafter ..... 670,569 692,093 664,262 680,069
-------- -------- -------- --------
$726,104 $747,991 $738,216 $754,179
======== ======== ======== ========
Actual maturities of the mortgage-related securities may differ from
scheduled maturities as borrowers have the right to call or prepay certain
obligations, sometimes without penalties. Maturities of mortgage-related
securities depend on the repayment characteristics and experience of the
underlying obligation.
F-14
<PAGE>
As of September 30, 1998, the Bank has pledged securities available for
sale as collateral with amortized cost of $145,658 and estimated market
value of $148,522 to public unit depositors of the Bank, as security for
letters of credit for low income housing projects and as collateral for
securities sold under agreement to repurchase (Note 12).
4. MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY
September 30, 1998
------------------------------------------
Gross Gross Estimated
Amortized Unrealize Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Collateralized mortgage
obligations:
Federal National Mortgage
Association .................. $240,242 $ 396 $ 1,289 $239,349
Federal Home Loan Mortgage
Corporation .................. 80,137 358 79,779
-------- -------- -------- --------
$320,379 $ 396 $ 1,647 $319,128
======== ======== ======== ========
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Collateralized mortgage
obligations:
Federal National Mortgage
Association ................. $113,114 $ $ 1,003 $112,111
Federal Home Loan Mortgage
Corporation ................. 6,893 5 53 6,845
-------- -------- -------- --------
$120,007 $ 5 $ 1,056 $118,956
======== ======== ======== ========
The amortized cost and estimated market value of mortgage-related
securities held-to-maturity by contractual maturity are as follows:
September 30, 1998 September 30, 1997
--------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
One year or less ............... $ 192 $ 192 $ 5,583 $ 5,541
One year through five years .... 1,310 1,304
Ten years and thereafter ....... 320,187 318,936 113,114 112,111
-------- -------- -------- --------
$320,379 $319,128 $120,007 $118,956
======== ======== ======== ========
Actual maturities of the mortgage-related securities may differ from
scheduled maturities as borrowers have the right to call or prepay certain
obligations, sometimes without penalties. Maturities of mortgage-related
securities depend on the repayment characteristics and experience of the
underlying obligation.
F-15
<PAGE>
There were no sales of mortgage-related securities held-to-maturity during
1998, 1997 and 1996.
As of September 30, 1998, the Bank has pledged mortgage-related securities
with amortized cost of $44,224 and estimated market value of $45,002 as
collateral for securities sold under agreement to repurchase (Note 12).
5. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
The Bank purchases investment securities and mortgage-related securities
under agreements to resell substantially identical securities. Securities
purchased under an agreement to resell as of September 30, 1998 consist of
mortgage-related securities.
The amount advanced under the agreement represents short-term loans and is
reflected as an asset in the consolidated balance sheets. Securities are
delivered into the Bank's account maintained at the Federal Reserve Bank
under a written custodial agreement that explicitly recognizes the Bank's
interest in the securities. As of September 30, 1998, the agreement
matured within 90 days and the agreement to resell securities purchased
was outstanding with one dealer.
6. LOANS RECEIVABLE
1998 1997
---- ----
Mortgage loans:
Residential - one-to-four units .............. $3,504,799 $3,145,799
Second mortgages ............................. 97,829 80,640
Residential - five or more units ............. 40,361 26,688
Construction and development ................. 52,086 51,157
Commercial ................................... 9,069 5,924
---------- ----------
3,704,144 3,310,208
Other loans:
Property improvements, auto and other ........ 8,964 7,755
Student loans ................................ 20,120 23,365
Deposits ..................................... 16,446 16,314
---------- ----------
45,530 47,434
---------- ----------
Less:
Undisbursed loan funds ....................... 21,690 21,872
Allowance for loan losses .................... 4,981 1,639
Unearned loan fees and deferred costs ........ 12,751 12,029
---------- ----------
$3,710,252 $3,322,102
========== ==========
During 1997, the Bank was a participating institution in two commercial
real estate loans. As a participating institution, the Bank is not
responsible for the servicing of the loan or disbursement of funds. The
total unpaid principal balance of these participations as of September 30,
1998 and 1997 was $3,449 and $1,283, respectively. There were no other
commercial real estate or business loans purchased or originated during
1998, 1997 or 1996.
F-16
<PAGE>
The Bank originates and purchases both adjustable and fixed rate loans.
The approximate composition of these loans is as follows:
September 30, 1998
- --------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- -------------------------------------- -----------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
-------- ---------- ---------- ----------
1 mo. - 1 yr. $17,780 1 mo. - 1 yr. $149,382
1 yr. - 3 yrs. 20,600 1 yr. - 3 yrs. 1,389,109
3 yrs. - 5 yrs. 22,403 3 yrs. - 5 yrs. 37,762
5 yrs. - 10 yrs. 167,658 5 yrs. - 10 yrs. 70,329
10 yrs. - 20 yrs. 625,921
Over 20 yrs. 1,248,730
---------- ---------
$2,103,092 $1,646,582
========== ==========
September 30, 1997
- -------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- ------------------------------------- -----------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
-------- ---------- ---------- ----------
1 mo. - 1 yr. $11,495 1 mo. - 1 yr. $130,286
1 yr. - 3 yrs. 14,541 1 yr. - 3 yrs. 1,605,717
3 yrs. - 5 yrs. 31,297 3 yrs. - 5 yrs. 53,631
5 yrs. - 10 yrs. 139,680 5 yrs. - 10 yrs. 103,743
10 yrs. - 20 yrs. 387,875
Over 20 yrs. 879,377
---------- ---------
$1,464,265 $1,893,377
========== ==========
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed to the cost of funds for the 11th District of
Federal Home Loan Bank or one year constant maturity treasury note.
The Bank is subject to numerous lending-related regulations. Under FIRREA,
the Bank may not make real estate loans to one borrower in excess of the
greater of 15% of its unimpaired capital and surplus or $500,000,
whichever is greater. As of September 30, 1998, the Bank is in compliance
with this limitation.
A summary of the activity in the allowance for loan losses is as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year ................. $ 1,639 $ 1,583 $ 1,359
Provision charged to expense ............. 3,362 56 865
Losses charged against the allowance ..... (20) (641)
------- ------- -------
Balance, end of year ....................... $ 4,981 $ 1,639 $ 1,583
======= ======= =======
F-17
<PAGE>
The Bank did not engage in any troubled debt restructurings during the
years ended September 30, 1998, 1997 and 1996. No loans were considered
impaired during the years ended September 30, 1998, 1997 and 1996.
Aggregate loans to executive officers, directors and their associates,
including companies in which they have partial ownership interest did not
exceed 5% of equity as of September 30, 1998 and 1997. Management believes
such loans were made under terms and conditions substantially the same as
loans made to parties not affiliated with the Bank.
As of September 30, 1998 and 1997, loans totaling approximately $6,229 and
$6,109, respectively, were on nonaccrual status. Gross interest income
would have increased by $227 and $223 for the years ended September 30,
1998 and 1997, respectively, for nonaccrual status loans.
As of September 30, 1998 and 1997, the Bank was servicing loans for others
aggregating approximately $520,595 and $640,618, respectively. Such loans
are not included in the accompanying consolidated balance sheets.
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income includes servicing fees
from investors and certain charges collected from borrowers, such as late
payment fees. The Bank held borrowers' escrow balances on loans serviced
for others of $8,662 and $10,524 as of September 30, 1998 and 1997,
respectively.
7. LOANS HELD FOR SALE
1998 1997
---- ----
Loans held for sale .............................. $14,595 $ 9,547
Deferred net discounts, premiums and
other related costs ............................ (17) 43
------- -------
Loans held for sale, net ......................... $14,578 $ 9,590
======= =======
Gross realized gains on sales of loans held for sale were $172, $253 and
$292, respectively, for the years ended September 30, 1998, 1997 and 1996.
There were no realized losses for the years ended September 30, 1998, 1997
and 1996.
8. PREMISES AND EQUIPMENT
1998 1997
---- ----
Land ........................................... $ 6,462 $ 6,060
Building and improvements ...................... 24,532 22,458
Furniture, fixtures and equipment .............. 19,210 16,530
------- -------
50,204 45,048
Less accumulated depreciation .................. 27,419 24,935
------- -------
$22,785 $20,113
======= =======
F-18
<PAGE>
Depreciation and amortization expense for the years ended September 30,
1998, 1997 and 1996 was $2,960, $2,816 and $2,769, respectively.
Certain Bank facilities and equipment are leased under various operating
leases. Rental expense was $329, $219 and $206, respectively, for years
ended September 30, 1998, 1997 and 1996.
Future minimum rental commitments under noncancellable leases are:
1999 $597
2000 517
2001 215
------
$1,329
======
9. REAL ESTATE OWNED
1998 1997
---- ----
Real estate owned (acquired by foreclosure or
by deed in lieu of foreclosure) ...................... $2,103 $2,601
Less allowance for losses .............................. 139 166
------ ------
$1,964 $2,435
====== ======
A summary of the activity in the allowance for losses on real estate owned
is as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year ................. $ 166 $ 210 $ 110
Provision charged to expense ............. 216 424 415
Losses charged against the allowance ..... (243) (468) (315)
------- ------- -------
Balance, end of year ....................... $ 139 $ 166 $ 210
======= ======= =======
F-19
<PAGE>
10. DEPOSITS
1998 1997
------------------ -----------------
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Passbook and demand deposits:
NOW and PS* ............... $ 260,440 1.50% $ 249,585 1.89%
Passbook and Passcard ..... 129,180 2.22% 131,854 2.22%
Money Market Select ....... 213,181 5.09% 30,405 5.34%
Cash Fund ................. 225,356 3.08% 293,108 3.17%
---------- ---------
828,157 704,952
Certificates of deposit:
3.00% to 3.99%.............. 5,900 3.88% 7,866 3.92%
4.00% to 4.99%.............. 429,108 4.51% 25,822 4.79%
5.00% to 5.99%.............. 1,684,996 5.63% 2,224,325 5.68%
6.00% to 6.99%.............. 715,234 6.16% 598,005 6.19%
7.00% to 7.99%.............. 227,695 7.68% 220,048 7.68%
8.00% to 8.99%.............. 2,405 8.47% 5,398 8.38%
9.00% to 9.99%.............. 685 9.00% 707 9.06%
---------- ---------
3,066,023 3,082,171
---------- ----------
$3,894,180 $3,787,123
========== ==========
Weighted average interest
rate on deposits during year 5.15% 5.34%
===== =====
As of September 30, 1998 and 1997, certificates of deposit mature as
follows:
1998 1997
---- ----
Within one year ................................ $1,551,042 $1,560,161
Beyond one year but within two years ........... 1,065,832 730,336
Beyond two years but within three years ........ 224,416 646,427
Beyond three years ............................. 224,733 145,247
---------- ----------
Total ................................ $3,066,023 $3,082,171
========== ==========
A summary of interest expense by deposit type is as follows:
1998 1997 1996
---- ---- ----
Passbook savings deposits ............ $ 2,918 $ 2,931 $ 2,985
NOW accounts and money market
demand deposits .................... 19,861 15,141 15,879
Certificates of deposit .............. 180,647 184,357 176,901
-------- -------- --------
$203,426 $202,429 $195,765
======== ======== ========
F-20
<PAGE>
The amount of non-interest bearing deposits was $23,168 and $15,690 as of
September 30, 1998 and 1997, respectively. The aggregate amount of deposit
accounts with a balance of $100 or greater was approximately $402,781 and
$351,118 as of September 30, 1998 and 1997, respectively, of which jumbo
certificates of deposits with a minimum denomination of $100 was $299,476
and $287,828 as of September 30, 1998 and 1997, respectively. Deposits in
excess of $100 are not insured by the Federal Deposit Insurance
Corporation.
11. ADVANCES FROM FEDERAL HOME LOAN BANK
1998 1997
------------------------------------ ------------------------------------
Fiscal Fiscal
Year Interest Year Interest
Maturity Amount Rate Maturity Amount Rate
-------- ------ ---- -------- ------ ----
2004 $250,000 5.78% 2004 $250,000 5.78%
2005 25,000 5.58% 2005 25,000 5.58%
2008 225,000 5.68%
-------- -------
$500,000 5.73% $275,000 5.76%
======== ==== ======== ====
Actual maturities of the advances may differ from scheduled maturities as
the Federal Home Loan Bank has the right to call the advances. The call
dates range from years 2000 to 2003. The Bank may refinance or reprice the
advance at the two week advance rate at each respective call date. The
advances are collateralized by a blanket pledge agreement, including all
capital stock of Federal Home Loan Bank and qualifying first mortgage
loans.
The Bank has a line-of-credit agreement with the Federal Home Loan Bank
wherein the Bank can borrow up to $300,000. As of September 30, 1998 and
1997, there were no outstanding borrowings on this agreement. The
agreement expires December 11, 1998.
12. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The Bank sells securities under agreements to repurchase ("repurchase
agreements"). Fixed-coupon repurchase agreements are treated as
financings, and the obligations to repurchase the identical securities
sold are reflected as liabilities in the consolidated balance sheets. The
dollar amount of securities underlying the agreements remains in the asset
accounts. The Bank sold certain mortgage-related securities under
agreements to repurchase with book values of $181,024 and $188,796 and
market values of $189,265 and $191,746 as of September 30, 1998 and 1997,
respectively.
The securities underlying these agreements are delivered to a designated
safekeeping agent at the inception of the agreement.
F-21
<PAGE>
The following provides information regarding the repurchase agreements as
of and for the years ended September 30, 1998, 1997 and 1996.
1998 1997 1996
---- ---- ----
Weighted average interest rate during
and at the end of the period ............ 5.73% 5.73% 5.78%
========= ========= =======
Maximum amount outstanding at any
month-end during the period ............. $ 175,000 $ 175,000 $75,000
========= ========= =======
Average amount outstanding during
the period .............................. $ 175,000 $ 82,692 $75,000
========= ========= =======
The repurchase agreements have a scheduled maturity date of 2004. Actual
maturities of the repurchase agreements may differ from scheduled
maturities due to a call date of 2000. The Bank would refinance at the
call date.
13. INCOME TAXES
1998 1997 1996
---- ---- ----
Current ..................... $34,814 $25,054 $23,524
Deferred .................... (33) 10,637 (5,131)
------- ------- -------
$34,781 $35,691 $18,393
======= ======= =======
Income tax expense has been provided at effective rates of 39.2%, 40.4%
and 40.9% for the years ended September 30, 1998, 1997 and 1996,
respectively. The differences between such effective rates and the
statutory Federal income tax rate computed on income before income tax
expense result from the following:
1998 1997 1996
-------------- -------------- -------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Federal income tax expense
computed at statutory rate $31,070 35.0% $30,938 35.0% $15,755 35.0%
Increases (decreases) in
taxes resulting from:
State taxes, net of Federal
income tax benefit 3,849 4.4 4,705 5.3 1,617 3.6
Other (138) (0.2) 48 0.1 1,021 2.3
------- ----- ------- ---- ------- ----
$34,781 39.2% $35,691 40.4% $18,393 40.9%
======= ===== ======= ==== ======= ====
F-22
<PAGE>
Deferred tax expense (benefit) results from timing differences in the
recognition of revenue and expense for tax and financial statement
purposes. The sources of these differences and the tax effect of each were
as follows:
1998 1997 1996
---- ---- ----
BIF/SAIF Premium ........................... $ 9,421 $(9,421)
Deferred loan fees and costs ............... $ 342 270 246
Accrued interest on savings ................ 352 352 373
Increase in allowance for loan losses ...... (1,310) (337)
Salaries and employee benefits ............. (99) (84) (221)
Federal Home Loan Bank stock dividends ..... 1,242 1,032 911
Bad debts reserve .......................... (27) 1,830
Other ...................................... (560) (327) 1,488
------- ------- -------
$ (33) $10,637 $(5,131)
======= ======= =======
The components of net deferred tax liabilities as of September 30, 1998
and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Deferred loan fees and costs ................... $ 495 $ 736
Accrued interest on savings .................... 1,405 1,757
Allowance for loan losses ...................... 1,950 868
Salaries and employee benefits ................. 1,305 1,273
Allowance for losses on real
estate owned .................................. 5 213
Other .......................................... 314 169
-------- --------
$ 5,474 $ 5,016
======== ========
Deferred tax liabilities:
Unrealized gain on mortgage-related
securities available-for-sale ................. $ (8,755) $ (6,385)
Federal Home Loan Bank stock dividends ......... (8,906) (7,664)
Bad debt reserves .............................. (13,203) (13,203)
Prepaid expenses ............................... (291) (335)
Fixed assets - depreciation .................... (263) (326)
Pension fund ................................... (328) (327)
Other .......................................... (2,723) (3,434)
-------- --------
(34,469) (31,674)
-------- --------
Net deferred tax liabilities ..................... ($28,995) ($26,658)
======== ========
F-23
<PAGE>
14. EMPLOYEE BENEFITS
The Bank sponsors a defined benefit pension plan (the "Plan") covering
substantially all employees completing one year of employment (1,000 hours
of service) and attainment of age 21. Normal retirement benefits are
calculated under the Plan using various formulas based upon years of
service and compensation. The Bank's funding policy is to contribute
annually an amount intended to at least meet the minimum funding
requirements of applicable regulations.
The following table sets forth the Plan's funded status as of September
30:
1998 1997
---- ----
Actuarial present value of benefit obligations -
Accumulated benefit obligation, including
vested benefits of $7,888 and $8,074 ................ $ 8,074 $ 8,238
======= =======
Plan assets at fair value .............................. 10,523 10,367
Less projected benefit obligation for service
rendered to date ...................................... 10,290 11,023
------- -------
Projected benefit obligation deficiency in
(excess of) plan assets ............................... 233 (656)
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions ............................. 1,685 2,283
Unrecognized prior service cost ........................ 92 130
Unrecognized net obligation at October 1,
1987 being recognized over 15 years ................... 460 575
------- -------
Prepaid pension expense ................................ $ 2,470 $ 2,332
======= =======
As of September 30, 1998 and 1997, plan assets consist of debt and equity
securities and life insurance policies.
Net periodic pension costs for the years ended September 30:
1998 1997 1996
---- ---- ----
Service cost benefits earned
during the period ...................... $ 516 $ 454 $ 687
Interest cost on projected
benefit obligation ..................... 666 644 654
Actual return on plan assets ............ (748) (1,192) (785)
Net amortization ........................ 247 856 589
------- ------- -------
Net periodic pension cost ............... $ 681 $ 762 $ 1,145
======= ======= =======
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 5.9%, 6.5% and 6.5%
for the years ended September 30, 1998, 1997 and 1996. The weighted
average increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 4.0% for
the years ended September 30, 1998, 1997 and 1996. The expected long-term
rate of return on assets was 7.8% for the years ended September 30, 1998,
1997 and 1996.
F-24
<PAGE>
The Bank intends to terminate the Plan effective May 31, 1999 and to cease
the accrual of any further benefits and the contribution of any further
amounts under the Plan. Following the approval of the Plan's termination
by the IRS and the Pension Benefit Guaranty Corporation, the Bank intends
to distribute the Plan's assets to participants in accordance with their
accrued benefits and the requirements of applicable law.
The Bank has a profit sharing trust which covers all employees with a
minimum of two years of service. This plan allows discretionary employer
contributions between 1% and 15% and requires employee contributions equal
to 50% of the Bank's contributions, not to exceed 5% of the employee's
annual compensation, and permits additional contributions, per formula, up
to an additional 10% of the employee's annual compensation. Total profit
sharing expense amounted to $669, $571 and $288 for the years ended
September 30, 1998, 1997 and 1996, respectively.
15. DEFERRED COMPENSATION
The Bank has deferred compensation agreements with certain officers and
retired officers whereby stipulated amounts will be paid to them over a
period of 20 years upon their retirement or termination. Amounts accrued
under these agreements aggregate $1,299 and $1,361 as of September 30,
1998 and 1997, respectively, and are accrued over the period of active
employment and will be funded by life insurance contracts.
16. COMMITMENTS AND CONTINGENCIES
The Bank had approximate commitments outstanding to originate first
mortgage loans as of September 30, 1998 and 1997 as follows:
1998 1997
---- ----
Fixed rate (interest rates ranging from
4.25% to 9.5% and 4.25% to 8.625%, respectibely,
at September 30, 1998 and 1997) .................. $ 76,800 $ 87,800
Variable rate ..................................... 63,900 65,900
-------- --------
$140,700 $153,700
======== ========
As of September 30, 1998, the Bank had commitments to originate
non-mortgage loans approximating $8,750 of which approximately $418 were
fixed-rate (interest ranging from 8.75% to 10.50%) and $8,332 were
floating rate commitments. As of September 30, 1997, the Bank had
commitments to originate non-mortgage loans approximating $8,500 of which
approximately $520 were fixed rate (interest ranging from 8.25% to 10.50%)
and $7,980 were floating rate commitments.
The commitments to originate mortgage and non-mortgage loans are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require the payment
of a fee. Certain of the commitments are expected to expire without being
fully drawn upon. The total commitments amount disclosed above does not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if considered necessary by the Bank, upon extension
of credit is based on management's credit evaluation of the counterparty.
F-25
<PAGE>
The Bank has approved, but unused, home equity lines of credit of
approximately $123,000 at September 30, 1998. Approval of lines of credit
is based upon underwriting standards that generally do not allow total
borrowings, including existing mortgages and lines of credit, to exceed
100% of the estimated market value of the customer's home. The Bank has
outstanding letters of credit of $4,000 at September 30, 1998.
17. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory
agency, the Office of Thrift Supervision ("OTS"), requires that the Bank
maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 3%, and total
risk-based capital (as defined) of 8%. The Bank is also subject to prompt
corrective action capital requirement regulations set forth by the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC requires the Bank to
maintain a minimum of Tier 1 total and core capital (as defined in the
regulations) to risk-weighted assets (as defined), and of core capital (as
defined) to adjusted tangible assets (as defined). Management believes, as
of September 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1998 and 1997, the most recent notification from the
OTS categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Bank's category.
F-26
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ----------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $650,584 27.3% $191,168 8.0% $238,960 10.0%
Core capital (to adjusted tangible assets) 649,199 12.2% 159,447 3.0% 266,865 5.0%
Tangible capital (to tangible assets) 649,199 12.2% 79,724 1.5% N/A N/A
Tier I capital (to risk weighted assets) 649,199 27.2% N/A N/A 143,376 6.0%
As of September 30, 1997:
Total capital (to risk weighted assets) 594,794 27.1% 174,760 8.0% 218,450 10.0%
Core capital (to adjusted tangible assets) 595,208 12.0% 147,710 3.0% 247,415 5.0%
Tangible capital (to tangible assets) 595,208 12.0% 73,855 1.5% N/A N/A
Tier I capital (to risk weighted assets) 595,208 27.3% N/A N/A 131,070 6.0%
</TABLE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Bank using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amount the
Bank could realize in a current market exchange. The use of different
market assumptions and estimation methodologies may have a material effect
on the estimated fair value amounts.
F-27
<PAGE>
The estimated fair value of the Bank's financial instruments as of
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ........................ $ 24,454 $ 24,454 $ 31,188 $ 31,188
Investment securities ............................ 160,569 160,712 585,394 585,979
Securities purchased under
agreement to resell ............................ 235,000 235,000
Capital Stock of Federal Home
Loan Bank ...................................... 43,584 43,584 40,398 40,398
Mortgage-related securities:
Available-for-sale ............................. 747,991 747,991 754,179 754,179
Held-to-maturity ............................... 320,379 319,128 120,007 118,956
Loans held for sale .............................. 14,578 14,901 9,590 9,590
Loans receivable ................................. 3,710,252 3,953,942 3,322,102 3,927,775
Liabilities:
Deposits ......................................... 3,894,180 3,917,423 3,787,123 3,738,861
Advances from Federal Home
Loan Bank ...................................... 500,000 529,217 275,000 278,129
Securities sold under agreement
to repurchase .................................. 175,000 186,954 175,000 173,582
</TABLE>
1998 1997
------------------- -------------------
Contract Estimated Contract Estimated
or Unrealized or Unrealized
Notional Gain Notional Gain
Amount (Loss) Amount (Loss)
------ ------ ------ ------
Off-balance sheet financial
instruments:
Commitments to originate
mortgage loans .............. $140,700 $ (2,867) $153,700 $ 177
Commitments to originate
non-mortgage loans ......... 8,750 (402) 8,500 (68)
The following methods and assumptions were used to estimate the fair value
of the financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and cash
equivalents are reasonable estimates of their fair value.
Investment Securities, Mortgage-Related Securities, Securities Purchased
Under Agreement to Resell and Loans Held for Sale - Estimated fair values
of investment securities, mortgage-related securities, securities
purchased under agreement to resell and loans held for sale are based on
quoted market prices where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for
similar instruments.
F-28
<PAGE>
Capital Stock of Federal Home Loan Bank - The carrying value of capital
stock of Federal Home Loan Bank approximates its fair value.
Loans Receivable - Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as single
family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans. Each loan category is further
segmented into fixed and variable interest rate categories. Future cash
flows of these loans are discounted using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposits - The estimated fair value of demand deposits and savings
accounts is the amount payable on demand at the reporting date. The
estimated fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank - The estimated fair value of
advances from Federal Home Loan Bank is determined by discounting the
future cash flows of existing advances using rates currently available on
advances from Federal Home Loan Bank having similar characteristics.
Securities Sold Under Agreement to Repurchase - The estimated fair value
of securities sold under agreement to repurchase is estimated by
discounting the future cash flows based on rates currently offered for
contracts of similar terms.
Off-Balance Sheet Items - The estimated fair value of commitments to
originate, purchase or sell loans is based on the fees currently charged
to enter into similar agreements and the difference between current levels
of interest rates and the committed rates.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1998 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date. Therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
19. FEDERAL LEGISLATION
In September 1996, legislation was enacted which included a comprehensive
reform of the banking and thrift industries. The legislation imposed a
one-time assessment on qualifying thrift deposits to recapitalize the
Savings Bank Insurance Fund ("SAIF"), the fund which insures thrift
deposits, and ultimately merged the Bank Insurance Fund ("BIF") and the
SAIF, at which time banks and thrifts now pay the same deposit insurance
premiums. The amount of the one-time assessment was .657% on qualifying
thrift deposits as of March 31, 1995. This one-time assessment of $24,158
was expensed during 1996.
F-29
<PAGE>
20. PLAN OF REORGANIZATION AND STOCK ISSUANCE
On August 25, 1998, the Board of Directors of the Bank adopted the Amended
Plan of Reorganization and Stock Issuance (the "Plan") whereby the Bank
would convert from the mutual to stock form and offer shares of common
stock in a subscription and community offering. As part of the conversion,
newly authorized shares of the new stock holding company (the "Stock
Holding Company"), will be offered to the Bank's depositors and employee
benefit plans in accordance with applicable state and federal regulations.
The amount and pricing of the proposed stock offering will be based upon
an independent appraisal of the Bank. The Plan must be approved by certain
depositors of the Bank and the OTS. In connection with the conversion, the
costs of issuing the common stock will be deferred and deducted from the
sale proceeds. As of September 30, 1998, $77 of conversion costs had been
recorded. In the event that consummation of the conversion does not occur,
any recorded costs will be expensed.
At the time of conversion, the Bank will establish a liquidation account
in an amount equal to its capital as of the date of the latest
consolidated statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their deposit accounts
at the Bank after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible account
holder will be entitled to receive balances for accounts then held.
Pursuant to the Plan, the Bank intends to establish a private charitable
foundation (the "Foundation"), in connection with the conversion. The Plan
provides that the Bank and the Stock Holding Company will create the
Foundation immediately following the conversion by contributing cash and
Stock Holding Company common stock in an amount equal to 8% of the total
value of common stock shares to be sold in the conversion. The Foundation
is being formed as a complement to the Bank's existing community
activities and will be dedicated to community activities and the promotion
of charitable causes.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization. A contribution of common stock to
the Foundation by the Stock Holding Company would be tax deductible,
subject to certain limitations. The Stock Holding Company, however, would
be able to carry forward any unused portion of the deduction for five
years following the contribution. Upon funding the Foundation, the Stock
Holding Company will recognize an expense in the full amount of the
contribution, offset in part by the corresponding tax benefits, during the
quarter in which the contribution is made.
The Stock Holding Company plans to set up an employee stock ownership plan
("ESOP"), a tax-qualified benefit plan for officers and employees of the
Stock Holding Company and the Bank. It is assumed that 8% of the shares of
common stock sold in the conversion will be purchased by the ESOP with
funds loaned by the Stock Holding Company. The Stock Holding Company and
the Bank intend to make annual contributions to the ESOP in an amount
equal to the principal and interest requirement of the debt.
Following consummation of the conversion, the Stock Holding Company
intends to adopt a Stock Option Plan and a Recognition and Award Plan,
pursuant to which the Stock Holding Company intends to reserve a number of
shares of common stock equal to an aggregate of 10% and 4%, respectively,
of the common stock issued in the conversion for issuance pursuant to
stock options and stock grants.
******
F-30
<PAGE>
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Stock
Holding Company, the Bank or Webb. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction. Neither the delivery of this Prospectus
nor any sale hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Stock Holding Company or the Bank
since any of the dates as of which information is furnished herein or since the
date hereof.
--------------
TABLE OF CONTENTS
Page
----
Summary......................................................... 3
Glossary........................................................ 10
Selected Financial and Other Data............................... 14
Risk Factors.................................................... 16
Capitol Federal Financial....................................... 26
Capitol Federal Savings Bank.................................... 27
Capital Federal Savings Bank MHC................................ 28
Use of Proceeds................................................. 28
Dividends Policy................................................ 30
Waiver of Dividends by the MHC.................................. 31
MHC Conversion to Stock Form.................................... 32
Market for the Common Stock..................................... 34
Regulatory Capital.............................................. 34
Capitalization.................................................. 36
Pro Forma Data.................................................. 37
Comparison of Valuation and Pro Forma Information
with no Foundation........................................... 42
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 45
Business of Holding Company..................................... 61
Business of the Bank............................................ 61
Regulation...................................................... 86
Taxation........................................................ 95
Management ..................................................... 97
Proposed Management Purchases................................... 105
The Reorganization and Stock Issuance .......................... 106
Certain Restrictions and Acquisitions of the
Stock Holding Company and the Bank........................... 133
Description of Capital Stock of the
Stock Holding Company........................................ 135
Transfer Agent and Registrar.................................... 137
Experts......................................................... 137
Legal and Tax Opinions ......................................... 137
Additional Information.......................................... 137
Index to Consolidated Financial Statements...................... F-1
Until __________, 1999 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
UP TO
50,000,000 SHARES
CAPITOL FEDERAL
FINANCIAL
(Proposed Holding Company for
Capitol Federal Savings Bank)
COMMON STOCK
--------------
PROSPECTUS
--------------
CHARLES WEBB & COMPANY, a
Division of Keefe, Bruyette &
Woods, Inc.
____________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution1
SEC filing fees..........................................$ 144,560
OTS filing fees.......................................... 14,400
Printing, postage and mailing............................ 125,000
Legal fees............................................... 950,000
Blue Sky filing fees and expenses........................ 5,000
Accounting fees.......................................... 450,000
Appraiser's fees......................................... 100,000
Miscellaneous............................................ 6,102
Total....................................................$ 1,795,062
- -----------------------------
Item 14. Indemnification of Directors and Officers
Federal Regulations define areas for indemnity coverage by Capitol
Federal Savings Bank (the "Bank") as follows:
(a) Any person against whom any action is brought or threatened because
that person is or was a director or officer of the Bank shall be indemnified by
the Bank, as the case may be, for:
(i) Any amount for which such person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred by such person in
defending or settling such action, or in enforcing his or her
rights to indemnification if the person attains a favorable
judgment in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director
- --------
1 In addition to the foregoing expenses, Charles Webb & Company, a
Division of Keefe, Bruyette & Woods, Inc. will receive fees based on the number
of shares of Common Stock sold in the Reorganization and Stock Issuance, plus
expenses. Based upon the assumptions and the information set forth under "Pro
Forma Data" and "The Reorganization and Stock Issuance - Marketing Arrangements"
in the Prospectus, it is estimated that such fees will amount to $3,650,590,
$4,302,764, $4,954,938 and $5,704,938 in the event that 32,136,106 shares,
37,807,183 shares, 43,478,261 shares and 50,000,000 shares of Common Stock are
sold in the Reorganization and Stock Issuance, respectively.
1
<PAGE>
only if the requirements of this subparagraph are met:
(i) The Bank shall make the indemnification provided by
subparagraph (a) in connection with any such action which
results in a final judgment on the merits in favor of such
officer or director.
(ii) The Bank shall make the indemnification provided by
subparagraph (a) in case of (1) settlement of such action, (2)
final judgment against such director or officer or (3) final
judgment in favor of such director or officer other than on
the merits, if a majority of the disinterested directors of
the Bank determines that such a director or officer was acting
in good faith within the scope of his or her employment or
authority as he or she could reasonably have perceived it
under the circumstances and for a purpose which he or she
could reasonably have believed under the circumstances was in
the best interest of the Bank or its members.
(c) As used in this Item 14:
(i) "action" means any judicial or administrative proceeding,
or threatened proceeding, whether civil, criminal, or
otherwise, including any appeal or other proceeding for
review;
(ii) "final judgment" means a judgment, decree, or order which
is not appealable or as to which the period for appeal has
expired with no appeal taken;
(iii) "settlement" includes the entry of a judgment by consent
or by confession or a plea of guilty or nolo contendere.
The Bank has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of the
Bank while serving in their capacities as such.
Item 15. Recent Sales of Unregistered Securities
Not applicable.
Item 16. Exhibits and Financial Statements Schedules
(a) See the Exhibit Index filed as part of this Registration Statement.
(b) Financial Statement Schedules.
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
2
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Form S-1 Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Topeka,
State of Kansas on December 2, 1998.
CAPITOL FEDERAL FINANCIAL
(In organization)
By: /s/ John C. Dicus
-----------------------
JOHN C. DICUS
Chairman and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
Each person whose signature appears below hereby makes, constitutes and
appoints John C. Dicus his true and lawful attorney, with full power to sign for
each person and in such person's name and capacity indicated below, and with
full power of substitution, any and all amendments to this Registration
Statement, hereby ratifying and confirming such person's signature as it may be
signed by said attorney to any and all amendments. Pursuant to the requirements
of the Securities Act of 1933, this Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ John C. Dicus Chairman and December 2, 1998
- ----------------- Chief Executive Officer
JOHN C. DICUS (Principal Executive Officer)
/s/ John B. Dicus President, Chief Operating December 2, 1998
- ----------------- Officer and Director
JOHN B. DICUS
/s/ Neil F.M. McKay Executive Vice President December 2, 1998
- ------------------- and Chief Financial Officer
NEIL F.M. MCKAY (Principal Financial Officer)
<PAGE>
Name Title Date
---- ----- ----
/s/ Kent G. Townsend First Vice President December 2, 1998
- -------------------- and Controller
KENT G. TOWNSEND (Principal Accounting Officer)
/s/ B.B. Andersen Director December 2, 1998
- -----------------
B.B. ANDERSEN
/s/ Robert B. Maupin Director December 2, 1998
- --------------------
ROBERT B. MAUPIN
/s/ Frederick P. Reynolds Director December 2, 1998
- -------------------------
FREDERICK P. REYNOLDS
/s/ Carl W. Quarnstrom Director December 2, 1998
- ----------------------
CARL W. QUARNSTROM
/s/ Marilyn S. Ward Director December 2, 1998
- -------------------
MARILYN S. WARD
<PAGE>
EXHIBIT INDEX
Exhibits:
1.1 Engagement Letter with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc.
1.2 Form of Agency Agreement with Charles Webb & Company, a Division of
Keefe, Bruyette & Woods, Inc.
2.0 Amended Plan of Reorganization and Stock Issuance Plan
3.1 Federal MHC Subsidiary Holding Company Charter for Capitol Federal
Financial
3.2 Bylaws of Capitol Federal Financial
4.0 Form of Stock Certificate of Capitol Federal Financial
5.0 Opinion of Silver, Freedman & Taff L.L.P. Re: Legality
8.1 *Opinion of Silver, Freedman & Taff L.L.P. Re: Federal Tax Matters
8.2 *Opinion of Deloitte & Touche L.L.P.
8.3 Letter of RP Financial, LC. Re: Subscription Rights
10.1 Letter Agreement regarding Appraisal Services
10.2 Letter Agreement regarding Business Plan
10.3 Letter Agreement regarding the Charitable Foundation
21.0 Subsidiaries of the Registrant
23.1 Consent of Silver, Freedman & Taff L.L.P. (included in Exhibit 5.0)
23.2 Consent of Deloitte & Touche L.L.P.
23.3 Consent of RP Financial, LC.
24.0 Power of Attorney, included in signature pages.
27.0 Financial Data Schedule
99.1 Appraisal Report of RP Financial, LC. (P)
99.2 Subscription Order Form and Instructions
99.3 Additional Solicitation Material
- -----------------------------
* To be filed by amendment.
(P) Filed in paper format pursuant to continuing hardship exemption.
Exhibit 1.1
[CHARLES WEBB & COMPANY LETTERHEAD]
July 1, 1998
Mr. John C. Dicus
Chairman and Chief Executive Officer
Capitol Federal Savings & Loan Assoc.
700 Kansas Avenue
Topeka, KS 66603-38109
Dear Mr. Dicus:
This proposal is in connection with Capitol Federal Savings and Loan
Association's (the "Association") intention to convert from a mutual to a
capital stock form of organization (the "Conversion"). In order to effect the
Conversion, it is contemplated that all of the Association's common stock either
in the form of a mutual holding company or otherwise to be outstanding pursuant
to the Conversion will be issued to a holding company (the "Company") to be
formed by the Association, and that the Company will offer and sell shares of
its common stock first to eligible persons (pursuant to the Association's Plan
of Conversion) in a Subscription and Community Offering.
Charles Webb & Company ("Webb"), a Division of Keefe, Bruyette and Woods, Inc.
("KBW"), will act as the Association's and the Company's financial advisor and
marketing agent in connection with the Conversion. This letter sets forth
selected terms and conditions of our engagement.
1. Advisory/Conversion Services. As the Association's and Company's financial
advisor and marketing agent, Webb will provide the Association and the Company
with a comprehensive program of conversion services designed to promote an
orderly, efficient, cost-effective and long-term stock distribution. Webb will
provide financial and logistical advice to the Association and the Company
concerning the offering and related issues. Webb will assist in providing
conversion enhancement services intended to maximize stock sales in the
Subscription Offering and to residents of the Association's market area, if
necessary, in the Community Offering.
Webb shall provide financial advisory services to the Association which are
typical in connection with an equity offering and include, but are not limited
to, overall financial analysis of the client with a focus on identifying factors
which impact the valuation of the common stock and provide the appropriate
recommendations for the equity valuation.
<PAGE>
Additionally, post conversion financial advisory services will include advice on
shareholder relations, NASDAQ listing, dividend policy (for both regular and
special dividends), stock repurchase strategy and communication with market
makers. Prior to the closing of the offering, Webb shall furnish to client a
Post-Conversion reference manual which will include specifics relative to these
items. (The nature of the services to be provided by Webb as the Association's
and the Company's financial advisor and marketing agent are further described in
Exhibit A attached hereto.)
2. Preparation of Offering Documents. The Association, the Company and their
counsel will draft the Registration Statement, Application for Conversion,
Prospectus and other documents to be used in connection with the Conversion.
Webb will attend meetings to review these documents and advise you on their form
and content. Webb and its counsel will draft appropriate agency agreement and
related documents as well as marketing materials other than the Prospectus.
3. Due Diligence Review. Prior to filing the Registration Statement, Application
for Conversion or any offering or other documents naming Webb as the
Association's and the Company's financial advisor and marketing agent, Webb and
its representatives will undertake substantial investigations to learn about the
Association's business and operations ("due diligence review") in order to
confirm information provided to us and to evaluate information to be contained
in the Association's and/or the Company's offering documents. The Association
agrees that it will make available to Webb all relevant information, whether or
not publicly available, which Webb reasonably requests, and will permit Webb to
discuss with management the operations and prospects of the Association. Webb
will treat all material non-public information as confidential. The Association
acknowledges that Webb will rely upon the accuracy and completeness of all
information received from the Association, its officers, directors, employees,
agents and representatives, accountants and counsel including this letter to
serve as the Association's and the Company's financial advisor and marketing
agent.
4. Regulatory Filings. The Association and/or the Company will cause appropriate
offering documents to be filed with all regulatory agencies including, the
Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD"), Office of Thrift Supervision ("OTS") and such state
securities commissioners as may be determined by the Association.
5. Agency Agreement. The specific terms of the conversion services, conversion
offering enhancement and syndicated offering services contemplated in this
letter shall be set forth in an Agency Agreement between Webb and the
Association and the Company to be executed prior to commencement of the
offering, and dated the date that the Company's Prospectus is declared effective
and/or authorized to be disseminated by the appropriate regulatory agencies, the
SEC, the NASD, the OTS and such state securities commissioners and other
regulatory agencies as required by applicable law.
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6. Representations, Warranties and Covenants. The Agency Agreement will provide
for customary representations, warranties and covenants by the Association and
Webb, and for the Company to indemnify Webb and their controlling persons (and,
if applicable, the members of the selling group and their controlling persons),
and for Webb to indemnify the Association and the Company against certain
liabilities, including, without limitation, liabilities under the Securities Act
of 1933.
7. Fees. For the services hereunder, the Association and/or Company shall pay
the following fees to Webb at closing unless stated otherwise:
(a) A Management Fee of $100,000 payable in four installments of $25,000
as of August 25, October 15, December 15 and February 15. Such fees
shall be deemed to have been earned when due. Should the Conversion be
terminated for any reason not attributable to the action or inaction
of Webb, Webb shall have earned and be entitled to be paid fees
accruing through the stage at which point the termination occurred.
(b) A Success Fee of 1.25% shall be charged based on the aggregate
Purchase Price of Common Stock sold in the Subscription Offering and
Community Offering excluding shares purchased by the Association's
officers, directors, or employees (or members of their immediate
families) plus any ESOP, tax-qualified or stock based compensation
plans (except IRA's) or similar plan created by the Association for
some or all of its directors or employees. The Management Fee
described in 7(a) will be applied against the Success Fee.
(c) If any shares of the Company's stock remain available after the
subscription offering, at the request of the Association, Webb will
seek to form a syndicate of registered broker-dealers to assist in the
sale of such common stock on a best efforts basis, subject to the
terms and conditions set forth in the selected dealers agreement. Webb
will endeavor to distribute the common stock among dealers in a
fashion which best meets the distribution objectives of the
Association and the Plan of Conversion. Webb will be paid a fee not to
exceed 5.5% of the aggregate Purchase Price of the shares of common
stock sold by them. Webb will pass onto selected broker-dealers who
assist in the syndicated community offering, 4% of the gross
underwriting discounts charged at such time. Fees with respect to
purchases affected with the assistance of a broker/dealer other than
Webb shall be transmitted by Webb to such broker/dealer. The decision
to utilize selected broker-dealers will be made by the Association
upon consultation with Webb. In the event, with respect to any stock
purchases, fees are paid pursuant to this subparagraph 7(c), such fees
shall be in lieu of, and not in addition to, payment pursuant to
subparagraph 7(a) and 7(b).
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8. Additional Services. Webb further agrees to provide financial advisory
assistance to the Company and the Association for a period of one year following
completion of the Conversion, including formation of a dividend policy and share
repurchase program, assistance with shareholder reporting and shareholder
relations matters, general advice on mergers and acquisitions and other related
financial matters, without the payment by the Company and the Association of any
fees in addition to those set forth in Section 7 hereof. Nothing in this
Agreement shall require the Company and the Association to obtain such services
from Webb. Following this initial one year term, if both parties wish to
continue the relationship, a fee will be negotiated and an agreement entered
into at that time.
9. Expenses. The Association will bear those expenses of the proposed offering
customarily borne by issuers, including, without limitation, regulatory filing
fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the
Association's accountants, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing and syndicate expenses associated with the
Conversion; the fees set forth in Section 7; and fees for "Blue Sky" legal work.
If Webb incurs expenses on behalf of Client, Client will reimburse Webb for such
expenses.
The Association will also reimburse Webb for any out-of-pocket expenses related
to travel, meals lodging, photocopying, etc. Additionally, the Association will
reimburse Webb for the reasonable fees and expenses of Webb's counsel. Such
legal fees and Underwriter's counsel expenses shall not exceed $100,000.
10. Conditions. Webb's willingness and obligation to proceed hereunder shall be
subject to, among other things, satisfaction of the following conditions in
Webb's opinion, which opinion shall have been formed in good faith by Webb after
reasonable determination and consideration of all relevant factors: (a) full and
satisfactory disclosure of all relevant material, financial and other
information in the disclosure documents and a determination by Webb, in its sole
discretion, that the sale of stock on the terms proposed is reasonable given
such disclosures; (b) no material adverse change in the condition or operations
of the Association subsequent to the execution of the agreement; and (c) no
adverse market conditions at the time of offering which in Webb's opinion make
the sale of the shares by the Company inadvisable.
12. Benefit. This Agreement shall inure to the benefit of the parties hereto and
their respective successors and to the parties indemnified pursuant to the terms
and conditions of the Agency Agreement and their successors, and the obligations
and liabilities assumed hereunder by the parties hereto shall be binding upon
their respective successors provided, however, that this Agreement shall not be
assignable by Webb.
13. Definitive Agreement. This letter reflects Webb's present intention of
proceeding to work with the Association on its proposed conversion. It does not
create a binding obligation on the part of the Association, the Company or Webb
except as to the agreement to maintain the confidentiality of non-public
information set forth in Section 3, the payment of certain fees as set
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forth in Section 7(a) and 7(b) and the assumption of expenses as set forth in
Section 9, all of which shall constitute the binding obligations of the parties
hereto and which shall survive the termination of this Agreement or the
completion of the services furnished hereunder and shall remain operative and in
full force and effect. The Association further acknowledges that any report or
analysis rendered by Webb pursuant to this engagement is rendered for use solely
by the management of the Association and its agents in connection with the
Conversion. Accordingly, the Association agrees that it will not provide any
such information to any other person without Webb's prior written consent.
Webb acknowledges that in offering the Company's stock no person will be
authorized to give any information or to make any representation not contained
in the offering prospectus and related offering materials filed as part of a
registration statement to be declared effective in connection with the offering.
Accordingly, Webb agrees that in connection with the offering it will not give
any unauthorized information or make any unauthorized representation. We will be
pleased to elaborate on any of the matters discussed in this letter at your
convenience.
If the foregoing correctly sets forth our mutual understanding, please so
indicate by signing and returning the original copy of this letter to the
undersigned.
Very truly yours,
CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
By: /s/ Charles R. Webb
-------------------------
Charles R. Webb
President
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
By: /s/ John C. Dicus Date: August 25, 1998
------------------------- ----------------------
John C. Dicus
Chairman
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EXHIBIT A
CONVERSION SERVICES PROPOSAL
TO CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
Charles Webb & Company provides thrift institutions converting from mutual to
stock form of ownership with a comprehensive program of conversion services
designed to promote an orderly, efficient, cost-effective and long-term stock
distribution. The following list is representative of the conversion services,
if appropriate, we propose to perform on behalf of the Association.
General Services
- ----------------
Assist management and legal counsel with the design of the transaction
structure.
Analyze and make recommendations on bids from printing, transfer agent and
appraisal firms.
Assist officers and directors in obtaining bank loans to purchase stock, if
requested.
Assist in drafting and distribution of press releases as required or
appropriate.
Conversion Offering Enhancement Services
- ----------------------------------------
Establish and manage Stock Information Center at the Association. Stock
Information Center personnel will track prospective investors; record stock
orders; mail order confirmations; provide the Association's senior management
with daily reports; answer customer inquiries; and handle special situations as
they arise.
Assign Webb's personnel to be at the Association through completion of the
Subscription and Community Offerings to manage the Stock Information Center,
meet with prospective shareholders at individual and community information
meetings, solicit local investor interest through a tele-marketing campaign,
answer inquiries, and otherwise assist in the sale of stock in the Subscription
and Community Offerings. This effort will be lead by a Principal of Webb/KBW.
Create target investor list based upon review of the Association's depositor
base.
Provide intensive financial and marketing input for drafting of the prospectus.
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Conversion Offering Enhancement Services- Continued
- ---------------------------------------------------
Prepare other marketing materials, including prospecting letters and brochures,
and media advertisements.
Arrange logistics of community information meeting(s) as required.
Prepare audio-visual presentation by senior management for community information
meeting(s).
Prepare management for question-and-answer period at community information
meeting(s).
Attend and address community information meeting(s) and be available to answer
questions.
Broker-Assisted Sales Services.
- -------------------------------
Arrange for broker information meeting(s) as required.
Prepare audio-visual presentation for broker information meeting(s).
Prepare script for presentation by senior management at broker information
meeting(s).
Prepare management for question-and-answer period at broker information
meeting(s).
Attend and address broker information meeting(s) and be available to answer
questions.
Produce confidential broker memorandum to assist participating brokers in
selling the Association's common stock.
Aftermarket Support Services.
- -----------------------------
Webb will use their best efforts to secure market making and on-going research
commitment from at least three NASD firms, one of which will be Keefe, Bruyette
& Woods, Inc.
7
CAPITOL FEDERAL FINANCIAL
__________ Shares
COMMON STOCK
(Par Value $.0l Per Share)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
___________ __, 1999
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
211 Bradenton Avenue
Dublin, Ohio 43017
Ladies and Gentlemen:
Capitol Federal Financial, a federal corporation (the "Company"), Capitol
Federal Savings Bank MHC, a federally chartered mutual holding company ("MHC")
and Capitol Federal Savings and Loan Association, a federally chartered mutual
savings and loan association (the "Bank") (reference to the "Bank" includes the
Bank in the mutual or stock form, as indicated by the context) with its deposit
accounts insured by the Savings Association Insurance Fund ("SAIF") administered
by the Federal Deposit Insurance Corporation ("FDIC"), hereby confirm, jointly
and severally, their agreement with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc. ("Webb" or "the Agent"), as follows:
Section 1. The Offering. The Bank, in accordance with its Plan of
Reorganization and Stock Issuance Plan adopted by its Board of Directors and
subsequently amended (the "Plan"), intends to convert from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank,
and will issue all of its issued and outstanding capital stock to the Company.
In addition, pursuant to the Plan, the Company will offer and sell up
to_______________ shares of its common stock, par value, $.01 per share (the
"Shares" or "Common Stock"), in a subscription offering (the "Subscription
Offering") to (1) depositors of the Bank with account balances of $50.00 or more
as of June 30, 1997 ("Eligible Account Holders"), (2) the Capitol Federal
Financial Employee Stock Ownership Plan (the "ESOP"), (3) depositors of the Bank
with account balances of $50.00 or more as of December 31, 1998 ("Supplemental
Eligible Account Holders"),
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(4) depositors of the Bank as of the close of business on______________________
(other than Eligible Account Holders and Supplemental Eligible Account Holders)
("Other Members"), and (5) employees, officers and directors of the Bank. To the
extent Shares remain unsold in the Subscription Offering, the Company is
offering for sale in a community offering (the "Community Offering" and when
referred to together with the Subscription Offering, the "Subscription and
Community Offering"), the Shares not so subscribed for or ordered in the
Subscription Offering to members of the general public, with preference given to
natural persons residing in the counties in which the Bank has offices ("Other
Subscribers"), (all such offerees being referred to in the aggregate as
"Eligible Offerees"). It is anticipated that shares not subscribed for in the
Subscription and Community Offering will be offered to certain members of the
general public on a best efforts basis through a selected dealers arrangement
(the "Syndicated Community Offering") (the Subscription Offering, Community
Offering and Syndicated Community Offering are collectively referred to as the
"Offering"). It is acknowledged that the purchase of Shares in the Offering is
subject to the maximum and minimum purchase limitations as described in the Plan
and that the Company and the Bank may reject, in whole or in part, any orders
received in the Community Offering or Syndicated Community Offering.
Collectively, these transactions are referred to herein as the "Reorganization."
The Company will issue the Shares at a purchase price of $10.00 per share (the
"Purchase Price ").
In connection with the Reorganization and pursuant to the terms of the Plan
as described in the Prospectus (as hereinafter defined), immediately following
the consummation of the Reorganization, subject to the approval of the members
of Bank and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute newly issued Common Stock equal to 4%
of such Shares sold in the Reorganization to the Capitol Federal Foundation (the
"Foundation") such shares hereinafter being referred to as the ("Foundation
Shares"). In addition, the Company will make a cash contribution to the
Foundation equal to the value of the Common Stock contributed.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333- ) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares and the Foundation Shares under the Securities
Act of 1933 (the "1933 Act"), and has filed such amendments thereof and such
amended prospectuses as may have been required to the date hereof. The term
"Registration Statement" shall include all exhibits thereto, as amended,
including post-effective amendments. The prospectus, as amended, on file with
the Commission at the time the Registration Statement initially became effective
is hereinafter called the "Prospectus," except that if any Prospectus is filed
by the Company pursuant to Rule 424(b) or (c) of the rules and regulations of
the Commission under the 1933 Act (the "1933 Act Regulations") differing from
the prospectus on file at the time the Registration Statement initially becomes
effective, the term "Prospectus" shall refer to the prospectus filed pursuant to
Rule 424(b) or (c) from and after the time said prospectus is filed with the
Commission.
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<PAGE>
In accordance with Title 12, Parts 575 and 563b of the Code of Federal
Regulations (the "MHC Regulations"), the Bank has filed with the Office of
Thrift Supervision (the "OTS") a Notice of Mutual Holding Company Reorganization
and Application for Approval of an Issuance by a Subsidiary of a Mutual Holding
Company (the "MHC Notice and MHC Application"), including the Prospectus and the
Reorganization Valuation Appraisal Report prepared by RP Financial, LC (the
"Appraisal") and has filed such amendments thereto as may have been required by
the OTS. The MHC Application has been approved by the OTS and the related
Prospectus has been authorized for use by the OTS. In addition, the Company has
filed with the OTS its application on Form H-(e)1 (the "Holding Company
Application") to acquire the Bank and to become a registered savings and loan
holding company under the Home Owners' Loan Act, as amended ("HOLA").
Section 2. Retention of Agent; Compensation; Sale and Delivery of the
Shares. Subject to the terms and conditions herein set forth, the Company and
the Bank have retained Charles Webb & Company, a Division of Keefe, Bruyette &
Woods, Inc. to consult with and to advise the Bank, the MHC and the Company, and
to assist the Company, on a best efforts basis, in the distribution of the
shares of Common Stock in the Offering. The services that Webb will provide
include, but are not limited to (i) training the employees of the Bank who will
perform certain ministerial functions in the Subscription and Community Offering
regarding the mechanics and regulatory requirements of the stock offering
process, (ii) managing the Stock Information Center by assisting interested
stock subscribers and by keeping records of all stock orders, (iii) preparing
marketing materials and (iv) assisting in the solicitation of proxies from the
Bank's members for use at the Special Meeting.
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, the Agent
accepts such appointment and agrees to consult with and advise the Company, the
MHC and the Bank as to the matters set forth in the letter agreement ("Letter
Agreement"), dated July 1, 1998 between the Bank and Webb (a copy of which is
attached hereto as Exhibit A). It is acknowledged by the Company, the MHC and
the Bank that the Agent shall not be required to take or purchase any Shares or
be obligated to take any action which is inconsistent with all applicable laws,
regulations, decisions or orders.
The obligations of the Agent pursuant to this Agreement (other than those
set forth in Sections 2(d), 8 and 9 hereof) shall terminate upon the completion
or termination or abandonment of the Plan by the Company or upon termination of
the Offering, but in no event later than the date (the "End Date") which is 45
days after the Closing Date (as hereinafter defined). All fees or expenses due
to the Agent but unpaid will be payable to the Agent in next day funds at the
earlier of the Closing Date (as hereinafter defined) or the End Date. In the
event the Offering is extended beyond the End Date, the Company, the MHC, the
Bank and the Agent may agree to renew this Agreement under mutually acceptable
terms.
In the event the Company is unable to sell a minimum of _________ Shares
within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the Shares,
the full amount which it may have received from them plus
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accrued interest as set forth in the Prospectus; and none of the parties to this
Agreement shall have any obligation to the other parties hereunder, except as
set forth in this Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Offering is terminated, the Agent shall be reimbursed for
its actual accountable out-of-pocket expenses.
If all conditions precedent to the consummation of the Reorganization,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on
the Closing Date (as hereinafter defined) against payment to the Company by any
means authorized by the Plan; provided, however, that no funds shall be released
to the Company until the conditions specified in Section 7 hereof shall have
been complied with to the reasonable satisfaction of the Agent and their
counsel. The release of Shares against payment therefor shall be made on a date
and at a place acceptable to the Company, the MHC, the Bank and the Agent.
Certificates for shares shall be delivered directly to the purchasers in
accordance with their directions. The date upon which the Company shall release
or deliver the Shares sold in the Offering, in accordance with the terms herein,
is called the "Closing Date."
The Agent shall receive the following compensation for its services
hereunder:
(a) A management fee of $100,000, payable in four installments of $25,000
as of August 25, October 15, December 15 and February 15. Should the
Reorganization be terminated for any reason not attributable to the
action or inaction of the Agent, the Agent shall have earned and be
entitled to be paid fees accruing through the stage at which the
termination occurred.
(b) A Success Fee of 1.25% of the aggregate Purchase Price of the shares
of Common Stock sold in the Subscription Offering and Community
Offering excluding shares purchased by the Bank's officers, directors,
or employees (or members of their immediate families) plus any ESOP,
tax-qualified or stock based compensation plans (except IRA's) or
similar plan created by the Bank for some or all of its directors or
employees. The success fee paid to Webb will be reduced by the amount
of the management fee.
(c) If any of the shares remain available after the Subscription and
Community Offerings, at the request of the Bank, Webb will seek to
form a syndicate of registered broker-dealers to assist in the sale of
such Common Stock on a best efforts basis, subject to the terms and
conditions set forth in the selected dealers agreement. Webb will
endeavor to distribute the Common Stock among dealers in a fashion
which best meets the distribution objectives of the Bank and the Plan
of Reorganization and Stock Issuance. Webb will be paid a fee not to
exceed 5.5% of the aggregate Purchase Price of the Shares sold by
them. Webb will pass onto
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selected broker-dealers, who assist in the syndicated community, 4% of
the gross underwriting discounts charged at such time. Fees with
respect to purchases affected with the assistance of a broker/dealer
other than Webb shall be transmitted by Webb to such broker/dealer.
The decision to utilize selected broker-dealers will be made by the
Bank upon consultation with Webb. In the event, with respect to any
purchases of Shares, fees are paid pursuant to this subparagraph 2(c),
such fees shall be in lieu of, and not in addition to, payment
pursuant to subparagraph 2(a) and 2(b).
(d) The Company, the MHC and the Bank have agreed to reimburse Webb for
its out-of-pocket expenses, and its legal fees and to indemnify Webb
against certain claims or liabilities, including certain liabilities
under the Securities Act, and will contribute to payments Webb may be
required to make in connection with any such claims or liabilities;
and the fees set forth under this Section 2.
Section 3. Prospectus; Offering. The Shares are to be initially offered in
the Offering at the Purchase Price as defined and set forth on the cover page of
the Prospectus.
Section 4. Representations and Warranties of the Company, the MHC and the
Bank. The Company, the MHC and the Bank jointly and severally represent and
warrant to and agree with the Agent as follows:
(a) The Registration Statement which was prepared by the Company, the MHC
and the Bank and filed with the Commission was declared effective by
the Commission on __________ __, 1999. At the time the Registration
Statement, including the Prospectus contained therein (including any
amendment or supplement), became effective, the Registration Statement
contained all statements that were required to be stated therein in
accordance with the 1933 Act and the 1933 Act Regulations, complied in
all material respects with the requirements of the 1933 Act and the
1933 Act Regulations and the Registration Statement, including the
Prospectus contained therein (including any amendment or supplement
thereto), and any information regarding the Company or the MHC or the
Bank or the Foundation contained in Sales Information (as such term is
defined in Section 8 hereof) authorized by the Company, the MHC or the
Bank for use in connection with the Offering, did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and at the time any Rule 424(b) or (c) Prospectus was
filed with the Commission and at the Closing Date referred to in
Section 2, the Registration Statement, including the Prospectus
contained therein (including any amendment or supplement thereto), and
any information regarding the Company, the MHC or the Bank contained
in Sales Information (as such term is defined in Section 8 hereof)
authorized by the Company, the MHC or the
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Bank for use in connection with the Offering will contain all
statements that are required to be stated therein in accordance with
the 1933 Act and the 1933 Act Regulations and will not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this Section 4(a)
shall not apply to statements or omissions made in reliance upon and
in conformity with written information furnished to the Company, the
MHC or the Bank by the Agent or its counsel expressly regarding the
Agent for use in the Prospectus under the caption "The Reorganization
and Stock Issuance-Marketing Arrangements" or statements in or
omissions from any Sales Information or information filed pursuant to
state securities or blue sky laws or regulations regarding the Agent.
(b) The MHC Notice and MHC Applications which were prepared by the
Company, the MHC and the Bank and filed with the OTS were approved by
the OTS on ___________ ___, 1998, including the waiver of certain
provisions of the MHC Regulations specified in such approval with
respect to the establishment of and contribution to the Foundation,
and the related Prospectus has been authorized for use by the OTS. At
the time of the approval of the MHC Application, including the
Prospectus (including any amendment or supplement thereto), by the OTS
and at all times subsequent thereto until the Closing Date, the MHC
Application, including the Prospectus (including any amendment or
supplement thereto), will comply in all material respects with the MHC
Regulations, except to the extent waived in writing by the OTS. The
MHC Notice and MHC Application, including the Prospectus (including
any amendment or supplement thereto), do not include any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
Section 4(b) shall not apply to statements or omissions made in
reliance upon and in conformity with written information furnished to
the Company, the MHC or the Bank by the Agent or its counsel expressly
regarding the Agent for use in the Prospectus contained in the MHC
Notice and MHC Application under the caption "The Reorganization and
Stock Issuance-Marketing Arrangements" or statements in or omissions
from any sales information. The Holding Company Application for
approval pursuant to the HOLA and the regulations promulgated
thereunder (the "Control Act Regulations"), has been prepared by the
Bank, the MHC and the Company in material conformity with the
requirements of the Control Act Regulations and has been filed with
the OTS. A conformed copy of the Holding Company Application has been
delivered to the Agent.
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(c) The Company has filed with the OTS the Holding Company Application. As
of the Closing Date, approval of the Company's acquisition of the Bank
will have been obtained from the OTS.
(d) No order has been issued by the OTS or the FDIC (hereinafter any
reference to the FDIC shall include the SAIF) preventing or suspending
the use of the Prospectus, and no action by or before any such
government entity to revoke any approval, authorization or order of
effectiveness related to the Reorganization is, to the best knowledge
of the Company, the MHC or the Bank, pending or threatened.
(e) As of the Closing Date, the MHC will be duly organized and will be
validly existing as a federally chartered mutual holding company under
the laws of the United States, duly authorized to conduct its business
and own its property as described in the Registration Statement and
the Prospectus; as of the Closing Date, the MHC will have obtained all
licenses, permits and other governmental authorizations required for
the conduct of its business except those that individually or in the
aggregate would not materially adversely affect the financial
condition, earnings, capital, assets or properties of the Company, MHC
and Bank taken as a whole; as of the Closing Date, all such licenses,
permits and governmental authorizations will be in full force and
effect and the MHC will be in compliance therewith in all material
respects; as of the Closing Date, the MHC will be duly qualified as a
foreign corporation to transact business in each jurisdiction in which
the failure to be so qualified in one or more of such jurisdictions
would have a material adverse effect on the financial condition,
earnings, capital, assets, properties or business of the Company, MHC
and Bank considered as one enterprise.
(f) The MHC does not own any equity securities or any equity interest in
any business enterprise except as described in the Prospectus.
(g) The MHC is not authorized to issue any shares of capital stock.
(h) At the Closing Date, the Plan will have been adopted by the Boards of
Directors of the Company, the MHC and the Bank and approved by the
members of the Bank, and the offer and sale of the Shares and all
actions in connection with the contribution to the Foundation will
have been conducted in all material respects in accordance with the
Plan, the MHC Regulations, and all other applicable laws, regulations,
decisions and orders, including all terms, conditions, requirements
and provisions precedent to the Reorganization imposed upon the
Company, the MHC or the Bank by the OTS, the Commission, or any other
regulatory authority and in the manner described in the Prospectus. No
person has sought to obtain review of the
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final action of the OTS in approving the Plan or in approving the MHC
Applications, the MHC Notice or the Holding Company Application
pursuant to the HOLA, or any other statute or regulation.
(i) The Bank has been organized and is a validly existing federally
chartered savings and loan association in mutual form of organization
and upon the Reorganization will become a duly organized and validly
existing federally chartered savings bank in capital stock form of
organization, in both instances duly authorized to conduct its
business and own its property as described in the Registration
Statement and the Prospectus; the Bank has obtained all material
licenses, permits and other governmental authorizations currently
required for the conduct of its business; all such licenses, permits
and governmental authorizations are in full force and effect, and the
Bank is in all material respects complying with all laws, rules,
regulations and orders applicable to the operation of its business;
the Bank is existing under the laws of the federal government and is
duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which its ownership of property
or leasing of property or the conduct of its business requires such
qualification, unless the failure to be so qualified in one or more of
such jurisdictions would not have a material adverse effect on the
condition, financial or otherwise, or the business, operations or
income of the Bank. The Bank does not own equity securities or any
equity interest in any other business enterprise except as described
in the Prospectus or as would not be material to the operations of the
Bank. Upon completion of the sale by the Company of the Shares
contemplated by the Prospectus, (i) the Bank will be converted
pursuant to the Plan to a federally chartered stock savings bank, (ii)
all of the issued and outstanding capital stock of the Bank will be
owned by the Company, (iii) the Company will have no direct
subsidiaries other than the Bank, and (iv) the Company will be a
majority-owned subsidiary of the MHC. The Reorganization will have
been effected in all material respects in accordance with all
applicable statutes, regulations, decisions and orders; and, except
with respect to the filing of certain post-sale, post-Reorganization
reports, and documents in compliance with the 1933 Act Regulations,
the OTS' resolutions or letters of approval, all terms, conditions,
requirements and provisions with respect to the Reorganization imposed
by the Commission, the OTS, and the FDIC, if any, will have been
complied with by the Company, the MHC and the Bank in all material
respects or appropriate waivers will have been obtained and all
material notice and waiting periods will have been satisfied, waived
or elapsed.
(j) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the ___________ with
corporate power and authority to own, lease and operate its properties
and to
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conduct its business as described in the Registration Statement and
the Prospectus, and at the Closing Date the Company will be qualified
to do business as a foreign corporation in each jurisdiction in which
the conduct of its business requires such qualification, except where
the failure to so qualify would not have a material adverse effect on
the condition, financial or otherwise, or the business, operations or
income of the Company. The Company has obtained all material licenses,
permits and other governmental authorizations currently required for
the conduct of its business; all such licenses, permits and
governmental authorizations are in full force and effect, and the
Company is in all material respects complying with all laws, rules,
regulations and orders applicable to the operation of its business.
(k) The Bank has one active subsidiary, Capitol Funds, Inc. (the
"Subsidiary"). The Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the ___________ with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus, and at the Closing Date the
Subsidiary will be qualified to do business as a foreign corporation
in each jurisdiction in which the conduct of its business requires
such qualification, except where the failure to so qualify would not
have a material adverse effect on the condition, financial or
otherwise, or the business, operations or income of the Subsidiary.
The Subsidiary has obtained all material licenses, permits and other
governmental authorizations currently required for the conduct of its
business; all such licenses, permits and governmental authorizations
are in full force and effect, and the Subsidiary is in all material
respects complying with all laws, rules, regulations and orders
applicable to the operation of its business.
(l) The Bank is a member of the Federal Home Loan Bank of Topeka ("FHLB-
Topeka"). The deposit accounts of the Bank are insured by the FDIC up
to the applicable limits; and no proceedings for the termination or
revocation of such insurance are pending or, to the best knowledge of
the Company or the Bank, threatened. Upon consummation of the
Reorganization, the liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders will be duly
established in accordance with the requirements of the MHC
Regulations.
(m) The Company, the MHC and the Bank have good and marketable title to
all real property and good title to all other assets material to the
business of the Company, the MHC and the Bank, taken as a whole, and
to those properties and assets described in the Registration Statement
and Prospectus as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Registration Statement and Prospectus, or
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are not material to the business of the Company, the MHC and the Bank,
taken as a whole; and all of the leases and subleases material to the
business of the Company, the MHC and the Bank, taken as a whole, under
which the Company, the MHC or the Bank hold properties, including
those described in the Registration Statement and Prospectus, are in
full force and effect.
(n) The Company and the Bank have received an opinion of their special
counsel, Silver Freedman & Taff, L.L.P. with respect to the federal
income tax consequences of the Reorganization and the opinions of
Deloitte & Touche L.L.P. with respect to Kansas income tax
consequences of the Reorganization and the federal income tax
consequences of the proposed establishment of, and contribution to,
the Foundation; all material aspects of the opinions of Silver
Freedman & Taff, L.L.P. and Deloitte & Touche L.L.P. are accurately
summarized in the Registration Statement and will be accurately
summarized in the Prospectus; and further represent and warrant that
the facts upon which such opinions are based are truthful, accurate
and complete.
(o) The Company, the MHC and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to enter into
this Agreement, to carry out the provisions and conditions hereof and
to issue and sell the Shares to be sold by the Company, and to issue
and contribute the Foundation Shares and any related cash
contribution, as provided herein and as described in the Prospectus
except approval or confirmation by the OTS of the final appraisal of
the Bank. The consummation of the Reorganization, the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated have been duly and validly authorized
by all necessary corporate action on the part of the Company, the MHC
and the Bank and this Agreement has been validly executed and
delivered by the Company, the MHC and the Bank and is the valid, legal
and binding agreement of the Company, the MHC and the Bank enforceable
in accordance with its terms (except as the enforceability thereof may
be limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of savings and loan
holding companies, the accounts of whose subsidiaries are insured by
the FDIC or by general equity principles regardless of whether such
enforceability is considered in a proceeding in equity or at law, and
except to the extent if any, that the provisions of Sections 8 and 9
hereof may be unenforceable as against public policy).
(p) The Company, the MHC and the Bank are not in violation of any
directive received from the OTS, the FDIC, or any other agency to make
any material
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change in the method of conducting their businesses so as to comply in
all material respects with all applicable statutes and regulations
(including, without limitation, regulations, decisions, directives and
orders of the OTS, and the FDIC) and, except as may be set forth in
the Registration Statement and the Prospectus, there is no suit or
proceeding or charge or action before or by any court, regulatory
authority or governmental agency or body, pending or, to the knowledge
of the Company, the MHC or the Bank, threatened, which might
materially and adversely affect the Reorganization, the performance of
this Agreement or the consummation of the transactions contemplated in
the Plan and as described in the Registration Statement and the
Prospectus or which might result in any material adverse change in the
condition (financial or otherwise), earnings, capital or properties of
the Company, the MHC and the Bank, or which would materially affect
their properties and assets.
(q) The financial statements, schedules and notes related thereto which
are included in the Prospectus fairly present the consolidated balance
sheet, income statement, statement of changes in equity and cash flows
of the Bank at the respective dates indicated and for the respective
periods covered thereby and comply as to form in all material respects
with the applicable accounting requirements of Title 12 of the Code of
Federal Regulations and generally accepted accounting principles
(including those requiring the recording of certain assets at their
current market value). Such financial statements, schedules and notes
related thereto have been prepared in accordance with generally
accepted accounting principles consistently applied through the
periods involved, present fairly in all material respects the
information required to be stated therein and are consistent with the
most recent financial statements and other reports filed by the Bank
with the OTS. The other financial, statistical and pro forma
information and related notes included in the Prospectus present
fairly the information shown therein on a basis consistent with the
audited and unaudited financial statements of the Bank included in the
Prospectus, and as to the pro forma adjustments, the adjustments
described therein have been properly applied on the basis described
therein.
(r) Since the respective dates as of which information is given in the
Registration Statement including the Prospectus: (i) there has not
been any material adverse change, financial or otherwise, in the
condition of the Company, the MHC or the Bank and its subsidiaries
considered as one enterprise, or in the earnings, capital or
properties of the Company, the MHC or the Bank, whether or not arising
in the ordinary course of business; (ii) there has not been any
material increase in the long-term debt of the Bank or in the
principal amount of the Bank's assets which are classified by the Bank
as
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substandard, doubtful or loss or in loans past due 90 days or more or
real estate acquired by foreclosure, by deed-in-lieu of foreclosure or
deemed in-substance foreclosure or any material decrease in retained
earnings or total assets of the Bank nor has the Company, the MHC or
the Bank issued any securities (other than in connection with the
incorporation of the Company) or incurred any liability or obligation
for borrowing other than in the ordinary course of business; (iii)
there have not been any material transactions entered into by the
Company, the MHC or the Bank; (iv) there has not been any material
adverse change in the aggregate dollar amount of the Bank's deposits
or its consolidated net worth; (v) there has been no material adverse
change in the Company's, the MHC's or the Bank's relationship with its
insurance carriers, including, without limitation, cancellation or
other termination of the Company's, the MHC's or the Bank's fidelity
bond or any other type of insurance coverage; (vi) except as disclosed
in the Prospectus there has been no material change in management of
the Company, the MHC or the Bank, neither of which has any material
undisclosed liability of any kind, contingent or otherwise; (vii) the
Company, the MHC or the Bank has not sustained any material loss or
interference with its respective business or properties from fire,
flood, windstorm, earthquake, accident or other calamity, whether or
not covered by insurance; (viii) the Company, the MHC or the Bank is
not in default in the payment of principal or interest on any
outstanding debt obligations; (ix) the capitalization, liabilities,
assets, properties and business of the Company, the MHC and the Bank
conform in all material respects to the descriptions thereof contained
in the Prospectus; and (x) neither the Company, the MHC nor the Bank
has any material contingent liabilities, except as set forth in the
Prospectus. All documents made available to or delivered or to be made
available to or delivered by the Bank, the MHC or the Company or their
representatives in connection with the issuance and sale of the
Shares, including records of account holders, depositors and other
members of the Bank, or in connection with the Agent's exercise of due
diligence, except for those documents which were prepared by parties
other than the Bank, the MHC, the Company or their representatives, to
the best knowledge of the Bank, the MHC and the Company, were on the
dates on which they were delivered, or will be on the dates on which
they are to be delivered, true, complete and correct in all material
respects.
(s) As of the date hereof and as of the Closing Date, neither the Company,
the MHC nor the Bank is (i) in violation of its articles of
incorporation or charter or bylaws, respectively (and the Bank will
not be in violation of its charter or bylaws in capital stock form
upon consummation of the Reorganization), or (ii) in default in the
performance or observance of any material obligation, agreement,
covenant, or condition contained in any material contract, lease,
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loan agreement, indenture or other instrument to which it is a party
or by which it or any of its property may be bound; the consummation
of the Reorganization, the execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
have been duly and validly authorized by all necessary corporate
action on the part of the Company, the MHC and the Bank and this
Agreement has been validly executed and delivered by the Company, the
MHC and the Bank and is a valid, legal and binding Agreement of the
Company, the MHC and the Bank enforceable in accordance with its
terms, except as the enforceability thereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium, conservatorship,
receivership or other similar laws now or hereafter in effect relating
to or affecting the enforcement of creditors' rights generally or the
rights of creditors of federal savings institutions, (ii) general
equitable principles, (iii) laws relating to the safety and soundness
of insured depository institutions, and (iv) applicable law or public
policy with respect to the indemnification and/or contribution
provisions contained herein, and except that no representation or
warranty need be made as to the effect or availability of equitable
remedies or injunctive relief (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The
consummation of the transactions herein contemplated will not: (i)
conflict with or constitute a breach of, or default under, or result
in the creation of any material lien, charge or encumbrance (with the
exception of the liquidation account established in the
Reorganization) upon any of the assets of the Company, the MHC or the
Bank pursuant to the articles of incorporation of the Company or the
charter and bylaws of the Bank and the MHC (in either mutual or
capital stock form), or any material contract, lease or other
instrument to which the Company, the MHC or the Bank has a beneficial
interest, or any applicable law, rule, regulation or order; (ii)
violate any authorization, approval, judgement, decree, order,
statute, rule or regulation applicable to the Company, the MHC or the
Bank, except for such violations which would not have a material
adverse effect on the financial condition and results of operations of
the Company, the MHC and the Bank on a consolidated basis; or (iii)
with the exception of the liquidation account established in the
Reorganization, result in the creation of any material lien, charge or
encumbrance upon any property of the Company, the MHC or the Bank.
(t) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, on the part of the
Company, the MHC or the Bank in the due performance and observance of
any term, covenant or condition of any indenture, mortgage, deed of
trust, note, bank loan or credit agreement or any other instrument or
agreement to which the Company, the MHC or the Bank is a party or by
which any of them or any
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of their property is bound or affected, except such defaults which
would not have a material adverse affect on the financial condition or
results of operations of the Company, the MHC and the Bank on a
consolidated basis; such agreements are in full force and effect; and
no other party to any such agreements has instituted or, to the best
knowledge of the Company, the MHC and the Bank, threatened any action
or proceeding wherein the Company, the MHC or the Bank would or might
be alleged to be in default thereunder.
(u) Upon consummation of the Reorganization, the authorized, issued and
outstanding equity capital of the Company will be within the range set
forth in the Prospectus under the caption "Capitalization," and no
Shares have been or will be issued and outstanding prior to the
Closing Date; the Shares and the Foundation Shares will have been duly
and validly authorized for issuance and, when issued and delivered by
the Company pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and in the Prospectus, will be
duly and validly issued, fully paid and non-assessable, except for
shares purchased by the ESOP with funds borrowed from the Company to
the extent payment therefor in cash has not been received by the
Company; except to the extent that subscription rights and priorities
pursuant thereto exist pursuant to the Plan, no preemptive rights
exist with respect to the Shares or the Foundation Shares; and the
terms and provisions of the Shares and the Foundation Shares will
conform in all material respects to the description thereof contained
in the Registration Statement and the Prospectus. To the best
knowledge of the Company, the MHC and the Bank, upon the issuance of
the Shares and the Foundation Shares, good title to the Shares and the
Foundation Shares will be transferred from the Company to the
purchasers thereof (or the Foundation, as appropriate) against payment
therefor, subject to such claims as may be asserted against the
purchasers thereof by third-party claimants.
(v) No approval of any regulatory or supervisory or other public authority
is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except for the approval of
the Commission, the OTS and any necessary qualification, notification,
registration or exemption under the securities or blue sky laws of the
various states in which the Shares are to be offered, and except as
may be required under the rules and regulations of the NASD.
(w) Deloitte & Touche LLP which has certified the consolidated audited
financial statements and schedules of the Bank included in the
Prospectus, has advised the Company, the MHC and the Bank in writing
that they are, with respect to the Company, the MHC and the Bank,
independent public accountants
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within the meaning of the Code of Professional Ethics of the American
Institute of Certified Public Accountants and Title 12 of the Code of
Federal Regulations and Section 571.2(c)(3).
(x) RP Financial LC, which has prepared the Bank's Reorganization
Valuation Appraisal Report as of November 20, 1998 (as amended or
supplemented, if so amended or supplemented) (the "Appraisal"), has
advised the Company in writing that it is independent of the Company,
the MHC and the Bank within the meaning of the MHC Regulations.
(y) The Company, the MHC and the Bank have timely filed all required
federal, state and local tax returns; the Company, the MHC and the
Bank have paid all taxes that have become due and payable in respect
of such returns, except where permitted to be extended, have made
adequate reserves for similar future tax liabilities and no deficiency
has been asserted with respect thereto by any taxing authority.
(z) The Bank is in compliance in all material respects with the applicable
financial record-keeping and reporting requirements of the Currency
and Foreign Transactions Reporting Act of 1970, as amended, and the
regulations and rules thereunder.
(aa) To the knowledge of the Company, the MHC and the Bank, neither the
Company, the MHC, the Bank nor employees of the Company, the MHC or
the Bank have made any payment of funds of the MHC, the Company or the
Bank as a loan for the purchase of the Shares or made any other
payment of funds prohibited by law, and no funds have been set aside
to be used for any payment prohibited by law.
(bb) Prior to the Reorganization, neither the Company, the MHC nor the Bank
has: (i) issued any securities within the last 18 months (except for
notes to evidence other bank loans and reverse repurchase agreements
or other liabilities in the ordinary course of business or as
described in the Prospectus, and except for any shares issued in
connection with the incorporation of the Company); (ii) had any
material dealings within the 12 months prior to the date hereof with
any member of the NASD, or any person related to or associated with
such member, other than discussions and meetings relating to the
proposed Offering and routine purchases and sales of United States
government and agency securities; (iii) entered into a financial or
management consulting agreement except as contemplated hereunder; and
(iv) engaged any intermediary between the Agent and the Company, the
MHC and the Bank in connection with the offering of the Shares, and no
person is being compensated in any manner for such service.
Appropriate
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arrangements have been made for placing the funds received from
subscriptions for Shares in a special interest-bearing account with
the Bank until all Shares are sold and paid for, with provision for
refund to the purchasers in the event that the Reorganization is not
completed for whatever reason or for delivery to the Company if all
Shares are sold.
(cc) The Company, the MHC and the Bank have not relied upon the Agent or
its legal counsel or other advisors for any legal, tax or accounting
advice in connection with the Reorganization.
(dd) The Company is not required to be registered under the Investment
Company Act of 1940, as amended.
(ee) Any certificates signed by an officer of the Company, the MHC or the
Bank pursuant to the conditions of this Agreement and delivered to the
Agent or their counsel that refers to this Agreement shall be deemed
to be a representation and warranty by the Company, the MHC or the
Bank to the Agent as to the matters covered thereby with the same
effect as if such representation and warranty were set forth herein.
(ff) The Foundation has been duly incorporated and is validly existing as a
private charitable foundation in good standing under the laws of the
State of Kansas with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Foundation will not be a savings and loan holding
company within the meaning of 12 C.F.R. Section 574.2(q) as a result
of the issuance of the Foundation Shares to it in accordance with the
terms of the Plan and in the amounts as described in the Prospectus;
to the knowledge of the Bank, the MHC and the Company, all approvals
required to establish the Foundation and to contribute the Foundation
Shares thereto and cash on an amount equal to 4.0% of the Shares sold
in the Offering have been obtained as described in the Prospectus;
except as specifically disclosed in the Prospectus and the Proxy
Statement, there are no agreements and/or understandings, written or
oral or otherwise, between the Company, the MHC, and/or the Bank and
the Foundation with respect to the control, directly or indirectly,
over the voting and the acquisition or disposition of the shares of
Common Stock to be contributed by the Company to the Foundation; the
Foundation Shares to be issued to the Foundation in accordance with
the Plan and as described in the Prospectus will have been duly
authorized for issuance and, when issued and contributed by the
Company pursuant to the Plan, will be duly and validly issued and
fully paid and non-assessable.
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Section 5. Representations and Warranties of the Agent.
Webb represents and warrants to the Company, the MHC and the Bank that:
(i) it is a corporation and is validly existing in good standing under
the laws of the State of Ohio and licensed to conduct business in the State
of Ohio and it has the full power and authority to provide the services to
be furnished to the Bank, the MHC and the Company hereunder.
(ii) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of the Agent, and this
Agreement has been duly and validly executed and delivered by the Agent and
is a legal, valid and binding agreement of the Agent, enforceable in
accordance with its terms.
(iii) Each of the Agent and its employees, agents and representatives
who shall perform any of the services hereunder shall be duly authorized
and empowered, and shall have all licenses, approvals and permits necessary
to perform such services.
(iv) The execution and delivery of this Agreement by the Agent, the
consummation of the transactions contemplated hereby and compliance with
the terms and provisions hereof will not conflict with, or result in a
breach of, any of the terms, provisions or conditions of, or constitute a
default (or an event which with notice or lapse of time or both would
constitute a default) under, the articles of incorporation of the Agent or
any agreement, indenture or other instrument to which the Agent is a party
or by which it or its property is bound.
(v) No approval of any regulatory or supervisory or other public
authority is required in connection with the Agent's execution and delivery
of this Agreement, except as may have been received.
(vi) There is no suit or proceeding or charge or action before or by
any court, regulatory authority or government agency or body or, to the
knowledge of the Agent, pending or threatened, which might materially
adversely affect the Agent's performance of this Agreement.
Section 5.l Covenants of the Company, the MHC and the Bank. The Company,
the MHC and the Bank hereby jointly and severally covenant with Webb as follows:
(a) The Company will not, at any time after the date the Registration
Statement is declared effective, file any amendment or supplement to
the Registration Statement without providing the Agent and its counsel
an opportunity to
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review such amendment or supplement or file any amendment or
supplement to which amendment or supplement the Agent or its counsel
shall reasonably object.
(b) The MHC and Bank will not, at any time after the MHC Application and
the MHC Notice is approved by the OTS, file any amendment or
supplement to such MHC Application or MHC Notice without providing the
Agent and its counsel an opportunity to review such amendment or
supplement or file any amendment or supplement to which amendment or
supplement the Agent or its counsel shall reasonably object.
(c) The Company will not, at any time before the Holding Company
Application is approved by the OTS, file any amendment or supplement
to such Holding Company Application without providing the Agent and
its counsel an opportunity to review the nonconfidential portions of
such amendment or supplement or file any amendment or supplement to
which amendment or supplement the Agent or its counsel shall
reasonably object.
(d) The Company, the MHC and the Bank will use their best efforts to cause
any post-effective amendment to the Registration Statement to be
declared effective by the Commission and any post-effective amendment
to the MHC Application or the MHC Notice to be approved by the OTS and
will immediately upon receipt of any information concerning the events
listed below notify the Agent: (i) when the Registration Statement, as
amended, has become effective; (ii) when the MHC Application, as
amended, and the MHC Notice have been approved by the OTS; (iii) any
comments from the Commission, the OTS or any other governmental entity
with respect to the Reorganization or the transactions contemplated by
this Agreement; (iv) of the request by the Commission, the OTS or any
other governmental entity for any amendment or supplement to the
Registration Statement, the MHC Application, the MHC Notice or for
additional information; (v) of the issuance by the Commission, the OTS
or any other governmental entity of any order or other action
suspending the Offering or the use of the Registration Statement or
the Prospectus or any other filing of the Company, the MHC or the Bank
under the MHC Regulations, or other applicable law, or the threat of
any such action; (vi) the issuance by the Commission, the OTS or any
authority of any stop order suspending the effectiveness of the
Registration Statement or of the initiation or threat of initiation or
threat of any proceedings for that purpose; or (vii) of the occurrence
of any event mentioned in paragraph (h) below. The Company, the MHC
and the Bank will make every reasonable effort (i) to prevent the
issuance by the Commission, the OTS or any state authority of any such
order and, if any
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such order shall at any time be issued, (ii) to obtain the lifting
thereof at the earliest possible time.
(e) The Company, the MHC and the Bank will deliver to the Agent and to its
counsel two conformed copies of the Registration Statement, the MHC
Application, the MHC Notice and the Holding Company Application, as
originally filed and of each amendment or supplement thereto,
including all exhibits. Further, the Company, the MHC and the Bank
will deliver such additional copies of the foregoing documents to
counsel to the Agent as may be required for any NASD and "blue sky"
filings.
(f) The Company, the MHC and the Bank will furnish to the Agent, from time
to time during the period when the Prospectus (or any later prospectus
related to this offering) is required to be delivered under the 1933
Act or the Securities Exchange Act of 1934 (the "1934 Act"), such
number of copies of such Prospectus (as amended or supplemented) as
the Agent may reasonably request for the purposes contemplated by the
1933 Act, the 1933 Act Regulations, the 1934 Act or the rules and
regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes the Agent to use the Prospectus
(as amended or supplemented, if amended or supplemented) in any lawful
manner contemplated by the Plan in connection with the sale of the
Shares by the Agent.
(g) The Company, the MHC and the Bank will comply with any and all
material terms, conditions, requirements and provisions with respect
to the Reorganization, and the transactions contemplated thereby,
including those conditions relating to the operation of the
Foundation, imposed by the Commission, the OTS or the MHC Regulations,
and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the
1934 Act Regulations to be complied with prior to or subsequent to the
Closing Date and when the Prospectus is required to be delivered, and
during such time period the Company, the MHC and the Bank will comply,
at their own expense, with all material requirements imposed upon them
by the Commission, the OTS or the MHC Regulations, and by the 1933
Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act
Regulations, including, without limitation, Rule 10b-5 under the 1934
Act, in each case as from time to time in force, so far as necessary
to permit the continuance of sales or dealing in the Common Stock
during such period in accordance with the provisions hereof and the
Prospectus.
(h) If, at any time during the period when the Prospectus relating to the
Shares is required to be delivered, any event relating to or affecting
the Company, the MHC or the Bank shall occur, as a result of which it
is necessary or
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<PAGE>
appropriate, in the opinion of counsel for the Company, the MHC and
the Bank or in the reasonable opinion of the Agent's counsel, to amend
or supplement the Registration Statement or Prospectus in order to
make the Registration Statement or Prospectus not misleading in light
of the circumstances existing at the time the Prospectus is delivered
to a purchaser, the Company, the MHC and the Bank will immediately so
inform the Agent and prepare and file, at their own expense, with the
Commission, the OTS and furnish to the Agent a reasonable number of
copies of an amendment or amendments of, or a supplement or
supplements to, the Registration Statement or Prospectus (in form and
substance reasonably satisfactory to the Agent and its counsel after a
reasonable time for review) which will amend or supplement the
Registration Statement or Prospectus so that as amended or
supplemented it will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, not misleading. For the
purpose of this Agreement, the Company, the MHC and the Bank each will
timely furnish to the Agent such information with respect to itself as
the Agent may from time to time reasonably request.
(i) The Company, the MHC and the Bank will take all necessary actions, in
cooperating with the Agent, and furnish to whomever the Agent may
direct, such information as may be required to qualify or register the
Shares for offering and sale by the Company or to exempt such Shares
from registration, or to exempt the Company as a broker-dealer and its
officers, directors and employees as broker-dealers or agents under
the applicable securities or blue sky laws of such jurisdictions in
which the Shares are required under the MHC Regulations to be sold or
as the Agent and the Company, the MHC and the Bank may reasonably
agree upon; provided, however, that the Company shall not be obligated
to file any general consent to service of process, to qualify to do
business in any jurisdiction in which it is not so qualified, or to
register its directors or officers as brokers, dealers, salesmen or
agents in any jurisdiction. In each jurisdiction where any of the
Shares shall have been qualified or registered as above provided, the
Company will make and file such statements and reports in each fiscal
period as are or may be required by the laws of such jurisdiction.
(j) The liquidation account for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders will be duly established and
maintained in accordance with the requirements of the OTS, and such
Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain their savings accounts in the Bank will have an
inchoate interest in their pro rata portion of the liquidation
account.
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(k) The Company, the MHC and the Bank will not sell or issue, contract to
sell or otherwise dispose of, for a period of 90 days after the
Closing Date, without the Agent's prior written consent, any Common
Stock other than the Shares or the Foundation Shares or other than in
connection with any plan or arrangement described in the Prospectus,
including existing stock benefit plans.
(l) The Company shall register its Common Stock under Section 12(g) of the
1934 Act on or prior to the Closing Date pursuant to the Plan and
shall request that such registration be effective prior to or upon
completion of the Reorganization. The Company shall maintain the
effectiveness of such registration for not less than three years or
such shorter period as may be required by the OTS.
(m) During the period during which the Company's Common Stock is
registered under the 1934 Act or for three (3) years from the date
hereof, whichever period is greater, the Company will furnish to its
shareholders as soon as practicable after the end of each fiscal year
an annual report of the Company (including a consolidated balance
sheet and statements of consolidated income, shareholders' equity and
cash flows of the Company and its subsidiaries as at the end of and
for such year, certified by independent public accountants in
accordance with Regulation S-X under the 1933 Act and the 1934 Act).
(n) During the period of three years from the date hereof, the Company
will furnish to the Agent: (i) as soon as practicable after such
information is publicly available, a copy of each report of the
Company furnished to or filed with the Commission under the 1934 Act
or any national securities exchange or system on which any class of
securities of the Company is listed or quoted (including, but not
limited to, reports on Forms 10-K, 10-Q and 8-K and all proxy
statements and annual reports to stockholders), (ii) a copy of each
other non-confidential report of the Company mailed to its
stockholders or filed with the Commission, the OTS or any other
supervisory or regulatory authority or any national securities
exchange or system on which any class of securities of the Company is
listed or quoted, each press release and material news items and
additional documents and information with respect to the Company, MHC
or the Bank as the Agent may reasonably request; and (iii) from time
to time, such other nonconfidential information concerning the
Company, the MHC or the Bank as the Agent may reasonably request.
(o) The Company, the MHC and the Bank will use the net proceeds from the
sale of the Shares in the manner set forth in the Prospectus under the
caption "Use of Proceeds."
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(p) Other than as permitted by the MHC Regulations, the HOLA, the 1933
Act, the 1933 Act Regulations, and the laws of any state in which the
Shares are registered or qualified for sale or exempt from
registration, neither the Company, the MHC nor the Bank will
distribute any prospectus, offering circular or other offering
material in connection with the offer and sale of the Shares.
(q) The Company will use its best efforts to (i) encourage and assist a
market maker to establish and maintain a market for the Shares and
(ii) list and maintain quotation of the Shares on a national or
regional securities exchange or on the Nasdaq Stock Market ("Nasdaq")
effective on or prior to the Closing Date.
(r) The Bank will maintain appropriate arrangements for depositing all
funds received from persons mailing subscriptions for or orders to
purchase Shares in the Offering on an interest-bearing basis at the
rate described in the Prospectus until the Closing Date and
satisfaction of all conditions precedent to the release of the Bank's
obligation to refund payments received from persons subscribing for or
ordering Shares in the Offering in accordance with the Plan and as
described in the Prospectus or until refunds of such funds have been
made to the persons entitled thereto or withdrawal authorizations
canceled in accordance with the Plan and as described in the
Prospectus. The Bank will maintain such records of all funds received
to permit the funds of each subscriber to be separately insured by the
FDIC (to the maximum extent allowable) and to enable the Bank to make
the appropriate refunds of such funds in the event that such refunds
are required to be made in accordance with the Plan and as described
in the Prospectus.
(s) The Company will promptly take all necessary action to register as a
savings and loan holding company under the HOLA within 90 days of the
Closing Date.
(t) The Company, the MHC and the Bank will take such actions and furnish
such information as are reasonably requested by the Agent in order for
the Agent to ensure compliance with the NASD's "Interpretation
Relating to Free Riding and Withholding."
(u) Neither the Company, the MHC nor the Bank will amend the Plan without
notifying the Agent prior thereto.
(v) The Company shall assist the Agent, if necessary, in connection with
the allocation of the Shares in the event of an oversubscription and
shall provide
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the Agent with any information necessary to assist the Company in
allocating the Shares in such event and such information shall be
accurate and reliable in all material respects.
(w) Prior to the Closing Date, the Company, the MHC and the Bank will
inform the Agent of any event or circumstances of which it is aware as
a result of which the Registration Statement and/or Prospectus, as
then amended or supplemented, would contain an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein not misleading.
(x) Subsequent to the date the Registration Statement is declared
effective by the Commission and prior to the Closing Date, except as
otherwise may be indicated or contemplated therein or set forth in an
amendment or supplement thereto, neither the Company, the MHC nor the
Bank will have: (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, except
borrowings from the same or similar sources indicated in the
Prospectus in the ordinary course of its business, or (ii) entered
into any transaction which is material in light of the business and
properties of the Company and the Bank, taken as a whole.
(y) The facts and representations provided to Silver Freedman & Taff,
L.L.P. by the Bank, the MHC and the Company and upon which Silver
Freedman & Taff, L.L.P. will base its opinion under Section 7(c)(1)
are and will be truthful, accurate and complete.
(z) The Company, the MHC and the Bank shall use their best efforts to
ensure that the Foundation submits within the time frames required by
applicable law a request to the Internal Revenue Service to be
recognized as a tax- exempt organization under Section 501(c)(3) of
the Internal Revenue Code of 1986, as amended (the "Code"); the
Company, the MHC and the Bank will take no action which will result in
the possible loss of the Foundation's tax- exempt status; and neither
the Company, the MHC nor the Bank will contribute any additional
assets to the Foundation until such time that such additional
contributions will be deductible for federal and state income tax
purposes.
Section 6. Payment of Expenses. Whether or not the Reorganization is
completed or the sale of the Shares by the Company is consummated, the Company,
the MHC and the Bank jointly and severally agree to pay or reimburse the Agent
for the Company, the MHC and the Bank have agreed to reimburse Webb for its
out-of-pocket expenses, and its legal fees and to indemnify Webb against certain
claims or liabilities, including certain liabilities under the Securities Act,
and will contribute to payments Webb may be required to make in connection with
any such claims or
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liabilities; and the fees set forth under this Section 2. In the event the
Company is unable to sell a minimum of___________ Shares or the Reorganization
is terminated or otherwise abandoned, the Company, the MHC and the Bank shall
promptly reimburse the Agent in accordance with Section 2 hereof.
Section 7. Conditions to the Agent's Obligations. The obligations of the
Agent hereunder, as to the Shares to be delivered at the Closing Date, are
subject, to the extent not waived in writing by the Agent, to the condition that
all representations and warranties of the Company, the MHC and the Bank herein
are, at and as of the commencement of the Offering and at and as of the Closing
Date, true and correct in all material respects, the condition that the Company,
the MHC and the Bank shall have performed all of their obligations hereunder to
be performed on or before such dates, and to the following further conditions:
(a) At the Closing Date, the Company, the MHC and the Bank shall have
conducted the Reorganization in all material respects in accordance
with the Plan, the MHC Regulations, and all other applicable laws,
regulations, decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Reorganization imposed
upon them by the OTS.
(b) The Registration Statement shall have been declared effective by the
Commission and the MHC Application and MHC Notice shall be approved by
the OTS not later than 5:30 p.m. on the date of this Agreement, or
with the Agent's consent at a later time and date; and at the Closing
Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings
therefore initiated or threatened by the Commission or any state
authority, and no order or other action suspending the authorization
of the Prospectus or the consummation of the Conversion shall have
been issued or proceedings therefore initiated or, to the Company's,
the MHC's or the Bank's knowledge, threatened by the Commission, the
OTS, the FDIC, or any state authority.
(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing Date and addressed
to the Agent and for its benefit, of Silver Freedman & Taff,
L.L.P., special counsel for the Company, the MHC and the Bank, in
form and substance to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation under the laws of the United States.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus.
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(iii) The Bank has been organized and is a validly existing
federally chartered savings bank in capital stock form of
organization, authorized to conduct its business and own its
property as described in the Registration Statement and the
Prospectus. All of the outstanding capital stock of the Bank upon
completion of the Reorganization will be duly authorized and,
upon payment therefor, will be validly issued, fully paid and
non-assessable and will be owned by the Company, free and clear
of any liens, encumbrances, claims or other restrictions.
(iv) The Subsidiary has been duly incorporated and is
validly existing as a corporation under the laws of the state of
Kansas and has corporate power and authority to own, lease and
operate its properties and conduct its business as described in
the Prospectus. The activities of the Subsidiary as described in
the Prospectus are permitted to subsidiaries of a savings and
loan holding company and of a federally chartered savings and
loan association by the rules, regulations, resolutions and
practices of the OTS.
(v) The Bank is a member of the FHLB-Topeka. The deposit
accounts of the Bank are insured by the FDIC up to the maximum
amount allowed under law and no proceedings for the termination
or revocation of such insurance are pending or, to such counsel's
Actual Knowledge, threatened; the description of the liquidation
account as set forth in the Prospectus under the captions "The
Reorganization and Stock Issuance-Effects of the
Reorganization-Liquidation Rights," to the extent that such
information constitutes matters of law and legal conclusions, has
been reviewed by such counsel and is accurately described in all
material respects.
(vi) The MHC has been duly organized and is validly existing
as a federally chartered mutual holding company, duly authorized
to conduct its business and own its properties as described in
the Registration Statement and Prospectus.
(vii) Upon consummation of the Reorganization and the
issuance of Foundation Shares to the Foundation immediately upon
completion thereof subject to compliance with all conditions
imposed upon the Foundation and the contribution thereof by the
OTS under the terms of the OTS' approval order, in an amount as
described in the Prospectus, the authorized, issued and
outstanding capital stock of the Company will be within the range
set forth in the Prospectus under the caption "Capitalization,"
and no shares of Common Stock have been issued prior to the
Closing Date; at the time of the Reorganization, the Shares
subscribed for pursuant to the Offering and the Foundation Shares
will have been duly and validly authorized for issuance, and when
issued and delivered by the Company pursuant to the Plan against
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payment of the consideration calculated as set forth in the Plan
and Prospectus, will be duly and validly issued and fully paid
and non-assessable; the issuance of the Shares and the Foundation
Shares is not subject to preemptive rights and the terms and
provisions of the Shares and the Foundation Shares conform in all
material respects to the description thereof contained in the
Prospectus. To such counsel's Actual Knowledge, upon the issuance
of the Shares and the Foundation Shares, good title to the Shares
and the Foundation Shares will be transferred by the Company to
the purchasers thereof against payment therefor, subject to such
claims as may be asserted against the purchasers thereof by
third-party claimants.
(viii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including
the establishment of the Foundation and the contribution thereto
of the Foundation Shares, have been duly and validly authorized
by all necessary action on the part of the Company, the MHC and
the Bank; and this Agreement is a valid and binding obligation of
the Company, the MHC and the Bank, enforceable in accordance with
its terms, except as the enforceability thereof may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws now or
hereafter in effect relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of savings
institutions, the deposits of which are insured by the FDIC and
their holding companies, (ii) general equitable principles, (iii)
laws relating to the safety and soundness of insured depository
institutions and their holding companies, and (iv) applicable law
or public policy with respect to the indemnification and/or
contribution provisions contained herein, including without
limitation the provisions of Sections 23A and 23B of the Federal
Reserve Act and except that no opinion need be expressed as to
the effect or availability of equitable remedies or injunctive
relief (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
(ix) The MHC Application (including therewith, the
establishment of the Foundation and the contribution of the
Foundation Shares thereto) and the MHC Notice have been approved
by the OTS and the Prospectus has been authorized for use by the
OTS. The OTS has approved the Holding Company Application and
issued its order of approval under the savings and loan holding
company provisions of the HOLA, the purchase by the Company of
all of the issued and outstanding capital stock of the Bank has
been authorized by the OTS and no action has been taken, and to
such counsel's Actual Knowledge none is pending or threatened, to
revoke any such authorization or approval.
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(x) The Plan and the establishment and funding of the
Foundation has been duly adopted by the required vote of the
directors of the Company, the MHC and the Bank, and based upon
the certificate of the inspector of election, by the members of
the Bank.
(xi) Subject to the satisfaction of the conditions to the
OTS' approval of the Reorganization, no further approval,
registration, authorization, consent or other order of any
federal regulatory agency is required in connection with the
execution and delivery of this Agreement, the issuance of the
Shares and the Foundation Shares and the consummation of the
Reorganization, except as may be required under the securities or
blue sky laws of various jurisdictions (as to which no opinion
need be rendered) and except as may be required under the rules
and regulations of the NASD and/or the NYSE (as to which no
opinion need be rendered). To such counsel's Actual Knowledge,
the Reorganization has been consummated in all material respects
in accordance with MHC Regulations, except that no opinion is
rendered with respect to (a) the MHC Application, the
Registration Statement or Prospectus, which are covered by other
clauses of this opinion, (b) the satisfaction of the
post-Reorganization conditions in the OTS Regulations or in the
OTS approvals of the MHC Application and the Holding Company
Application, (c) the securities or "blue sky" laws of various
jurisdictions, and (d) the rules and regulations of the NASD.
(xii) The Registration Statement is effective under the 1933
Act, and no stop order suspending the effectiveness has been
issued under the 1933 Act or proceedings therefor initiated or,
to such counsel's Actual Knowledge, threatened by the Commission.
(xiii) At the time the MHC Application, including the
Prospectus contained therein, and the MHC Notice were approved by
the OTS, the MHC Application, including the Prospectus contained
therein, and the MHC Notice complied as to form in all material
respects with the requirements of the MHC Regulations, federal
law and all applicable rules and regulations promulgated
thereunder (other than the financial statements, the notes
thereto, and other tabular, financial, statistical and appraisal
data included therein, as to which no opinion need be rendered).
(xiv) At the time that the Registration Statement became
effective, (i) the Registration Statement (as amended or
supplemented, if so amended or supplemented) (other than the
financial statements, the notes thereto, and other tabular,
financial, statistical and appraisal data included therein, as to
which no opinion need be rendered), complied as to form in all
material respects with the requirements of the 1933 Act and the
1933 Act Regulations,
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<PAGE>
and (ii) the Prospectus (other than the financial statements, the
notes thereto, and other tabular, financial, statistical and
appraisal data included therein, as to which no opinion need be
rendered) complied as to form in all material respects with the
requirements of the 1933 Act, the 1933 Act Regulations, the MHC
Regulations and federal law.
(xv) The terms and provisions of the Shares of the Company
conform, in all material respects, to the description thereof
contained in the Registration Statement and Prospectus, and the
form of certificate used to evidence the Shares is in due and
proper form.
(xvi) There are no legal or governmental proceedings pending
or threatened which are required to be disclosed in the
Registration Statement and Prospectus, other than those disclosed
therein, and to such counsel's Actual Knowledge, all pending
legal and governmental proceedings to which the Company, the MHC,
the Bank or the Foundation is a party or of which any of their
property is the subject, which are not described in the
Registration Statement and the Prospectus, including ordinary
routine litigation incidental to the Company's, the MHC's or the
Bank's business, are, considered in the aggregate, not material.
(xvii) To such counsel's Actual Knowledge, there are no
material contracts, indentures, mortgages, loan agreements,
notes, leases or other instruments required to be described or
referred to in the MHC Application, the Registration Statement or
the Prospectus or required to be filed as exhibits thereto other
than those described or referred to therein or filed as exhibits
thereto in the MHC Application, the Registration Statement or the
Prospectus. The description in the MHC Application, the
Registration Statement and the Prospectus of such documents and
exhibits is accurate in all material respects and fairly presents
the information required to be shown.
(xviii) To such counsel's Actual Knowledge, the Company, the
MHC and the Bank have conducted the Reorganization, in all
material respects, in accordance with all applicable requirements
of the Plan and applicable federal law, except that no opinion is
rendered with respect to (a) the MHC Application, the
Registration Statement or Prospectus, which are covered by other
clauses of this opinion, (b) the satisfaction of the
post-Reorganization conditions in the OTS Regulations or in the
OTS approvals of the MHC Application and the Holding Company
Application, (c) the securities or "blue sky" laws of various
jurisdictions, and (d) the rules and regulations of the NASD. The
Plan complies in all material respects with all applicable
federal laws, rules, regulations, decisions and orders including,
but not limited to, the MHC Regulations; no order has been issued
by the OTS, the Commission,
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the FDIC, or any state authority to suspend the Offering or the
use of the Prospectus, and no action for such purposes has been
instituted or, to such counsel's Actual Knowledge, threatened by
the OTS, the Commission, the FDIC, or any state authority and no
person has sought to obtain regulatory or judicial review of the
final action of the OTS, approving the Plan, the MHC Application,
the Holding Company Application or the Prospectus.
(xix) To such counsel's Actual Knowledge, the Company, the
MHC, the Bank and the Subsidiary have obtained all material
licenses, permits and other governmental authorizations currently
required for the conduct of their businesses and all such
licenses, permits and other governmental authorizations are in
full force and effect, and the Company, the MHC, the Bank and the
Subsidiary are in all material respects complying therewith,
except where the failure to have such licenses, permits and other
governmental authorizations or the failure to be in compliance
therewith would not have a material adverse effect on the
business or operations of the Bank, the MHC, the Company an the
Subsidiary, taken as a whole.
(xx) To such counsel's Actual Knowledge, neither the
Company, the MHC nor the Bank is in violation of its articles of
incorporation and bylaws or its Charter and bylaws, as
appropriate or, to such counsel's Actual Knowledge, in default or
violation of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which it is a party or by
which it or its property may be bound, except for such defaults
or violations which would not have a material adverse impact on
the financial condition or results of operations of the Company,
the MHC and the Bank on a consolidated basis; to such counsel's
Actual Knowledge, the execution and delivery of this Agreement,
the occurrence of the obligations herein set forth and the
consummation of the transactions contemplated herein will not
conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, the MHC
or the Bank pursuant to any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Company, the MHC or the Bank is a party or by which any
of them may be bound, or to which any of the property or assets
of the Company, the MHC or the Bank are subject (other than the
establishment of the liquidation account); and, such action will
not result in any violation of the provisions of the certificate
of incorporation or bylaws of the Company or the Charter or
bylaws of the MHC or the Bank or, to such counsel's Actual
Knowledge, result in any violation of any applicable federal law,
act, regulation (except that no opinion with respect to the
securities and blue sky laws of various jurisdictions or the
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rules or regulations of the NASD need be rendered) or order or
court order, writ, injunction or decree.
(xxi) The Company's articles of incorporation and bylaws
comply in all material respects with the regulations of the OTS.
The Bank's and MHC's charter and bylaws comply in all material
respects with the rules and regulations of the OTS.
(xxii) To such counsel's Actual Knowledge, neither the
Company, the MHC nor the Bank is in violation of any directive
from the OTS or the FDIC to make any material change in the
method of conducting its respective business.
(xxiii) The information in the Prospectus under the captions
"Regulation," "The Reorganization and Stock Issuance," "Certain
Restrictions on Acquisition of the Stock Holding Company and the
Bank" and "Description of Capital Stock of the Stock Holding
Company," to the extent that such information constitutes matters
of law, summaries of legal matters, documents or proceedings, or
legal conclusions, has been reviewed by such counsel and is
correct in all material respects. The description of the
Reorganization process under the caption "The Reorganization and
Share Issuance" in the Prospectus has been reviewed by such
counsel and fairly describes such process in all material
respects. The discussion of statutes or regulations described or
referred to in the Prospectus are accurate summaries and fairly
present the information required to be shown. The information
under the caption "The Reorganization and Stock Issuance-Effects
of the Reorganization-Tax Effects" has been reviewed by such
counsel and fairly describes the opinions rendered by Silver
Freedman & Taff, L.L.P. and Deloitte & Touche LLP to the Company,
the MHC and the Bank with respect to such matters.
(xxiv) The Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing
under the laws of the State of Kansas with corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus; the Foundation is
not a savings and loan holding company within the meaning of 12
C.F.R. Section 574.2(q) as a result of the issuance of the
Foundation Shares to it in accordance with the terms of the Plan
and in the amounts as described in the Prospectus; no approvals
are required to establish the Foundation and to contribute the
Foundation Shares and cash amounts thereto as described in the
Prospectus other than those set forth in the OTS' approval order;
the Foundation Shares to be issued to the Foundation in
accordance with the Plan and as described in the Prospectus will
have been duly
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authorized for issuance and, when issued and contributed by the
Company pursuant to the Plan, will be duly and validly issued and
fully paid and non-assessable.
In addition, such counsel shall state that during the
preparation of the MHC Application, the MHC Notice, the
Registration Statement and the Prospectus, they participated in
conferences with certain officers of, the independent public and
internal accountants for, and other representatives of the
Company, the MHC and the Bank, at which conferences the contents
of the MHC Application, the MHC Notice, the Registration
Statement and the Prospectus and related matters were discussed
and, while such counsel have not confirmed the accuracy or
completeness of or otherwise verified the information contained
in the MHC Application, the MHC Notice, the Registration
Statement or the Prospectus, and do not assume any responsibility
for such information, based upon such conferences and a review of
documents deemed relevant for the purpose of rendering their view
(relying as to materiality as to factual matters on certificates
of officers and other factual representations by the Company, the
MHC and the Bank), nothing has come to their attention that would
lead them to believe that the MHC Application, the MHC Notice,
the Registration Statement, the Prospectus, or any amendment or
supplement thereto (other than the financial statements, the
notes thereto, and other tabular, financial, statistical and
appraisal data included therein as to which no view need be
rendered) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
In giving such opinion, such counsel may rely as to all matters
of fact on certificates of officers or directors of the Company, the
MHC and the Bank and certificates of public officials. Such counsel's
opinion shall be limited to matters governed by federal banking and
securities laws. The opinion of Silver Freedman & Taff, L.L.P. shall
be governed by the Legal Opinion Accord ("Accord") of the American Bar
Association Section of Business Law (1991). The term "Actual
Knowledge" as used herein shall have the meaning set forth in the
Accord. For purposes of such opinion, no proceedings shall be deemed
to be pending, no order or stop order shall be deemed to be issued,
and no action shall be deemed to be instituted unless, in each case, a
director or executive officer of the Company, the MHC or the Bank
shall have received a copy of such proceedings, order, stop order or
action. In addition, such opinion may be limited to present statutes,
regulations and judicial interpretations and to facts as they
presently exist; in rendering such opinion, such counsel need assume
no obligation to revise or supplement it should the present laws be
changed by legislative or regulatory action, judicial decision or
otherwise; and such counsel need express no view, opinion or belief
with respect to whether any proposed or pending legislation, if
enacted, or
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any proposed or pending regulations or policy statements issued by any
regulatory agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the Reorganization or any
aspect thereof. Such counsel may assume that any agreement is the
valid and binding obligation of any parties to such agreement other
than the Company, the MHC or the Bank.
The favorable opinion, dated as of the Closing Date and addressed
to the Agent and for their benefit, of the Bank's local counsel, in
form and substance to the effect that, to the best of such counsel's
knowledge, (i) the Company, the MHC and the Bank have good and
marketable title to all properties and assets which are material to
the business of the Company, the MHC and the Bank and to those
properties and assets described in the Registration Statement and
Prospectus, as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Registration Statement and Prospectus, or are not material in relation
to the business of the Company, the MHC and the Bank considered as one
enterprise; (ii) all of the leases and subleases material to the
business of the Company, the MHC and the Bank under which the Company,
the MHC and the Bank hold properties, as described in the Registration
Statement and Prospectus, are in full force and effect; and (iii) the
Bank is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which its ownership of
property or leasing of property or the conduct of its business
requires such qualification, unless the failure to be so qualified in
one or more of such jurisdictions would not have a material adverse
effect on the condition, financial or otherwise, or the business,
operations or income of the Bank.
(d) At the Closing Date, the Agent shall have received the favorable
opinion, dated as of the Closing Date, of Elias, Matz, Tiernan &
Herrick, L.L.P., the Agent's counsel, with respect to such matters as
the Agent may reasonably require. Such opinion may rely upon the
opinions of counsel to the Company, the MHC and the Bank, and as to
matters of fact, upon certificates of officers and directors of the
Company, the MHC and the Bank delivered pursuant hereto or as such
counsel shall reasonably request.
(e) At the Closing Date, the Agent shall receive a certificate of the
Chief Executive Officer and the Principal Financial and/or Accounting
Officer of the Company, the MHC and the Bank in form and substance
reasonably satisfactory to the Agent's Counsel, dated as of such
Closing Date, to the effect that: (i) they have carefully reviewed the
Prospectus and, in their opinion, at the time the Prospectus became
authorized for final use, the Prospectus did not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; (ii) since
the date the Prospectus became authorized for final use, no event has
occurred which should have been set forth in an amendment or
supplement to the Prospectus which has not been so set forth,
including specifically, but without limitation, any material adverse
change in the condition, financial or otherwise, or in the earnings,
capital, properties or business of the Company,
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the MHC or the Bank, and the conditions set forth in this Section 7
have been satisfied; (iii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, capital or properties of the
Company, the MHC or the Bank, independently, or of the Company, the
MHC and the Bank, considered as one enterprise, whether or not arising
in the ordinary course of business; (iv) the representations and
warranties in Section 4 are true and correct with the same force and
effect as though expressly made at and as of the Closing Date; (v) the
Company, MHC and the Bank have complied in all material respects with
all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to the Closing Date and will comply
in all material respects with all obligations to be satisfied by them
after the Reorganization; (vi) no stop order suspending the
effectiveness of the Registration Statement has been initiated or, to
the best knowledge of the Company, the MHC or the Bank, threatened by
the Commission or any state authority; (vii) no order suspending the
Offering, the Reorganization, the acquisition of all of the shares of
the Bank by the Company or the effectiveness of the Prospectus has
been issued and no proceedings for that purpose are pending or, to the
best knowledge of the Company, the MHC or the Bank, threatened by the
OTS, the Commission, the FDIC, or any state authority; and (viii) to
the best knowledge of the Company, the MHC or the Bank, no person has
sought to obtain review of the final action of the OTS approving the
Plan.
(f) Prior to and at the Closing Date: (i) in the reasonable opinion of the
Agent, there shall have been no material adverse change in the
condition, financial or otherwise, or in the earnings or business of
the Company, the MHC or the Bank independently, or of the Company, the
MHC and the Bank, considered as one enterprise, from that as of the
latest dates as of which such condition is set forth in the Prospectus
other than transactions referred to or contemplated therein; (ii) the
Company, the MHC or the Bank shall not have received from the OTS or
the FDIC any direction (oral or written) to make any material change
in the method of conducting their business with which it has not
complied (which direction, if any, shall have been disclosed to the
Agent) or which materially and adversely would affect the business,
operations or financial condition or income of the Company, the MHC
and the Bank taken as a whole; (iii) the Company, the MHC and the Bank
shall not have been in default (nor shall an event have occurred
which, with notice or lapse of time or both, would constitute a
default) under any provision of any agreement or instrument relating
to any outstanding indebtedness; (iv) no action, suit or proceeding,
at law or in equity or before or by any federal or state commission,
board or other administrative agency, shall be pending or, to the
knowledge of the Company, the MHC or the Bank, threatened
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against the Company, the MHC or the Bank or affecting any of their
properties wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, operations, financial
condition or income of the Company, the MHC and the Bank taken as a
whole; and (v) the Shares have been qualified or registered for
offering and sale or exempted therefrom under the securities or blue
sky laws of the jurisdictions as the Agent shall have reasonably
requested and as agreed to by the Company, the MHC and the Bank.
(g) Concurrently with the execution of this Agreement, the Agent shall
receive a letter from Deloitte & Touche LLP dated as of the date of
the Prospectus and addressed to the Agent: (i) confirming that
Deloitte & Touche LLP is a firm of independent public accounts within
the meaning of Rule 101 of the Code of Professional Ethics of the
American Institute of Certified Public Accountants and applicable
regulations of the OTS and stating in effect that in its opinion the
consolidated financial statements, schedules and related notes of the
Bank as of September 30, 1998 and 1997 and for each of the three years
in the period ended September 30, 1997, as are included in the
Prospectus and covered by their opinion included therein, comply as to
form in all material respects with the applicable accounting
requirements and related published rules and regulations of the OTS
and the 1933 Act; (ii) stating in effect that, on the basis of certain
agreed upon procedures (but not an audit in accordance with generally
accepted auditing standards) consisting of a reading of the latest
available unaudited interim consolidated financial statements of the
Bank prepared by the Bank, a reading of the minutes of the meetings of
the Board of Directors and members of the Bank and consultations with
officers of the Bank responsible for financial and accounting matters,
nothing came to their attention which caused them to believe that: (A)
the unaudited financial statements included in the Prospectus are not
in conformity with the 1933 Act, applicable accounting requirements of
the OTS and generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements included in the Prospectus; or (B) during the period from
the date of the latest unaudited consolidated financial statements
included in the Prospectus to a specified date not more than three
business days prior to the date of the Prospectus, except as has been
described in the Prospectus, there was any increase in borrowings,
other than normal deposit fluctuations, by the Bank; or (c) there was
any decrease in the consolidated net assets of the Bank at the date of
such letter as compared with amounts shown in the latest unaudited
consolidated statement of condition included in the Prospectus; and
(iii) stating that, in addition to the audit referred to in their
opinion included in the Prospectus and the performance of the
procedures referred to in clause (ii) of this subsection (f), they
have compared with the general accounting
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records of the Bank, which are subject to the internal controls of the
Bank, the accounting system and other data prepared by the Bank,
directly from such accounting records, to the extent specified in such
letter, such amounts and/or percentages set forth in the Prospectus as
the Agent may reasonably request; and they have reported on the
results of such comparisons.
(h) At the Closing Date, the Agent shall receive a letter dated the
Closing Date, addressed to the Agent, confirming the statements made
by Deloitte & Touche LLP in the letter delivered by it pursuant to
subsection (f) of this Section 7, the "specified date" referred to in
clause (ii) of subsection (f) thereof to be a date specified in such
letter, which shall not be more than three business days prior to the
Closing Date.
(i) At the Closing Date, the Agent shall receive a letter from RP
Financial LC, dated the date thereof and addressed to counsel for the
Agent (i) confirming that said firm is independent of the Company, the
MHC and the Bank and is experienced and expert in the area of
corporate appraisals within the meaning of Title 12 of the Code of
Federal Regulations, Section 563b.7(f)(1)(i), (ii) stating in effect
that the Appraisal prepared by such firm complies in all material
respects with the applicable requirements of Title 12 of the Code of
Federal Regulations, and (iii) further stating that their opinion of
the aggregate pro forma market value of the Company, the MHC and the
Bank expressed in their Appraisal dated as of November 20, 1998, and
most recently updated, remains in effect.
(j) The Company, the MHC and the Bank shall not have sustained since the
date of the latest financial statements included in the Prospectus any
material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Registration
Statement and Prospectus and since the respective dates as of which
information is given in the Registration Statement and Prospectus,
there shall not have been any change in the long- term debt of the
Company, the MHC or the Bank other than debt incurred in relation to
the purchase of Shares by the Bank's Eligible Plans, or any change, or
any development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company or the Bank, otherwise than as
set forth or contemplated in the Registration Statement and
Prospectus, the effect of which, in any such case described above, is
in Webb's reasonable judgment sufficiently material and adverse as to
make it impracticable or inadvisable to proceed with the Subscription
Offering or the delivery of the Shares on the terms and in the manner
contemplated in the Prospectus.
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(k) At or prior to the Closing Date, the Agent shall receive: (i) a copy
of the letters from the OTS approving the MHC Application and the MHC
Notice and authorizing the use of the Prospectus; (ii) a copy of the
order from the Commission declaring the Registration Statement
effective; (iii) certificate of good standing from the OTS evidencing
the good standing of the Company; (iv) a certificate from the FDIC
evidencing the Bank's insurance of accounts; (v) a certificate of the
FHLB-Topeka evidencing the Bank's membership thereof; (vi) a copy of
the letter from the OTS approving the Company's Holding Company
Application; (vii) a copy of the Bank's federal stock charter; and
(viii) a copy of the Company's federal charter; and (viii) a copy of
the MHC's federal charter.
(l) Subsequent to the date hereof, there shall not have occurred any of
the following: (i) a suspension or limitation in trading in securities
generally on the New York Stock Exchange or in the over-the-counter
market, or quotations halted generally on the Nasdaq Stock Market, or
minimum or maximum prices for trading have been fixed, or maximum
ranges for prices for securities have been required by either of such
exchanges or the NASD or by order of the Commission or any other
governmental authority; (ii) a general moratorium on the operations of
commercial banks, federal savings institutions or a general moratorium
on the withdrawal of deposits from commercial banks or federal savings
institutions declared by federal authorities; (iii) the engagement by
the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or
war; or (iv) a material decline in the price of equity or debt
securities if the effect of such a declaration or decline, in the
Agent's reasonable judgement, makes it impracticable or inadvisable to
proceed with the Offering or the delivery of the shares on the terms
and in the manner contemplated in the Registration Statement and the
Prospectus.
(m) At or prior to the Closing Date, counsel to the Agent shall have been
furnished with such documents and opinions as they may reasonably
require for the purpose of enabling them to pass upon the sale of the
Shares and the issuance of the Foundation Shares as herein
contemplated and related proceedings or in order to evidence the
occurrence or completeness of any of the representations or
warranties, or the fulfillment of any of the conditions, herein
contained; and all proceedings taken by the Company, the MHC or the
Bank in connection with the Reorganization and the sale of the Shares
and the issuance of the Foundation Shares as herein contemplated shall
be satisfactory in form and substance to Webb and its counsel.
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Section 8. Indemnification.
(a) The Company, the MHC and the Bank jointly and severally agree to
indemnify and hold harmless the Agent, its respective officers and
directors, employees and agents, and each person, if any, who controls
the Agent within the meaning of Section 15 of the 1933 Act or Section
20(a) of the 1934 Act, against any and all loss, liability, claim,
damage or expense whatsoever (including but not limited to settlement
expenses), joint or several, that the Agent or any of them may suffer
or to which the Agent and any such persons may become subject under
all applicable federal or state laws or otherwise, and to promptly
reimburse the Agent and any such persons upon written demand for any
expense (including reasonable fees and disbursements of counsel)
incurred by the Agent or any of them in connection with investigating,
preparing or defending any actions, proceedings or claims (whether
commenced or threatened) to the extent such losses, claims, damages,
liabilities or actions: (i) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment or supplement thereto),
preliminary or final Prospectus (or any amendment or supplement
thereto), the MHC Application (or any amendment or supplement
thereto), the MHC Notice (or any amendment or supplement thereto) the
Holding Company Application or any instrument or document executed by
the Company, the MHC or the Bank or based upon written information
supplied by the Company, the MHC or the Bank filed in any state or
jurisdiction to register or qualify any or all of the Shares or to
claim an exemption therefrom, or provided to any state or jurisdiction
to exempt the Company as a broker-dealer or its officers, directors
and employees as broker-dealers or agent, under the securities laws
thereof (collectively, the "Blue Sky Application"), or any document,
advertisement, oral statement or communication ("Sales Information")
prepared, made or executed by or on behalf of the Company, the MHC or
the Bank with their consent or based upon written or oral information
furnished by or on behalf of the Company, the MHC or the Bank, whether
or not filed in any jurisdiction, in order to qualify or register the
Shares or to claim an exemption therefrom under the securities laws
thereof; (ii) arise out of or are based upon the omission or alleged
omission to state in any of the foregoing documents or information, a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; or (iii) arise from any theory of liability
whatsoever relating to or arising from or based upon the Registration
Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the MHC
Application (or any amendment or supplement thereto), the MHC Notice
(or any amendment or
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supplement thereto), the Holding Company Application, any Blue Sky
Application or Sales Information or other documentation distributed in
connection with the Reorganization; provided, however, that no
indemnification is required under this paragraph (a) to the extent
such losses, claims, damages, liabilities or actions arise out of or
are based upon any untrue material statement or alleged untrue
material statement in, or material omission or alleged material
omission from, the Registration Statement (or any amendment or
supplement thereto), preliminary or final Prospectus (or any amendment
or supplement thereto), the MHC Application (or any amendment or
supplement thereto), the MHC Notice (or any amendment or supplement
thereto), the Holding Company Application, any Blue Sky Application or
Sales Information made in reliance upon and in conformity with
information furnished in writing to the Company, the MHC or the Bank
by the Agent or its counsel regarding the Agent provided, that it is
agreed and understood that the only information furnished in writing
to the Company, the MHC or the Bank by the Agent regarding the Agent
is set forth in the Prospectus under the caption "The Reorganization
and Stock Issuance--Marketing Arrangements"; and, provided further,
that such indemnification shall be to the extent permitted by the
Commissioner, the OTS, the FDIC and the Board of Governors of the
Federal Reserve. The indemnification provided for in this paragraph
(a) shall not be applicable with respect to any loss, liability,
claim, damage, or expense whatsoever if it is determined by final
judgment of a court having jurisdiction over the matter that such
loss, liability, claim, damage or expense was primarily a result of
the Agent's willful misconduct or gross negligence.
(b) The Agent agrees to indemnify and hold harmless the Company, the MHC
and the Bank, their directors and officers and each person, if any,
who controls the Company, the MHC or the Bank within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against
any and all loss, liability, claim, damage or expense whatsoever
(including but not limited to settlement expenses), joint or several,
which they, or any of them, may suffer or to which they, or any of
them may become subject under all applicable federal and state laws or
otherwise, and to promptly reimburse the Company, the MHC, the Bank,
and any such persons upon written demand for any expenses (including
reasonable fees and disbursements of counsel) incurred by them, or any
of them, in connection with investigating, preparing or defending any
actions, proceedings or claims (whether commenced or threatened) to
the extent such losses, claims, damages, liabilities or actions: (i)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement
(or any amendment or supplement thereto), the MHC Application (or any
amendment or supplement thereto), the MHC Notice (as any amendment or
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supplement thereto), the Holding Company Application, the preliminary
or final Prospectus (or any amendment or supplement thereto), any Blue
Sky Application or Sales Information, (ii) are based upon the omission
or alleged omission to state in any of the foregoing documents a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or (iii) arise from any theory of liability
whatsoever relating to or arising from or based upon the Registration
Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the MHC
Application (or any amendment or supplement thereto), the Holding
Company Application, or any Blue Sky Application or Sales Information
or other documentation distributed in connection with the
Reorganization; provided, however, that the Agent's obligations under
this Section 8(b) shall exist only if and only to the extent (i) that
such untrue statement or alleged untrue statement was made in, or such
material fact or alleged material fact was omitted from, the
Registration Statement (or any amendment or supplement thereto), the
preliminary or final Prospectus (or any amendment or supplement
thereto), the MHC Application (or any amendment or supplement
thereto), the MHC Notice (or any amendment or supplement thereto), or
any Blue Sky Application or Sales Information in reliance upon and in
conformity with information furnished in writing to the Company, the
MHC or the Bank by the Agent or its counsel regarding the Agent,
provided, that it is agreed and understood that the only information
furnished in writing to the Company, the MHC or the Bank by the Agent
regarding the Agent is set forth in the Prospectus under the caption
"The Reorganization and Stock Issuance--Marketing Arrangements". The
indemnification provided for in this Section 8 (b) shall not be
applicable with respect to any loss, liability, claim, damage, or
expense whatsoever if it is determined by final judgment of a court
having jurisdiction over the matter that such loss, liability, claim,
damage or expense was primarily a result of the Company's, the MHC's
or the Bank's willful misconduct or gross negligence.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced
or threatened), or suit instituted against it in respect of which
indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve it from any liability which it
may have on account of this Section 8 or otherwise. An indemnifying
party may participate at its own expense in the defense of such
action. In addition, if it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume defense of such
action with counsel chosen by it and approved by the indemnified
parties that
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are defendants in such action, unless such indemnified parties
reasonably object to such assumption on the ground that there may be
legal defenses available to them that are different from or in
addition to those available to such indemnifying party. If an
indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of
counsel for the indemnified parties incurred thereafter in connection
with such action, proceeding or claim, other than reasonable costs of
investigation. In no event shall the indemnifying parties be liable
for the fees and expenses of more than one separate firm of attorneys
(and any special counsel that said firm may retain) for each
indemnified party in connection with any one action, proceeding or
claim or separate but similar or related actions, proceedings or
claims in the same jurisdiction arising out of the same general
allegations or circumstances.
(d) The agreements contained in this Section 8 and in Section 9 hereof and
the representations and warranties of the Company, the MHC and the
Bank set forth in this Agreement shall remain operative and in full
force and effect regardless of: (i) any investigation made by or on
behalf of agent or their officers, directors or controlling persons,
agent or employees or by or on behalf of the Company, the MHC or the
Bank or any officers, directors or controlling persons, agent or
employees of the Company, the MHC or the Bank; (ii) delivery of and
payment hereunder for the Shares; or (iii) any termination of this
Agreement.
Section 9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the MHC, the Bank or the Agent, the
Company, the MHC, the Bank and the Agent shall contribute to the aggregate
losses, claims, damages and liabilities (including any investigation, legal and
other expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding of any claims asserted, but after deducting
any contribution received by the Company, the MHC, the Bank or the Agent from
persons other than the other party thereto, who may also be liable for
contribution) in such proportion so that the Agent is responsible for that
portion represented by the percentage that the fees paid to the Agent pursuant
to Section 2 of this Agreement (not including expenses) bears to the gross
proceeds received by the Company from the sale of the Shares in the Offering,
and the Company, the MHC and the Bank shall be responsible for the balance. If,
however, the allocation provided above is not permitted by applicable law or if
the indemnified party failed to give the notice required under Section 8 above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative fault of the Company, the MHC and the Bank on the one hand and the
Agent on the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities (or actions, proceedings or
claims in respect thereto), but also the relative benefits received by the
Company, the MHC and the Bank on the one hand and the Agent on the other from
the
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Offering (before deducting expenses). The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the MHC and/or the Bank on the
one hand or the Agent on the other and the parties' relative intent, good faith,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the MHC, the Bank and the Agent agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by pro-rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to above
in this Section 9. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions, proceedings or
claims in respect thereof) referred to above in this Section 9 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action, proceeding
or claim. It is expressly agreed that the Agent shall not be liable for any
loss, liability, claim, damage or expense or be required to contribute any
amount which in the aggregate exceeds the amount paid (excluding reimbursable
expenses) to the Agent under this Agreement. It is understood that the above
stated limitation on the Agent's liability is essential to the Agent and that
the Agent would not have entered into this Agreement if such limitation had not
been agreed to by the parties to this Agreement. No person found guilty of any
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not found guilty
of such fraudulent misrepresentation. The obligations of the Company, the MHC
and the Bank under this Section 9 and under Section 8 shall be in addition to
any liability which the Company and the Bank may otherwise have. For purposes of
this Section 9, each of the Agent's, the Company's, the MHC or the Bank's
officers and directors and each person, if any, who controls the Agent or the
Company or the MHC or the Bank within the meaning of the 1933 Act and the 1934
Act shall have the same rights to contribution as the Agent, the Company, the
MHC or the Bank. Any party entitled to contribution, promptly after receipt of
notice of commencement of any action, suit, claim or proceeding against such
party in respect of which a claim for contribution may be made against another
party under this Section 9, will notify such party from whom contribution may be
sought, but the omission to so notify such party shall not relieve the party
from whom contribution may be sought from any other obligation it may have
hereunder or otherwise than under this Section 9.
Section 10. Survival of Agreements, Representations and Indemnities. The
respective indemnities of the Company, the MHC, the Bank and the Agent and the
representations and warranties and other statements of the Company, the MHC, the
Bank and the Agent set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of the Agent, the Company,
the MHC, the Bank or any controlling person referred to in Section 8 hereof, and
shall survive the issuance of the Shares, and any successor or assign of the
Agent, the Company, the MHC, the Bank, and any such controlling person shall be
entitled to the benefit of the respective agreements, indemnities, warranties
and representations.
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Section 11. Termination. The Agent may terminate this Agreement by giving
the notice indicated below in this Section 11 at any time after this Agreement
becomes effective as follows:
(a) In the event the Company fails to sell the required minimum number of
the Shares by June 30, 1999, and in accordance with the provisions of
the Plan or as required by the MHC Regulations, and applicable law,
this Agreement shall terminate upon refund by the Company to each
person who has subscribed for or ordered any of the Shares the full
amount which it may have received from such person, together with
interest as provided in the Prospectus, and no party to this Agreement
shall have any obligation to the other hereunder, except for payment
by the Company, the MHC and/or the Bank as set forth in Sections 2(a),
6, 8 and 9 hereof.
(b) If any of the conditions specified in Section 7 shall not have been
fulfilled when and as required by this Agreement unless waived in
writing, or by the Closing Date, this Agreement and all of the Agent's
obligations hereunder may be cancelled by the Agent by notifying the
Company, the MHC and the Bank of such cancellation in writing or by
telegram at any time at or prior to the Closing Date, and any such
cancellation shall be without liability of any party to any other
party except as otherwise provided in Sections 2(a), 6, 8 and 9
hereof.
(c) If the Agent elects to terminate this Agreement as provided in this
Section, the Company, the MHC and the Bank shall be notified promptly
by telephone or telegram, confirmed by letter.
The Company, the MHC and the Bank may terminate this Agreement in the event
the Agent is in material breach of the representations and warranties or
covenants contained in Section 5 and such breach has not been cured after the
Company, the MHC and the Bank have provided Webb with notice of such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
Section 12. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to the
Agent shall be mailed, delivered or telegraphed and confirmed to Charles Webb &
Company, a Division of Keefe, Bruyette & Woods, Inc., 211 Bradenton, Dublin,
Ohio 43017- 3514, Attention: Patricia A. McJoynt, Executive Vice President (with
a copy to Elias, Matz, Tiernan & Herrick, L.L.P., Attention: Kevin M. Houlihan,
Esq.) and, if sent to the Company, the MHC and the Bank, shall be mailed,
delivered or telegraphed and confirmed to the Company, the MHC and the Bank at
700 Kansas Avenue, Topeka, Kansas 66601, Attention: John B. Dicus, President
(with a copy to Silver, Freedman & Taff, L.L.P., Attention: James S. Fleischer,
Esq.).
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Section 13. Parties. The Company, the MHC and the Bank shall be entitled to
act and rely on any request, notice, consent, waiver or agreement purportedly
given on behalf of the Agent when the same shall have been given by the
undersigned. The Agent shall be entitled to act and rely on any request, notice,
consent, waiver or agreement purportedly given on behalf of the Company, the MHC
or the Bank, when the same shall have been given by the undersigned or any other
officer of the Company, the MHC or the Bank. This Agreement shall inure solely
to the benefit of, and shall be binding upon, the Agent, the Company, the MHC,
the Bank, and their respective successors and assigns, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provision herein
contained. It is understood and agreed that this Agreement is the exclusive
agreement among the parties hereto, and supersedes any prior agreement among the
parties and may not be varied except in writing signed by all the parties.
Section 14. Closing. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by the Agent
and the Company, the MHC and the Bank. At the closing, the Company, the MHC and
the Bank shall deliver to the Agent in next day funds the commissions, fees and
expenses due and owing to the Agent as set forth in Sections 2 and 6 hereof and
the opinions and certificates required hereby and other documents deemed
reasonably necessary by the Agent shall be executed and delivered to effect the
sale of the Shares as contemplated hereby and pursuant to the terms of the
Prospectus.
Section 15. Partial Invalidity. In the event that any term, provision or
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
Section 16. Construction. This Agreement shall be construed in accordance
with the laws of the State of Kansas.
Section 17. Counterparts. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
If the foregoing correctly sets forth the arrangement among the Company,
the MHC, the Bank and the Agent, please indicate acceptance thereof in the space
provided below for that purpose, whereupon this letter and the Agent's
acceptance shall constitute a binding agreement.
Section 18. Entire Agreement. This Agreement, including schedules and
exhibits hereto, which are integral parts hereof and incorporated as though set
forth in full, constitutes the entire agreement between the parties pertaining
to the subject matter hereof superseding any and all prior or contemporaneous
oral or prior written agreements, proposals, letters of intent and
understandings,
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and cannot be modified, changed, waived or terminated except by a writing which
expressly states that it is an amendment, modification or waiver, refers to this
Agreement and is signed by the party to be charged. No course of conduct or
dealing shall be construed to modify, amend or otherwise affect any of the
provisions hereof.
Very truly yours,
CAPITOL FEDERAL FINANCIAL CAPITOL FEDERAL SAVINGS
AND LOAN ASSOCIATION
By Its Authorized Representative: By Its Authorized Representative:
- --------------------------------- ---------------------------------
John C. Dicus John C. Dicus
Chairman Chairman
CAPITOL FEDERAL SAVINGS, MHC
By Its Authorized Representative:
- ---------------------------------
John C. Dicus
Chairman
Accepted as of the date first above written
Charles Webb & Company, a Division
Keefe, Bruyette & Woods, Inc.
By Its Authorized Representative:
- ---------------------------------
Patricia A. McJoynt
Executive Vice President
44
Exhibit 2
AMENDED PLAN OF REORGANIZATION
AND STOCK ISSUANCE PLAN
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
TOPEKA, KANSAS
as adopted on:
August 25, 1998
<PAGE>
AMENDED PLAN OF REORGANIZATION
AND STOCK ISSUANCE PLAN OF
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
I. Introduction.............................................................................................1
II. Definitions..............................................................................................2
III. Plan of Reorganization...................................................................................6
A. Certain Effects of Reorganization...............................................................7
B. Conditions to Implementation of Reorganization..................................................9
C. Special Meeting of Members.....................................................................10
D. Rights of Members of the MHC...................................................................10
E. Conversion of MHC to Stock Form................................................................11
F. Timing of the Reorganization and Sale of Capital Stock.........................................12
G. Number of Shares to Be Offered.................................................................12
H. Independent Valuation and Purchase Price of Shares.............................................13
I. Stock Issuance Procedure.......................................................................14
J. Subscription Rights............................................................................14
K. Public Offering and Direct Community Offering..................................................16
L. Additional Limitations Upon Purchases of Shares of Stock Holding
Company Common Stock.........................................................................18
M. Restrictions and Other Characteristics of Stock Holding Company
Common Stock Being Sold......................................................................19
N. Exercise of Subscription Rights; Order Forms...................................................19
O. Method of Payment..............................................................................21
P. Undelivered Defective or Late Order Form; Insufficient Payment.................................21
Q. Payment of Dividends and Repurchase of Stock...................................................22
R. Completion of the Stock Offering...............................................................22
S. Securities Registration and Market Making......................................................22
T. Stock Purchases by Directors and Officers After the Offering...................................22
U. Establishment and Funding of Charitable Foundation.............................................23
V. Stock Benefit Plans............................................................................23
W. Employment and Other Severance Agreements......................................................24
X. Expenses of Reorganization.....................................................................24
Y. Interpretation.................................................................................24
Z. Amendment or Termination of the Plan...........................................................24
</TABLE>
<PAGE>
I. Introduction
On August 25, 1998, the Board of Directors of Capitol Federal Savings
and Loan Association, Topeka, Kansas, (the "Association") unanimously adopted
this Amended Plan of Reorganization and Stock Issuance Plan (the "Plan")
pursuant to which the Association proposes to reorganize from a
federally-chartered mutual savings and loan association into a
federally-chartered mutual holding company structure (the "Reorganization")
pursuant to the laws of the United States of America and the rules and
regulations of the Office of Thrift Supervision ("OTS"). The Mutual Holding
Company ("MHC") will be owned by, and exclusive voting rights will be vested in,
the members of the Association. As part of the Reorganization and the Plan, the
Association will convert to a federal stock savings and loan association (the
"Stock Association") and will establish a federal stock holding company (the
"Stock Holding Company") which will be a majority-owned subsidiary of the MHC at
all times so long as the MHC structure is maintained. As part of the
Reorganization and concurrently with it, the Stock Holding Company intends to
undertake a stock issuance through the offering of up to 49.9% of its to be
outstanding common stock (the "Stock Offering").
The remaining common stock to be outstanding will be issued to the MHC. The
corporate name of the Stock Association and the Stock Holding Company will be
determined by the Board of Directors of the Association and the principal office
of each will be located in Topeka, Kansas.
The Offering provides that non-transferable subscription rights to
purchase Stock Holding Company Common Stock will be offered first to Eligible
Account Holders of record as of the Eligibility Record Date, then to the
Association's Tax-Qualified Employee Plans, then to Supplemental Eligible
Account Holders of record as of the Supplemental Eligibility Record Date, then
to Other Members, and then to directors, officers and employees of the
Association. Concurrently with, at any time during, or promptly after the
Subscription Offering, and on a lowest priority basis, an opportunity to
subscribe may also be offered to the general public in a Direct Community
Offering or a Public Offering. The price of the Stock Holding Company Common
Stock will be based upon an independent appraisal of the Association. The
primary purpose of the Reorganization is to establish a holding company and
stock savings association charter which will enable the Association to expand
and compete more effectively in the financial services industry.
The Reorganization will structure the Association in the stock form
used by commercial banks, most major business corporations and a majority of
savings institutions. In addition, the use of the holding company structure will
provide greater organizational and operating flexibility to the Association.
Moreover, the formation of a mutual holding company will allow the MHC and/or
the Stock Holding Company to borrow funds, on a secured or unsecured basis, and
to issue debt to the public or in a private placement. The proceeds of such
borrowings or debt offering could be contributed to the Stock Association to
increase its capital or could be used by the MHC and/or the Stock Holding
Company for other purposes. There are currently no plans to issue debt or borrow
funds by the MHC or the Stock Holding Company. The Reorganization will also ease
any transition to a uniform charter should such a charter be required in the
future.
The Association is also expected to benefit from its management and
other personnel having a stock ownership in its business, since stock ownership
is viewed as an effective performance incentive and a means of attracting,
retaining and compensating management and other personnel. No change will be
made in the Board of Directors or management as a result of the Reorganization.
In furtherance of the Association's long term commitment to its
community, the Stock Association and the Stock Holding Company will make a
donation to a charitable foundation established by the Association, in cash and
common stock, in an amount equal to up to 8% of the aggregate value of the
Common Stock issued in the Subscription Offering. Under the terms of the
Reorganization, this donation will be subject to the approval of the voting
members of the Association. In the event that the donation is not approved, the
Association may determine to complete the Reorganization without the donation.
<PAGE>
The Reorganization is subject to the approval of the OTS and the
affirmative vote of a majority of the total votes eligible to be cast by Voting
Members of the Association.
II. Definitions
As used in this Plan, the terms set forth below have the following
meanings:
Account(s): Withdrawable deposit(s) in the Association, including
certificates of deposit.
Acting in Concert: The term "acting in concert" shall have the same
meaning given it in ss.574.2(c) of the Regulations of the OTS. The determination
of whether a group is acting in concert shall be made solely by the Board of
Directors of the Association or officers delegated by such Board of Directors
and may be based on any evidence upon which such board or delegatee chooses to
rely.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a
specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Associate: The term "associate," when used to indicate a relationship
with any Person, means: (i) any corporation or organization (other than the
Association, the Stock Holding Company, the MHC or a majority-owned subsidiary
of any of them) of which such Person is a director, officer or partner or is,
directly or indirectly, the beneficial owner of ten percent or more of any class
of equity securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, (iii) any relative or spouse of such Person, or
any relative of such spouse, who has the same home as such Person or who is a
Director or Officer of the Association, the MHC, the Stock Holding Company or
any subsidiary of the MHC or the Stock Holding Company or any affiliate thereof;
and (iv) any person acting in concert with any of the persons or entities
specified in clauses (i) through (iii) above; provided, however, that any
Tax-Qualified or Non-Tax-Qualified Employee Plan shall not be deemed to be an
associate of any Director or Officer of the Association, the MHC or the Stock
Holding Company, to the extent provided herein. When used to refer to a Person
other than an Officer or Director of the Association, the Association in its
sole discretion may determine the Persons that are Associates of other Persons.
Association: Capitol Federal Savings and Loan Association, in its
current mutual form of organization.
Capital Stock: Any and all authorized stock of the Stock Holding
Company or the Stock Association.
Common Stock: Common stock, par value $.01 per share, issued by the
Stock Holding Company simultaneously with the Reorganization, pursuant to its
stock charter.
Deposit Account: Any withdrawable or repurchasable account or deposit
in the Association including Savings Accounts and demand accounts.
Depositor: Any person holding an Account in the Association.
Direct Community Offering: The offering to the general public of any
unsubscribed shares which may be effected as provided in Section III hereof.
Director: A member of the Board of Directors of the Association and,
where applicable, a member of the Board of Directors of the MHC and the Stock
Holding Company.
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<PAGE>
Effective Date: The effective date of the Reorganization which shall be
the date of consummation of the Reorganization and Stock Offering in accordance
with this Plan and all applicable approvals.
Eligible Account Holder: Any Person holding a Qualifying Deposit in the
Association on the Eligibility Record Date.
Eligibility Record Date: The close of business on June 30, 1997.
Employee: A person who is employed by the Association on the Effective
Date.
ESOP: The Association's employee stock ownership plan.
Exchange Act: The Securities Exchange Act of 1934, as amended.
FDIC: The Federal Deposit Insurance Corporation.
Foundation: Capitol Federal Savings & Loan Association Charitable
Foundation.
HOLA: The Home Owner's Loan Act, as amended.
Holding Company Application: The Application to be submitted by the
Stock Holding Company to the OTS to have the Stock Holding Company acquire the
common stock of the Stock Association.
Independent Appraiser: The appraiser retained by the Association to
prepare an appraisal of the pro forma market value of the Association and the
Stock Holding Company.
Market Maker: A dealer (i.e., any Person who engages directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
Marketing Agent: The broker-dealer responsible for organizing and
managing the Stock Offering and sale of the Common Stock.
Members: Any person or entity that is entitled under the Charter of the
Association to vote on matters affecting the Association.
MHC: Capitol Federal, MHC, the mutual holding company established by
the Association incident to the Reorganization.
Minority Ownership Interest: The shares of the Stock Holding Company's
Common Stock owned by persons other than the MHC, expressed as a percentage of
the total shares of Stock Holding Company Common Stock outstanding.
Minority Stock Offering: One or more offerings of less than 50% in the
aggregate of the outstanding Common Stock of the Stock Holding Company to
persons other than the MHC.
Minority Stockholder: Any owner of the Stock Holding Company's Common
Stock, other than the MHC.
3
<PAGE>
Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of the Association or the Stock Holding Company, such as an
employee stock ownership plan, stock bonus plan, profit-sharing plan or other
plan, which with its related trust does not meet the requirements to be
"qualified" under Section 401 of the Internal Revenue Code.
Non-Voting Stock: Any Capital Stock other than Voting Stock.
Notice of Reorganization: The Notice of MHC Reorganization to be
submitted by the Association to the OTS to notify the OTS of the Reorganization.
OTS: Office of Thrift Supervision, Department of the Treasury, and its
successors.
Officer: An executive officer of the Association which includes the
Chairman, Chief Executive Officer, President, Executive Vice Presidents and
Senior Vice Presidents in charge of principal business functions, and any other
person participating in major policy making functions of the Association.
Order Form: Form to be used in the Subscription Offering to exercise
subscription rights.
Other Members: Members of the Association, other than Eligible Account
Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders,
as of the Voting Record Date.
Parent: A company that controls another company, either directly or
indirectly through one or more subsidiaries.
Person: Any individual, a corporation, a partnership, an association, a
joint-stock company, a trust (including Individual Retirement Accounts and KEOGH
Accounts), any unincorporated organization, a government or political
subdivision thereof or any other entity.
Plan: This Amended Plan of Reorganization and Stock Offering of the
Association as it exists on the date hereof and as it may hereafter be amended
in accordance with its terms.
Public Offering: The offering for sale through the Underwriters to
selected members of the general public of any shares of Stock Holding Company
Common Stock not subscribed for in the Subscription Offering or the Direct
Community Offering, if any.
Public Offering Price: The price per share at which any unsubscribed
shares of Stock Holding Company Common Stock are initially offered for sale in
the Public Offering.
Qualifying Deposit: The aggregate balance of $50 or more of each
Deposit Account of an Eligible Account Holder or of a Supplemental Eligible
Account Holder.
Regulations: The regulations of the OTS regarding mutual holding
companies.
Reorganization: Collectively, all steps necessary for the Association
to reorganize into the mutual holding company form of organization in accordance
with the Plan and the provisions of the HOLA and Part 575 of the OTS Regulations
for Savings Associations.
Residence: The terms "residence," "reside," "resided" or "residing" as
used herein with respect to any person shall mean any person who occupied a
dwelling in the communities in which the Association does business, has an
intent to remain with such communities for a period of time, and manifests the
genuineness of that intent by establishing an ongoing physical presence within
such communities together with an indication that such presence within such
communities is something other than merely transitory in
4
<PAGE>
nature. To the extent the Person is a corporation or other business entity, the
principal place of business or headquarters shall be in these communities. To
the extent a person is a personal benefit plan, the circumstances of the
beneficiary shall apply with respect to this definition. In the case of all
other benefit plans, the circumstances of the trustee shall be examined for
purposes of this definition. The Association may utilize deposit or loan records
or such other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
the sole discretion of the Association.
SAIF: The Savings Association Insurance Fund, which is administered by
the FDIC.
Savings Account: The term "Savings Account" means any withdrawable
account in the Association except a demand account.
SEC: United States Securities and Exchange Commission.
Special Meeting of Members: The special meeting and any adjournments
thereof held to consider and vote upon this Plan.
Stock Holding Company: The federal stock corporation, majority-owned by
the MHC, which is being formed for the purpose of initially owning 100% of the
common stock of the Stock Association.
Stock Offering: The offering of Common Stock of the Stock Holding
Company to Persons other than the MHC, in a Subscription Offering and, to the
extent shares remain available, in a Direct Community Offering or otherwise.
Stock Association: The newly organized federally-chartered stock
association subsidiary of the Stock Holding Company resulting from the
Reorganization.
Subscription Offering: The offering of Common Stock of the Stock
Holding Company for subscription and purchase pursuant to this Plan.
Subsidiary: Any company, a majority of whose voting stock is indirectly
or directly owned, controlled or held with power to vote by another company.
Tax-Qualified Employee Plans: Any defined benefit plan or defined
contribution plan of the Association or the Stock Holding Company, such as an
employee stock ownership plan stock bonus plan, profit-sharing plan or other
plan, which with its related trust meets the requirements to be "qualified"
under Section 401 of the Internal Revenue Code, as amended.
Underwriters: The investment banking firm or firms agreeing to offer
and sell Stock Holding Company Common Stock in the Public Offering.
Voting Members: Those persons eligible to vote at meetings of Members
of the Association pursuant to the Association's Charter and Bylaws.
Voting Record Date: The date established by the Board of Directors of
the Association in accordance with OTS regulations for determining eligibility
to vote at the Special Meeting of Members.
Voting Stock: 1. Common or preferred stock, or similar interests if the
shares by statute, charter or in any manner, entitle the holder to: (i) vote for
or to select directors of the Association or the Stock Holding Company; and (ii)
vote on or direct the conduct of the operations or other significant policies of
the Association or the Stock Holding Company.
5
<PAGE>
2. Notwithstanding anything in paragraph (1) above, preferred stock is
not "Voting Stock" if: (i) voting rights associated with the preferred stock are
limited solely to the type customarily provided by statute with regard to
matters that would significantly and adversely affect the rights or preferences
of the preferred stock, such as the issuance of additional amounts or classes of
senior securities, the modification of the terms of the preferred stock, the
dissolution of the Association, or the payment of dividends by the Association
when preferred dividends are in arrears; (ii) the preferred stock represents an
essentially passive investment or financing device and does not otherwise
provide the holder with control over the issuer; and (iii) the preferred stock
does not at the time entitle the holder, by statute, charter, or otherwise, to
select or to vote for the selection of directors of the Association or the Stock
Holding Company.
3. Notwithstanding anything in paragraphs (1) and (2) above, "Voting
Stock" shall be deemed to include preferred stock and other securities that,
upon transfer or otherwise, are convertible into Voting Stock or exercisable to
acquire Voting Stock where the holder of the stock, convertible security or
right to acquire Voting Stock has the preponderant economic risk in the
underlying Voting Stock. Securities immediately convertible into Voting Stock at
the option of the holder without payment of additional consideration shall be
deemed to constitute the Voting Stock into which they are convertible; other
convertible securities and rights to acquire Voting Stock shall not be deemed to
vest the holder with the preponderant economic risk in the underlying Voting
Stock if the holder has paid less than 50% of the consideration required to
directly acquire the Voting Stock and has no other economic interest in the
underlying Voting Stock.
III. Plan of Reorganization
Pursuant to Section 10(o) of the HOLA and 12 C.F.R. Part 575 of the OTS
Regulations, the Reorganization will be accomplished in accordance with the
procedures set forth in this Plan, applicable regulations of the OTS, and as
otherwise may be required by the OTS.
A. Certain Effects of Reorganization
1. Organization of the MHC, the Stock Holding Company and the Stock
Association
A principal part of the Reorganization will be the formation of a
federally-chartered capital stock association subsidiary. As a result
of the Reorganization, the Stock Holding Company will own 100% of the
Stock Association's Voting Stock. The MHC will own a majority interest
in the Stock Holding Company and the Stock Association at all times as
long as the MHC remains in the mutual form of organization.
The Reorganization will be effected as follows, or in any manner
approved by the Board of Directors of the Association and the OTS that
is consistent with the purposes of this Plan and applicable laws and
regulations:
(i) the Association will organize an interim stock association as
a wholly-owned subsidiary ("Interim One"); (ii) Interim One will
organize an interim stock association as a wholly-owned subsidiary
("Interim Two"); (iii) Interim One will organize the Stock Holding
Company as a wholly-owned subsidiary; (iv) the Association will
exchange its charter for a federal stock association charter to become
the Stock Association and Interim One will exchange its charter for a
federal mutual holding company charter to become the MHC; (v)
simultaneously with step (iv), Interim Two will merge with and into
Stock Association with the Stock Association as the resulting
institution; (vi) all of the initially issued stock of the Stock
Association will be transferred to the MHC in exchange for membership
interests in the MHC; and (vii) the MHC will contribute the capital
stock of the Stock Association to the Stock Holding Company, and the
Stock Association will become a wholly-owned subsidiary of the Stock
Holding Company. Contemporaneously with the
6
<PAGE>
Reorganization, the Stock Holding Company will offer for sale in the
Stock Offering shares of Common Stock based on the pro forma market
value of the Stock Holding Company and the Association.
Upon consummation of the Reorganization, the legal existence of
the Association will not terminate, but the converted Stock
Association will be a continuation of the Association, and all
property of the Association, including its right, title and interest
in and to all property of whatsoever kind and nature, interest and
asset of every conceivable value or benefit then existing or
pertaining to the Association, or which would inure to the Association
immediately by operation of law and without the necessity of any
conveyance or transfer and without any further act or deed, will vest
in the Stock Association. The Stock Association will have, hold and
enjoy the same in its right and fully to the same extent as the same
was possessed, held and enjoyed by the Association. The Stock
Association will continue to have, succeed to, and be responsible for
all rights, liabilities and obligations of the Association and will
maintain its headquarters operations at the Association's present
location.
In connection with the Reorganization, the Association will apply
to the OTS to have the Stock Holding Company retain up to 50% of the
net proceeds of the Stock Offering, or such other amount as may be
determined by the board of the Association. The Stock Association may
distribute additional capital to the Stock Holding Company following
the Reorganization, subject to the OTS regulations governing capital
distributions. The Stock Holding Company will have the power to issue
shares of Capital Stock to persons other than the MHC. However, so
long as the MHC is in existence, the MHC will be required to own at
least a majority of the Voting Stock of the Stock Holding Company. The
Stock Holding Company may issue any amount of Non-Voting Stock to
persons other than the MHC. The Stock Holding Company will be
authorized to undertake one or more Minority Stock Offerings of less
than 50% in the aggregate of the total outstanding Common Stock of the
Stock Holding Company, and the Stock Holding Company intends to offer
for sale up to 49.9% of its Common Stock in the Stock Offering. The
Association believes that capitalization of the MHC and the Stock
Holding Company will provide the MHC and the Stock Holding Company
with economic strength separate and apart from the Stock Association
and could facilitate future activities by the MHC and the Stock
Holding Company.
2. Effect on Deposit Accounts and Borrowings
Each Deposit Account in the Association on the Effective Date
will remain a Deposit Account in the Stock Association in the same
amount and upon the same terms and conditions, and will continue to be
federally insured up to the legal maximum by the FDIC in the same
manner as the Deposit Account existed in the Association immediately
prior to the Reorganization. Upon consummation of the Reorganization,
all loans and other borrowings from the Association shall retain the
same status with the Stock Association after the Reorganization as
they had with the Association immediately prior to the Reorganization.
3. The Stock Association
Upon completion of the Reorganization the Stock Association will
be authorized to exercise any and all powers, rights and privileges
of, and will be subject to all limitations applicable to, capital
stock savings associations under federal law. A copy of the proposed
Charter and Bylaws of the Stock Association is attached hereto as
Exhibit A and made a part of this Plan. The Reorganization will not
result in any reduction of the amount of retained earnings (other than
the assets of the Association retained by or distributed to the Stock
Holding Company or the MHC), undivided profits, and general loss
reserves that the Association had prior to the Reorganization. Such
retained earnings and general loss reserves will be accounted for by
the MHC, the Stock
7
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Holding Company and the Stock Association on a consolidated basis in
accordance with generally accepted accounting principles.
The initial members of the Board of Directors of the Stock
Association will be the members of the existing Board of Directors of
the Association. The Stock Association will be wholly-owned by the
Stock Holding Company. The Stock Holding Company will be wholly-owned
by its stockholders, who will consist of the MHC and the Persons who
purchase Common Stock in the Stock Offering and any subsequent
Minority Stock Offering. Upon the Effective Date of the
Reorganization, the voting and membership rights of Members will be
transferred to the MHC, subject to the conditions specified below.
4. The Stock Holding Company
The Stock Holding Company will be authorized to exercise any and
all powers, rights and privileges, and will be subject to all
limitations applicable to savings and loan holding companies and
mutual holding companies under federal law and regulations. The
initial members of the Board of Directors of the Stock Holding Company
will be the existing Board of Directors of the Association.
Thereafter, the voting stockholders of the Stock Holding Company will
elect approximately one-third of the Stock Holding Company's directors
annually. A copy of the proposed Charter and Bylaws of the Stock
Holding Company is attached as Exhibit B and made part of this Plan.
The Stock Holding Company will have the power to issue shares of
Capital Stock to Persons other than the MHC. However, so long as the
MHC is in existence, the MHC will be required to own at least a
majority of the Voting Stock of the Stock Holding Company. The Stock
Holding Company may issue any amount of Non-Voting Stock to Persons
other than the MHC. The Stock Holding Company will be authorized to
undertake one or more Minority Stock Offerings of less than 50% in the
aggregate of the total outstanding Common Stock of the Stock Holding
Company, and the Stock Holding Company intends to offer for sale up to
49.9% of its Common Stock in the Stock Offering.
5. The MHC
As a mutual corporation, the MHC will have no stockholders. The
members of the MHC will have exclusive voting authority as to all
matters requiring a vote of members under the Charter of the MHC.
Persons who have membership rights with respect to the Association
under its existing Charter immediately prior to the Reorganization
shall continue to have such rights solely with respect to the MHC
after the Reorganization so long as such Persons remain depositors or
borrowers, as the case may be, of the Association after the
Reorganization. In addition, all Persons who become Depositors of the
Stock Association following the Reorganization will have membership
rights with respect to the MHC. The rights and powers of the MHC will
be defined by the MHC's Charter and Bylaws, a copy of which is
attached to this Plan as Exhibit C and made a part hereof, and by the
statutory and regulatory provisions applicable to savings and loan
holding companies and mutual holding companies. In particular, the MHC
shall be subject to the limitations and restrictions imposed on
savings and loan holding companies by Section 10(o)(5) of the HOLA.
The initial members of the Board of Directors of the MHC will be
the existing Board of Directors of the Association. Thereafter,
approximately one-third of the directors of the MHC will be elected
annually by the members of the MHC who will consist of certain of the
former Members of the Association and all persons who become
Depositors of the Stock Association after the Reorganization.
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B. Conditions to Implementation of Reorganization
Consummation of the Reorganization is expressly conditioned upon the
following:
1. Approval of the Plan by a majority of the Board of Directors of
the Association;
2. The filing of a Notice of Reorganization, including the Plan,
with the OTS and either: (a) the OTS has given written notice of
its intent not to disapprove the Reorganization; or (b) sixty
days have passed since the OTS received the Notice of
Reorganization and deemed it sufficient under Section 516.2(c) of
the OTS regulations, and the OTS has not given written notice
that the Reorganization is disapproved or extended for an
additional 30 days the period during which disapproval may be
issued;
3. The filing of the Holding Company Application with and approval
by the OTS pursuant to the HOLA for the Stock Holding Company and
MHC to become savings and loan holding companies by owning or
acquiring 100% of the common stock of the Stock Association and
at least more than 50% of the Stock Holding Company,
respectively, to be issued in connection with the Reorganization;
4. All necessary approvals have been obtained from the OTS in
connection with the adoption of the charter and bylaws of the
MHC, the Stock Holding Company and the Stock Association, the
conversion of the Association to a stock charter, and any
transfer of assets and liabilities of the Association to the
Stock Association pursuant to the Plan;
5. Approval of the Plan by a majority of the total votes of Voting
Members of the Association eligible to be cast at the Special
Meeting of Members;
6. Satisfaction of all conditions specified or otherwise imposed by
the OTS in connection with approval of the Notice of
Reorganization and all transactions related thereto;
7. Receipt by the Association of a favorable ruling of the Internal
Revenue Service ("IRS") or an opinion of the Association's tax
advisor with respect to federal taxation to the effect that
consummation of the Reorganization will not be a taxable event to
the MHC, the Stock Holding Company, the Stock Association, the
Association or the Association's Depositors; and
8. Receipt by the Association of either a private letter ruling of
the Kansas taxation authorities or an opinion of the
Association's tax advisor with respect to Kansas taxation to the
effect that consummation of the Reorganization will not be a
taxable event to the MHC, the Stock Holding Company, the Stock
Association, the Association or the Association's Depositors.
C. Special Meeting of Members
Subsequent to the approval of the Plan by the OTS, the Special Meeting
of Members shall be scheduled in accordance with the Association's Bylaws.
Promptly after receipt of approval and at least 20 days but not more than 45
days prior to the Special Meeting of Members, the Association shall distribute
proxy solicitation materials to all Voting Members as of the Voting Record Date.
The proxy solicitation materials shall include a proxy statement (the "Proxy
Statement"), other documents authorized for use by
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the regulatory authorities, and may also include a copy of the Plan. The proxy
materials shall contain the information that is relevant to the action to be
taken by the Voting Members.
Pursuant to the Regulations of the OTS, an affirmative vote of not less
than a majority of the total outstanding votes of the Voting Members eligible to
be cast is required for approval of the Plan. Voting may be in person or by
proxy in accordance with the Charter and Bylaws of the Association. The OTS
shall be notified promptly of the actions of the Voting Members.
D. Rights of Members of the MHC
Following the Reorganization, all persons who had membership rights
with respect to the Association as of the date of the Reorganization will
continue to have such rights solely with respect to the MHC. All existing
proxies granted by Members of the Association to the Board of Directors of the
Association shall automatically become proxies granted to the Board of Directors
of the MHC. In addition, all persons who become depositors of the Stock
Association subsequent to the Reorganization also will have membership rights
with respect to the MHC. In each case, no person who ceases to be the holder of
a deposit account in the Stock Association after the Reorganization shall have
any membership or rights with respect to the MHC. Borrowers of the Stock
Association who were borrower members of the Association at the time of the
Reorganization, if applicable, will have the same membership rights in the MHC
as they had in the Association immediately prior to the Reorganization for so
long as their pre-Reorganization borrowings remain outstanding. Borrowers will
not receive membership rights in connection with any new borrowings made after
the Reorganization.
E. Conversion of MHC to Stock Form
Following the completion of the Reorganization, the MHC may elect to
convert to stock form in accordance with applicable law (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur.
In a Conversion Transaction, the MHC would merge with and into the
Stock Association or the Stock Holding Company, with the Stock Association or
the Stock Holding Company as the resulting entity, and the depositors of the
Stock Association would receive the right to subscribe for a number of shares of
common stock of the Stock Holding Company, as determined by the formula set
forth below. The additional shares of common stock of the Stock Holding Company
issued in the Conversion Transaction would be sold at their aggregate pro forma
market value as determined by an independent appraisal.
Any Conversion Transaction shall be fair and equitable to Minority
Stockholders. In any Conversion Transaction, Minority Stockholders, if any, will
be entitled without additional consideration to maintain the same percentage
ownership interest in the Stock Holding Company after the Conversion Transaction
as their percentage ownership interest in the Stock Holding Company immediately
prior to the Conversion Transaction (i.e., the "Minority Ownership Interest"),
subject only to the following adjustments (if required by federal or state law,
regulation, or regulatory policy) to reflect: (i) the cumulative effect of the
aggregate amount of dividends waived by the MHC; and (ii) the market value of
assets of the MHC (other than common stock of the Stock Holding Company).
The adjustment referred to in clause (i) of the preceding paragraph
above would require that the Minority Ownership Interest (expressed as a
percentage) be adjusted by multiplying the Minority Ownership Interest by the
following fraction:
(Stock Holding Company stockholders' equity immediately
prior to Conversion Transaction) - (aggregate amount
of dividends waived by MHC)
-------------------------------------------------------
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Stock Holding Company stockholders' equity immediately
prior to Conversion Transaction
The Minority Ownership Interest shall also be adjusted to reflect any
assets of the MHC (other than Common Stock of the Stock Holding Company) by
multiplying it by the following fraction:
(pro forma market value of Stock Holding Company) -
(market value of assets of MHC other than
Stock Holding Company Common Stock)
---------------------------------------------------
pro forma market value of Stock Holding Company
At the sole discretion of the Board of Directors of the MHC and the
Stock Holding Company, a Conversion Transaction may be effected in any other
manner necessary to qualify the Conversion Transaction as a tax-free
reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders as set forth in the preceding paragraphs. If a Conversion
Transaction does not occur, the MHC will always own a majority of the voting
stock of the Stock Holding Company. Management of the Association has no current
intention to conduct a Conversion Transaction.
A Conversion Transaction would require the approval of applicable
federal regulators, and would be presented to a vote of the members of the MHC.
Federal regulatory policy requires that in any Conversion Transaction the
members of the MHC will be accorded the same stock purchase priorities as if the
MHC were a mutual savings association converting to stock form.
F. Timing of the Reorganization and Sale of Capital Stock
The Association intends to consummate the Reorganization as soon as
feasible following the receipt of all approvals referred to in the Plan. Subject
to the approval of the OTS, the Stock Holding Company intends to commence the
Stock Offering concurrently with the proxy solicitation of Members. The Stock
Holding Company may close the Stock Offering before the Special Meeting of
Members, provided that the offer and sale of the Common Stock shall be
conditioned upon approval of the Plan by the Members at the Special Meeting of
Members. The Association's proxy solicitation materials may permit certain
Members to return to the Association by a reasonable date certain a postage paid
card or other written communication requesting receipt of the prospectus
describing the Stock Offering if the prospectus is not mailed concurrently with
the proxy solicitation materials. The Stock Offering shall be conducted in
compliance with the securities offering regulations of the SEC. The Association
will not finance or loan funds to any person to purchase Common Stock.
G. Number of Shares to Be Offered
1. The total number of shares (or range thereof) of Common Stock
to be issued and offered for sale pursuant to the Plan shall be
determined initially by the Board of Directors of the Association and
the Stock Holding Company in conjunction with the determination of the
Independent Appraiser. The number of shares to be offered may be
adjusted prior to completion of the Stock Offering. The total number
of shares of Common Stock that may be issued to persons other than the
MHC at the close of the Stock Offering must be less than 50% of the
issued and outstanding shares of Common Stock of the Stock Holding
Company.
2. For a period of 15 days following the completion of the
Reorganization, the Boards of Directors of the Stock Holding Company
and the MHC, in their sole discretion, may determine to issue or
allocate shares of Common Stock ("Contingent Shares") to subscribers
to fill orders resulting from (i) any allocation oversights in the
event of an oversubscription, or (ii) orders initially
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rejected but later found to be legitimate. Contingent Shares shall be
authorized but unissued shares and shall include no more than a number
of shares equal to 1% of the shares issued in the Stock Offering.
Contingent Shares will not be included in the total number of shares
for purposes of determining any individual or maximum purchase
limitation or the number of shares of stock to be purchased by
Tax-Qualified Employee Plans. In the event of an oversubscription in
the Stock Offering, Contingent Shares will be allocated to a
subscriber based upon the allocation of shares to persons who had the
same or similar Deposit Account balance as that subscriber.
H. Independent Valuation and Purchase Price of Shares
All shares of Common Stock sold in the Stock Offering shall be sold at
a uniform price per share. The purchase price and number of shares to be
outstanding shall be determined by the Board of Directors of the Stock Holding
Company on the basis of the estimated pro forma market value of the Stock
Holding Company and the Association. The aggregate purchase price for the Common
Stock will not be inconsistent with such market value of the Stock Holding
Company and the Association. The pro forma market value of the Stock Holding
Company and the Association will be determined for such purposes by the
Independent Appraiser.
Prior to the commencement of the Stock Offering, an estimated valuation
range will be established, which range may vary within 15% above to 15% below
the midpoint of such range, and up to 15% greater than the maximum of such
range, as determined by the Board of Directors at the time of the Stock Offering
and consistent with OTS regulations. The Stock Holding Company intends to issue
up to 49.9% of its common stock in the Stock Offering. The number of shares of
Common Stock to be issued and the ownership interest of the MHC may be increased
or decreased by the Stock Holding Company, taking into consideration any change
in the independent valuation and other factors, at the discretion of the Board
of Directors of the Association and the Stock Holding Company.
Based upon the independent valuation as updated prior to the
commencement of the Stock Offering, the Board of Directors may establish the
minimum and maximum ownership percentage applicable to the Stock Offering, may
fix the ownership percentage of the Minority Stockholders, or may establish the
minimum and maximum aggregate dollar amount of shares to be sold. In the event
the ownership percentage of the Minority Stockholders is not fixed in the Stock
Offering, the minority ownership percentage (the "Minority Ownership
Percentage") will be determined as follows: (a) the product of (x) the total
number of shares of Common Stock issued by the Stock Holding Company and (y) the
purchase price per share divided by (b) the estimated aggregate pro forma market
value of the Association and the Stock Holding Company immediately after the
Stock Offering as determined by the Independent Appraiser, expressed in terms of
a specific aggregate dollar amount rather than as a range, upon the closing of
the Stock Offering or sale of all the Common Stock.
Notwithstanding the foregoing, no sale of Common Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Stock Holding Company, the Association and to the OTS that, to
the best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Common Stock
to be issued is incompatible with its estimate of the aggregate consolidated pro
forma market value of the Stock Holding Company and the Association. If such
confirmation is not received, the Stock Holding Company may cancel the Stock
Offering, extend the Stock Offering and establish a new estimated valuation
range and/or estimated price range, extend, reopen or hold a new Stock Offering
or take such other action as the OTS may permit.
The estimated market value of the Stock Holding Company and the
Association shall be determined for such purpose by an Independent Appraiser on
the basis of such appropriate factors as are not inconsistent
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with OTS regulations. The Common Stock to be issued in the Stock Offering shall
be fully paid and nonassessable.
If there is a Direct Community Offering or Public Offering of shares of
Common Stock not subscribed for in the Subscription Offering, the price per
share at which the Common Stock is sold in such Direct Community Offering or
Public Offering shall be equal to the purchase price per share at which the
Common Stock is sold to Persons in the Subscription Offering. Shares sold in the
Direct Community Offering or Public Offering will be subject to the same
limitations as shares sold in the Subscription Offering.
I. Stock Issuance Procedure
The Stock Holding Company Common Stock will be offered for sale in the
Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, Other Members and Directors, Officers and
employees of the Association, prior to or within 45 days after the date of the
Special Meeting of Members. However, the Stock Holding Company and the
Association may delay commencing the Subscription Offering beyond such 45-day
period in the event there exist unforeseen material adverse market or financial
conditions. The Association may, either concurrently with, at any time during,
or promptly after the Subscription Offering, also offer the Stock Holding
Company Common Stock to and accept subscriptions from other Persons in a Direct
Community Offering or a Public Offering; provided that the Association's
Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible
Account Holders, Other Members and Directors, Officers and employees shall have
the priority rights to subscribe for Stock Holding Company Common Stock set
forth in Section III of this Plan.
The period for the Subscription Offering and Direct Community Offering
will be not less than 20 days nor more than 45 days unless extended by the
Association. Upon completion of the Subscription Offering and the Direct
Community Offering, if any, any unsubscribed shares of Stock Holding Company
Common Stock may be sold through the Underwriters to selected members of the
general public in the Public Offering. If for any reason all of the shares are
not sold in the Subscription Offering, the Direct Community Offering, if any,
and the Public Offering, if any, the Stock Holding Company and the Association
will use their best efforts to obtain other purchasers, subject to OTS approval.
Completion of the sale of all shares of Stock Holding Company Common Stock not
sold in the Subscription Offering is required within 45 days after termination
of the Subscription Offering, subject to extension of such 45-day period by the
Stock Holding Company and the Association with the approval of the OTS. The
Stock Holding Company and the Association may jointly seek one or more
extensions of such 45-day period if necessary to complete the sale of all shares
of Stock Holding Company Common Stock. In connection with such extensions,
subscribers and other purchasers will be permitted to increase, decrease or
rescind their subscriptions or purchase orders to the extent required by the OTS
in approving the extensions. Completion of the sale of all shares of Stock
Holding Company Common Stock is required within 24 months after the date of the
Special Meeting of Members.
J. Subscription Rights
Non-transferable subscription rights to purchase shares will be issued
without payment therefor to Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and Directors,
Officers and employees of the Association as set forth below.
1. Preference Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive non-transferable
subscription rights to subscribe for shares of Stock Holding Company
Common Stock in an amount equal to the greater of $500,000, or
one-tenth of one percent (.10%) of the total offering of shares, or 15
times the product (rounded
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down to the next whole number) obtained by multiplying the total
number of shares of common stock to be issued by a fraction of which
the numerator is the amount of the Qualifying Deposit of the Eligible
Account Holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders in the converting Association
in each case on the Eligibility Record Date.
If sufficient shares are not available, shares shall be allocated
first to permit each subscribing Eligible Account Holder to purchase
to the extent possible 100 shares, and thereafter among each
subscribing Eligible Account Holder pro rata in the same proportion
that his Qualifying Deposit bears to the total Qualifying Deposits of
all subscribing Eligible Account Holders whose subscriptions remain
unsatisfied.
Non-transferable subscription rights to purchase Stock Holding
Company Common Stock received by Directors and Officers of the
Association and their Associates, based on their increased deposits in
the Association in the one-year period preceding the Eligibility
Record Date, shall be subordinated to all other subscriptions
involving the exercise of non-transferable subscription rights of
Eligible Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
Each Tax-Qualified Employee Plan shall be entitled to receive
non-transferable subscription rights to purchase up to 10% of the
shares of Stock Holding Company Common Stock, provided that singly or
in the aggregate such plans (other than that portion of such plans
which is self-directed) shall not purchase more than 10% of the shares
of the Stock Holding Company Common Stock. Subscription rights
received pursuant to this Category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares pursuant to
Category No. 1; provided, however, that notwithstanding any other
provision of this Plan to the contrary, the Tax-Qualified Employee
Plans shall have a first priority subscription right to the extent
that the total number of shares of Stock Holding Company Common Stock
sold in the Stock Offering exceeds the maximum of the estimated
valuation range as set forth in the subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account
Holders
Each Supplemental Eligible Account Holder shall receive
non-transferable subscription rights to subscribe for shares of Stock
Holding Company Common Stock in an amount equal to the greater of
$500,000, or one-tenth of one percent (.10%) of the total offering of
shares, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of common
stock to be issued by a fraction of which the numerator is the amount
of the Qualifying Deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders in the converting Association in
each case on the Supplemental Eligibility Record Date.
Subscription rights received pursuant to this category shall be
subordinated to all subscription rights received by Eligible Account
Holders and Tax-Qualified Employee Plans pursuant to Category Nos. 1
and 2 above.
Any non-transferable subscription rights to purchase shares
received by an Eligible Account Holder in accordance with Category No.
1 shall reduce to the extent thereof the subscription rights to be
distributed to such person pursuant to this Category.
In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall be
allocated first to permit each subscribing Supplemental Eligible
Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation
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<PAGE>
(including the number of shares, if any, allocated in accordance with
Category No. 1) equal to 100 shares, and thereafter among each
subscribing Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders
whose subscriptions remain unsatisfied.
4. Preference Category No. 4: Other Members
Each Other Member shall receive non-transferable subscription
rights to subscribe for shares of Stock Holding Company Common Stock
remaining after satisfying the subscriptions provided for under
Category Nos. 1 through 3 above, subject to the following conditions:
i. Each Other Member shall be entitled to subscribe for an
amount of shares equal to the greater of $500,000, or
one-tenth of one percent (.10%) of the total offering of
shares of common stock in the Stock Offering, to the extent
that Stock Holding Company Common Stock is available.
ii. In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall
be allocated among the subscribing Other Members pro rata in
the same proportion that his number of votes on the Voting
Record Date bears to the total number of votes on the Voting
Record Date of all subscribing Other Members on such date.
Such number of votes shall be determined based on the
Association's mutual charter and bylaws in effect on the
date of approval by members of this Plan.
5. Preference Category No. 5: Directors, Officers and Employees
Each Director, Officer and employee of the Association as of the
date of the commencement of the Subscription Offering shall be
entitled to receive non-transferable subscription rights to purchase
shares of the Stock Holding Company Common Stock to the extent that
shares are available after satisfying subscriptions under Category
Nos. 1 through 4 above. The shares which may be purchased under this
Category are subject to the following conditions:
i. The total number of shares which may be purchased under this
Category may not exceed 15% of the number of shares of Stock
Holding Company Common Stock.
ii. The maximum amount of shares which may be purchased under
this Category by any Person is $500,000 of Stock Holding
Company Common Stock. In the event of an oversubscription
for shares under the provisions of this subparagraph, the
shares available shall be allocated pro rata among all
subscribers in this Category.
K. Public Offering and Direct Community Offering
1. Any shares of Stock Holding Company Common Stock not
subscribed for in the Subscription Offering may be offered for sale in
a Direct Community Offering. This may involve an offering of all
unsubscribed shares directly to the general public with a preference
to those natural persons residing in the local community where the
Association conducts its business. The Direct Community Offering, if
any, shall be for a period of not less than 20 days nor more than 45
days unless extended by the Stock Holding Company and the Association,
and shall commence concurrently with, during or promptly after the
Subscription Offering. The purchase price per share to the general
public in a Direct Community Offering shall be the same as the
subscription price.
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The Stock Holding Company and the Association may use an investment
banking firm or firms on a best efforts basis to sell the unsubscribed
shares in the Direct Community Offering. The Stock Holding Company and
the Association may pay a commission or other fee to such investment
banking firm or firms as to the shares sold by such firm or firms in
the Direct Community Offering and may also reimburse such firm or
firms for expenses incurred in connection with the sale. The Stock
Holding Company Common Stock will be offered and sold in the Direct
Community Offering, if any, in accordance with OTS regulations, so as
to achieve the widest distribution of the Stock Holding Company Common
Stock. No person, by himself or herself, or with an Associate or group
of Persons acting in concert, may subscribe for or purchase more than
$500,000 of Stock Holding Company Common Stock in the Direct Community
Offering, if any. Further, the Association may limit total
subscriptions under this Section so as to assure that the number of
shares available for the Public Offering may be up to a specified
percentage of the number of shares of Stock Holding Company Common
Stock. Finally, the Association may reserve shares offered in the
Direct Community Offering for sales to institutional investors.
In the event of an oversubscription for shares in the Direct
Community Offering, shares may be allocated (to the extent shares
remain available) first to cover orders of natural persons residing in
the local community, then to cover the orders of any other person
subscribing for shares in the Direct Community Offering so that each
such person may receive 1,000 shares, and thereafter, on a pro rata
basis to such persons based on the amount of their respective
subscriptions.
The Association and the Stock Holding Company, in their sole
discretion, may reject subscriptions, in whole or in part, received
from any Person under this Section. Further, the Association and the
Stock Holding Company may, at their sole discretion, elect to forego a
Direct Community Offering and instead effect a Public Offering as
described below.
2. Any shares of Stock Holding Company Common Stock not sold in
the Subscription Offering or in the Direct Community Offering, if any,
may then be sold through the Underwriters to selected members of the
general public in the Public Offering. It is expected that the Public
Offering will commence as soon as practicable after termination of the
Subscription Offering and the Direct Community Offering, if any. The
Association and the Stock Holding Company, in their sole discretion,
may reject any subscription, in whole or in part, received in the
Public Offering. The Public Offering shall be completed within 90 days
after the termination of the Subscription Offering, unless such period
is extended as provided herein. No person, by himself or herself, or
with an Associate or group of Persons acting in concert, may purchase
more than $500,000 of Common Stock in the Public Offering, if any.
3. If for any reason any shares remain unsold after the
Subscription Offering, the Public Offering, if any, and the Direct
Community Offering, if any, the Boards of Directors of the Stock
Holding Company and the Association will seek to make other
arrangements for the sale of the remaining shares. Such other
arrangements will be subject to the approval of the OTS and to
compliance with applicable securities laws.
L. Additional Limitations Upon Purchases of Shares of Stock Holding
Company Common Stock
The following additional limitations shall be imposed on all purchases
of Stock Holding Company Common Stock in the Stock Offering:
1. No Person, by himself or herself, or with an Associate or
group of Persons acting in concert, may subscribe for or purchase in
the Stock Offering a number of shares of Stock Holding Company Common
Stock equal to the greater of $5,000,000 or 1% of the Common Stock
offered
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in the Stock Offering. For purposes of this paragraph, an Associate of
a Person does not include a Tax-Qualified or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity.
Moreover, for purposes of this paragraph, shares held by one or more
Tax-Qualified or Non-Tax Qualified Employee Plans attributed to a
Person shall not be aggregated with shares purchased directly by or
otherwise attributable to that Person.
2. Directors and Officers and their Associates may not purchase
in all categories in the Stock Offering an aggregate of more than 25%
of the Stock Holding Company Common Stock. For purposes of this
paragraph, an Associate of a Person does not include any Tax-Qualified
Employee Plan. Moreover, any shares attributable to the Officers and
Directors and their Associates, but held by one or more Tax-Qualified
Employee Plans shall not be included in calculating the number of
shares which may be purchased under the limitation in this paragraph.
3. The minimum number of shares of Stock Holding Company Common
Stock that may be purchased by any Person in the Stock Offering is 25
shares, provided sufficient shares are available.
4. The Boards of Directors of the Stock Holding Company and the
Association may, in their sole discretion, increase the maximum
purchase limitation referred to herein up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offered in the
Stock Offering shall not exceed, in the aggregate, 10% of the shares
being offered in the Stock Offering. Requests to purchase additional
shares of Stock Holding Company Common Stock under this provision will
be allocated by the Boards of Directors on a pro rata basis giving
priority in accordance with the priority rights set forth herein.
Depending upon market and financial conditions, the Boards of
Directors of the Stock Holding Company and the Association, with the
approval of the OTS and without further approval of the Members, may
increase or decrease any of the above purchase limitations.
For purposes of this Section, the Directors of the Stock Holding
Company and the Association shall not be deemed to be Associates or a
group acting in concert solely as a result of their serving in such
capacities.
Each Person purchasing Common Stock in the Stock Offering shall
be deemed to confirm that such purchase does not conflict with the
above purchase limitations. All questions concerning whether any
Persons are Associates or a group acting in concert or whether any
purchase conflicts with the purchase limitations in this Plan or
otherwise violates any provision of this Plan shall be determined by
the Association in its sole discretion. Such determination shall be
conclusive and binding on all Persons and the Association may take any
remedial action, including without limitation rejecting the purchase
or referring the matter to the OTS for action, as in its sole
discretion the Association may deem appropriate.
M. Restrictions and Other Characteristics of Stock Holding Company
Common Stock Being Sold
Stock Holding Company Common Stock purchased by Persons other than
Directors and Officers of the Stock Holding Company or the Association will be
transferable without restriction. Shares purchased by Directors or Officers
shall not be sold or otherwise disposed of for value for a period of one year
from the date of the Stock Offering, except for any disposition of such shares
(i) following the death of the original purchaser, or (ii) resulting from an
exchange of securities in a merger or acquisition approved by the applicable
regulatory authorities. Any transfers that could result in a change of control
of the Stock
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Association or the Stock Holding Company or result in the ownership by any
Person or group acting in concert of more than 10% of any class of the Stock
Association's or the Stock Holding Company's equity securities are subject to
the prior approval of the OTS.
The certificates representing shares of Stock Holding Company Common
Stock issued to Directors and Officers shall bear a legend giving appropriate
notice of the one-year holding period restriction. Appropriate instructions
shall be given to the transfer agent for such stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any shares
of common stock of the Stock Holding Company subsequently issued as a stock
dividend, stock split, or otherwise, with respect to any such restricted stock,
shall be subject to the same holding period restrictions for Stock Holding
Company or Association Directors and Officers as may be then applicable to such
restricted stock.
N. Exercise of Subscription Rights; Order Forms
1. If the Subscription Offering occurs concurrently with the
solicitation of proxies for the Special Meeting of Members, the
prospectus and Order Form may be sent to each Eligible Account Holder,
Tax-Qualified Employee Plan, Supplemental Eligible Account Holder,
Other Member, and Director, Officer and employee at their last known
address as shown on the records of the Association. However, the
Association may, and if the Subscription Offering commences after the
Special Meeting of Members the Association shall, furnish a prospectus
and Order Form only to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members,
and Directors, Officers and employees who have returned to the
Association by a specified date prior to the commencement of the
Subscription Offering a post card or other written communication
requesting a prospectus and Order Form. In such event, the Association
shall provide a postage-paid post card for this purpose and make
appropriate disclosure in its proxy statement for the solicitation of
proxies to be voted at the Special Meeting and/or letter sent in lieu
of the proxy statement to those Eligible Account Holders,
Tax-Qualified Employee Plans or Supplemental Eligible Account Holders
who are not Members on the Voting Record Date.
2. Each Order Form will be preceded or accompanied by a
prospectus describing the Stock Holding Company and the Stock
Association and the shares of Stock Holding Company Common Stock being
offered for subscription and containing all other information required
by the OTS or the SEC or necessary to enable Persons to make informed
investment decisions regarding the purchase of Stock Holding Company
Common Stock.
3. The Order Form (or accompanying instructions) used for the
Subscription Offering will contain, among other things, the following:
i. A clear and intelligible explanation of the subscription
rights granted under the Plan to Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members, and Directors, Officers and
employees;
ii. A specified expiration date by which the Order Form must be
returned to and actually received by the Association or its
representative for purposes of exercising subscription
rights, which date will be not less than 20 days after the
Order Forms are mailed by the Association;
iii. The subscription price to be paid for each share subscribed
for when the Order Form is returned;
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iv. A statement that 25 shares is the minimum number of shares
of Stock Holding Company Common Stock that may be subscribed
for under the Plan;
v. A specifically designated blank space for indicating the
number of shares being subscribed for;
vi. A set of detailed instructions as to how to complete the
Order Form including a statement as to the available
alternative methods of payment for the shares being
subscribed for;
vii. Specifically designated blank spaces for dating and signing
the Order Form;
viii. An acknowledgement that the subscriber has received the
prospectus;
ix. A statement of the consequences of failing to properly
complete and return the Order Form, including a statement
that the subscription rights will expire on the expiration
date specified on the Order Form unless such expiration date
is extended by the Stock Holding Company and the
Association, and that the subscription rights may be
exercised only by delivering the Order Form, properly
completed and executed, to the Association or its
representative by the expiration date, together with
required payment of the subscription price for all shares of
Stock Holding Company Common Stock subscribed for;
x. A statement that the subscription rights are
non-transferable and that all shares of Stock Holding
Company Common Stock subscribed for upon exercise of
subscription rights must be purchased on behalf of the
Person exercising the subscription rights for his own
account; and
xi. A statement that, after receipt by the Association or its
representative, a subscription may not be modified,
withdrawn or canceled without the consent of the
Association.
O. Method of Payment
Payment for all shares of Stock Holding Company Common Stock subscribed
for must accompany all completed Order Forms. Payment may be made in cash (if
presented in Person), by check, money order or, if the subscriber has a Deposit
Account in the Association (including a certificate of deposit), the subscriber
may authorize the Association to charge the subscriber's account.
If a subscriber authorizes the Association to charge his or her
account, the funds will continue to earn interest, but may not be used by the
subscriber until all Stock Holding Company Common Stock has been sold or the
Plan is terminated, whichever is earlier. The Association will allow subscribers
to purchase shares by withdrawing funds from certificate accounts without the
assessment of early withdrawal penalties with the exception of prepaid interest
in the form of promotional gifts. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
canceled if the remaining balance of the account is less than the applicable
minimum balance requirement, in which event the remaining balance will earn
interest at the passbook rate. This waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of Stock
Holding Company Common Stock under the Plan. Interest will also be paid, at not
less than the then-current passbook rate, on all orders
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paid in cash, by check or money order, from the date payment is received until
consummation of the Stock Offering. Payments made in cash, by check or money
order will be placed by the Association in an escrow or other account
established specifically for this purpose.
In the event of an unfilled amount of any subscription order, the Stock
Association will make an appropriate refund or cancel an appropriate portion of
the related withdrawal authorization, after consummation of the Stock Offering.
If for any reason the Stock Offering is not consummated, purchasers will have
refunded to them all payments made and all withdrawal authorizations will be
canceled in the case of subscription payments authorized from accounts at the
Association.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
may pay for such shares of Stock Holding Company Common Stock subscribed for
upon consummation of the Stock Offering. In the event that, after the completion
of the Subscription Offering, the amount of shares to be issued is increased
above the maximum of the estimated valuation range included in the prospectus,
the Tax Qualified and Non-Tax Qualified Employee Plans shall be entitled to
increase their subscriptions by a percentage equal to the percentage increase in
the amount of shares to be issued above the maximum of the estimated valuation
range provided that such subscriptions shall continue to be subject to
applicable purchase limits and stock allocation procedures.
P. Undelivered Defective or Late Order Form; Insufficient Payment
In the event Order Forms (a) are not delivered and are returned to the
Association by the United States Postal Service or the Association is unable to
locate the addressee, (b) are not received back by the Association or are
received by the Association after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment for the shares of Common Stock subscribed for (including cases in which
Deposit Accounts from which withdrawals are authorized are insufficient to cover
the amount of the required payment), or (e) are not mailed pursuant to a "no
mail" order placed in effect by the account holder, the subscription rights of
the Person to whom such rights have been granted will lapse as though such
Person failed to return the contemplated Order Form within the time period
specified thereon; provided, that the Association may, but will not be required
to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Association may specify. The
interpretation by the Association of terms and conditions of this Plan and of
the Order Forms will be final, subject to the authority of the OTS.
Q. Payment of Dividends and Repurchase of Stock
The Stock Association shall not declare or pay a cash dividend on, or
repurchase any of, its Capital Stock if the effect thereof would cause its
regulatory capital to be reduced below (i) the amount required for any required
liquidation account or (ii) the federal regulatory capital requirement set forth
in Section 567.2 of the Regulations of the OTS. Otherwise, the Stock Association
may declare dividends, make capital distributions or repurchase its capital
stock in accordance with applicable law and regulations. Subject to the approval
of the OTS, the MHC may waive its right to receive dividends declared by the
Stock Association or the Stock Holding Company.
R. Completion of the Stock Offering
The Stock Offering will be terminated if not completed within 90 days
from the date of approval by the OTS, unless an extension is approved by the
OTS.
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S. Securities Registration and Market Making
Promptly following the Stock Offering, the Stock Holding Company will
register its stock with the SEC pursuant to the Exchange Act. In connection with
the registration, the Stock Holding Company will undertake not to deregister
such stock, without the approval of the OTS, for a period of three years
thereafter. At the close of the Stock Offering the Stock Holding Company shall
use its best efforts to:
1. encourage and assist three market markers to establish and
maintain a market for the Common Stock; and
2. list the Common Stock on a national or regional securities
exchange, or on the Nasdaq System.
T. Stock Purchases by Directors and Officers After the Offering
For a period of three years after the proposed Stock Offering, no
Director or Officer of the Stock Association or its Affiliates, or an Associate
of such Person may purchase, without the prior written approval of the OTS, any
Common Stock of the Stock Holding Company, except from a broker-dealer
registered with the SEC, except that the foregoing shall not apply to:
1. Negotiated transactions involving more than 1% of the
outstanding stock in that class of stock; or
2. Purchases of stock made by and held by any Tax-Qualified or
Non-Tax Qualified Employee Plan of the Stock Association or the Stock
Holding Company even if such stock is attributed to Directors,
Officers or their Associates.
U. Establishment and Funding of Charitable Foundation
As part of the Reorganization, the Stock Holding Company and the
Association intend to establish the Foundation which will qualify as an exempt
organization under Section 501(c)(3) of the Internal Revenue Code and donate to
the Foundation cash and/or Common Stock in an amount up to 8% of the aggregate
value of shares of Common Stock sold in the Stock Offering. The Foundation would
be formed to complement the Association's existing community reinvestment
activities and to share with the Association's local community a part of the
Association's financial success as a community-oriented financial services
institution. The Foundation will be dedicated to the promotion of charitable
purposes including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations or
civic-minded projects. It is expected that the Foundation will annually
distribute total grants to assist charitable organizations or to fund projects
within its local community of not less than 5% of the average fair value of
Foundation assets each year. In order to serve the purposes for which it was
formed and maintain its Section 501(c)(3) qualification, the Foundation may
sell, on an annual basis, a limited portion of any securities contributed to it
by the Stock Holding Company.
The board of directors of the Foundation will be comprised of
individuals who are employees or Directors of the Association, or other persons
with a business or other relationship with the communities in which the
Association does business. The board of directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations, consistent with the stated purposes of the Foundation. The
establishment and funding of the Foundation as part of the Reorganization is
subject to the approval of the OTS.
V. Stock Benefit Plans
The Board of Directors of the Association and/or the Stock Holding
Company intend to adopt one or more stock benefit plans for its employees,
officers and directors, including an ESOP, stock award plans
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and stock option plans, which will be authorized to purchase Common Stock and
grant options for Common Stock. However, only the Tax-Qualified Employee Plans
will be permitted to purchase Common Stock in the Stock Offering subject to the
purchase priorities set forth in this Plan. The Board of Directors of the
Association intends to establish the ESOP and authorize the ESOP and any other
Tax-Qualified Employee Plans to purchase in the aggregate up to 10% of the
shares issued, excluding shares issued to the MHC. The Stock Association or the
Stock Holding Company may make scheduled discretionary contributions to one or
more Tax-Qualified Employee Plans to purchase Common Stock issued in the Stock
Offering or to purchase issued and outstanding shares of Common Stock or
authorized but unissued shares of Common Stock subsequent to the completion of
the Stock Offering, provided such contributions do not cause the Stock
Association to fail to meet any of its regulatory capital requirements. This
Plan specifically authorizes the grant and issuance by the Stock Holding Company
of (i) awards of Common Stock after the Stock Offering pursuant to one or more
stock recognition and award plans (the "Recognition Plans") in an amount equal
to up to 4% of the number of shares of Common Stock issued in the Stock
Offering, (ii) options to purchase a number of shares of the Stock Holding
Company's Common Stock in an amount equal to up to 10% of the number of shares
of Common Stock issued in the Stock Offering and shares of Common Stock issuable
upon exercise of such options, and (iii) Common Stock to one or more Tax
Qualified Employee Plans, including the ESOP, at the closing of the Stock
Offering or at any time thereafter, in an amount equal to up to 8% of the shares
issued. Shares awarded to the Tax Qualified Employee Plans or pursuant to the
Recognition Plans, and shares issued upon exercise of options may be authorized
but unissued shares of the Stock Holding Company's Common Stock, or shares of
Common Stock purchased by the Stock Holding Company or such plans on the open
market. Any awards of Common Stock under the Recognition Plans and the stock
option plans will be subject to prior stockholder approval.
W. Employment and Other Severance Agreements
Following or contemporaneously with the Reorganization, the Association
and/or the Stock Holding Company may enter into employment and/or severance
arrangements with one or more executive officers of the Association and/or the
Stock Holding Company. It is anticipated that any employment contracts entered
into by the Association and/or the Stock Holding Company will be for terms not
exceeding three years and that such contracts will provide for annual renewals
of the term of the contracts, subject to approval by the Board of Directors. The
Association and/or the Stock Holding Company also may enter into severance
arrangements with one or more executive officers which provide for the payment
of severance compensation in the event of a change in control of the Stock
Association and/or the Stock Holding Company. The terms of such employment and
severance arrangements have not been determined as of this time, but will be
described in any prospectus circulated in connection with the Stock Offering and
will be subject to and comply with all regulations of the OTS.
X. Expenses of Reorganization
The Association shall use its best efforts to assure that expenses
incurred by it in connection with the Reorganization shall be reasonable.
Y. Interpretation
All interpretations of this Plan and application of its provisions to
particular circumstances shall be made by the Board of Directors of the
Association and all such interpretations shall be final, subject to the
authority of the OTS.
Z. Amendment or Termination of the Plan
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to solicitation of proxies from Voting Members to vote on the
Plan by a majority vote of the Association's
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Board of Directors, and at any time thereafter by a majority vote of the Board
of Directors with the concurrence of the OTS. Any amendment to the Plan made
after approval by the Voting Members, with the approval of the OTS, shall not
necessitate further approval by the Members unless otherwise required by the
OTS. The Plan may be terminated by a majority vote of the Association's Board of
Directors at any time prior to the Special Meeting of Members to vote on the
Plan, and at any time thereafter by a majority vote of the Board of Directors
with the concurrence of the OTS. The Plan shall terminate automatically if the
Reorganization is not completed within 24 months of the date Voting Members
approve the Plan at the Special Meeting of Members, which time period may not be
extended by the Association's Board of Directors.
By adoption of the Plan, the Members of the Association authorize the
Board of Directors to amend or terminate the Plan under the circumstances set
forth in this Section.
Attachments A-1 and A-2 Charter and Bylaws of the MHC
Attachments B-1 and B-2 Charter and Bylaws of the Stock Holding Company
Attachments C-1 and C-2 Charter and Bylaws of Stock Association
23
Exhibit 3.1
FEDERAL MHC SUBSIDIARY HOLDING COMPANY CHARTER
CAPITOL FEDERAL FINANCIAL
SECTION 1. Corporate title. The full corporate title of the MHC
subsidiary holding company is Capitol Federal Financial (the "MHC subsidiary
holding company").
SECTION 2. Domicile. The domicile of the MHC subsidiary holding company
shall be in the city of Topeka, in the state of Kansas.
SECTION 3. Duration. The duration of the MHC subsidiary holding company
is perpetual.
SECTION 4. Purpose and powers. The purpose of the MHC subsidiary
holding company is to pursue any or all of the lawful objectives of a federal
mutual holding company chartered under section 10(o) of the Home Owners' Loan
Act, 12 U.S.C. 1467a(o), and to exercise all of the express, implied, and
incidental powers conferred thereby and by all acts amendatory thereof and
supplemental thereto, subject to the Constitution and laws of the United States
as they are now in effect, or as they may hereafter be amended, and subject to
all lawful and applicable rules, regulations, and orders of the Office of Thrift
Supervision ("Office").
SECTION 5. Capital stock. The total number of shares of all classes of
the capital stock which the MHC subsidiary holding company has the authority to
issue is 500 million, of which 450 million shall be common stock of par value of
$.01 per share, and of which 50 million shall be serial preferred stock of par
value $.01 per share. The shares may be issued from time to time as authorized
by the board of directors without further approval of stockholders, except as
otherwise provided in this Section 5 or to the extent that such approval is
required by governing law, rule or regulation. The consideration for the
issuance of the shares shall be paid in full before their issuance and shall not
be less than the par value. Neither promissory notes nor future services shall
constitute payment or part payment for the issuance of shares of the MHC
subsidiary holding company. The consideration for the shares shall be cash,
tangible or intangible property (to the extent direct investment in such
property would be permitted), labor, or services actually performed for the MHC
subsidiary holding company or any combination of the foregoing. In the absence
of actual fraud in the transaction, the value of such property, labor, or
services, as determined by the board of directors of the MHC subsidiary holding
company, shall be conclusive. Upon payment of such consideration, such shares
shall be deemed to be fully paid and nonassessable. In the case of a stock
dividend, that part of the retained earnings of the MHC subsidiary holding
company which is transferred to stated capital upon the issuance of shares as a
share dividend shall be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the MHC
subsidiary holding company or in connection with the conversion of the MHC
subsidiary holding company from the mutual to the stock form of capitalization,
no shares of capital stock (including shares issuable upon conversion, exchange,
or exercise of other securities) shall be issued, directly or indirectly, to
officers, directors, or controlling persons of the MHC subsidiary holding
company other than as part of a general public offering or as qualifying shares
to a director, unless their issuance or the plan under which they would be
issued has been approved by a majority of the total votes eligible to be cast at
a legal meeting.
<PAGE>
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or a series of capital stock to
vote as a separate class or series or to more than one vote per share, and there
shall be no right to cumulate votes in an election of directors: Provided, That
this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
board of directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the MHC subsidiary holding company with another
corporation or the sale, lease, or conveyance (other than by
mortgage or pledge) of properties or business in exchange for
securities of a corporation other than the MHC subsidiary holding
company if the preferred stock is exchanged for securities of
such other corporation: Provided, That no provision may require
such approval for transactions undertaken with the assistance or
pursuant to the direction of the Office or the Federal Deposit
Insurance Corporation;
(iii) To any amendment which would adversely change the specific terms
of any class or series of capital stock as set forth in this
Section 5 (or in any supplementary sections hereto), including
any amendment which would create or enlarge any class or series
ranking prior thereto in rights and preferences. An amendment
which increases the number of authorized shares of any class or
series of capital stock, or substitutes the surviving MHC
subsidiary holding company in a merger or consolidation for the
MHC subsidiary holding company, shall not be considered to be
such an adverse change.
A description of the different classes and series (if any) of the MHC
subsidiary holding company's capital stock and a statement of the designations,
and the relative rights, preferences, and limitations of the shares of each
class and series (if any) of capital stock are as follows:
A. Common stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund, or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the MHC
subsidiary holding company, the holders of the common stock (and the holders of
any class or series of stock entitled to participate with the common stock in
the distribution of assets) shall be entitled to receive, in cash
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or in kind, the assets of the MHC subsidiary holding company available for
distribution remaining after: (i) Payment or provision for payment of the MHC
subsidiary holding company's debts and liabilities; (ii) distributions or
provision for distributions in settlement of its liquidation account; and (iii)
distributions or provisions for distributions to holders of any class or series
of stock having preference over the common stock in the liquidation,
dissolution, or winding up of the MHC subsidiary holding company. Each share of
common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred stock. The MHC subsidiary holding company may provide in
supplementary sections to its charter for one or more classes of preferred
stock, which shall be separately identified. The shares of any class may be
divided into and issued in series, with each series separately designated so as
to distinguish the shares thereof from the shares of all other series and
classes. The terms of each series shall be set forth in a supplementary section
to the charter. All shares of the same class shall be identical except as to the
following relative rights and preferences, as to which there may be variations
between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date(s), the payment date(s) for dividends, and
the participating or other special rights, if any, with respect
to dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which such
shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event
of voluntary or involuntary liquidation, dissolution, or winding
up of the MHC subsidiary holding company;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application, including
the price(s) at which such shares may be redeemed or purchased
through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock
of the MHC subsidiary holding company and, if so, the conversion
price(s), or the rate(s) of exchange, and the adjustments
thereof, if any, at which such conversion or exchange may be
made, and any other terms and conditions of such conversion or
exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
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(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares
of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption
of supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the board of directors, the MHC
subsidiary holding company shall file with the Secretary to the Office a dated
copy of that supplementary section of this charter established and designating
the series and fixing and determining the relative rights and preferences
thereof.
SECTION 6. Preemptive rights. Holders of the capital stock of the MHC
subsidiary holding company shall not be entitled to preemptive rights with
respect to any shares of the MHC subsidiary holding company which may be issued.
SECTION 7. Directors. The MHC subsidiary holding company shall be under
the direction of a board of directors. The authorized number of directors, as
stated in the MHC subsidiary holding company's bylaws, shall not be fewer than
five nor more than fifteen except when a greater or lesser number is approved by
the Director of the Office, or his or her delegate.
SECTION 8. Certain provisions applicable for five years.
Notwithstanding anything contained in the MHC subsidiary holding company's
charter or bylaws to the contrary, for a period of five years from the date of
completion of the conversion of the MHC subsidiary holding company from mutual
to stock form, the following provisions shall apply:
A. Beneficial ownership limitation. No person, other than Capitol
Federal Savings Bank MHC, the parent holding company of the MHC subsidiary
holding company, shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10 percent of any class of an equity security
of the MHC subsidiary holding company. This limitation shall not apply to a
transaction in which the MHC subsidiary holding company forms a holding company
without change in the respective beneficial ownership interests of its
stockholders other than pursuant to the exercise of any dissenter and appraisal
rights, the purchase of shares by underwriters in connection with a public
offering, or the purchase of shares by a tax-qualified employee stock benefit
plan which is exempt from the approval requirements under ss.574.3(c)(1)(vi) of
the Office's regulations.
In the event shares are acquired in violation of this Section 8, all
shares beneficially owned by any person in excess of 10% shall be considered
"excess shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to the stockholders for a vote.
For purposes of this Section 8, the following definitions apply:
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(1) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock
company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding
or disposing of the equity securities of the MHC subsidiary holding
company.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether
or not pursuant to an express agreement, or (b) a combination or pooling of
voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangements, whether written or otherwise.
B. Cumulative voting limitation. Stockholders shall not be permitted to
cumulate their votes for election of directors.
C. Call for special meetings. Special meetings of stockholders relating
to changes in control of the MHC subsidiary holding company or amendments to its
charter shall be called only upon direction of the board of directors.
SECTION 9. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change or repeal of this charter shall be made,
unless such is proposed by the board of directors of the MHC subsidiary holding
company, approved by the shareholders by a majority of the votes eligible to be
cast at a legal meeting, unless a higher vote is otherwise required, and
approved or preapproved by the Office.
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CAPITOL FEDERAL FINANCIAL
Attest: _________________________________ By: _________________________________
Mary R. Falter, Secretary John C. Dicus, Chairman of the
Board and Chief Executive Officer
DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION
Attest: _________________________________ By: _________________________________
Secretary of the Office of Thrift Director of the Office of Thrift
Supervision Supervision
Effective Date:__________________________
6
Exhibit 3.2
BYLAWS
OF
CAPITOL FEDERAL FINANCIAL
ARTICLE I
HOME OFFICE
The home office of Capitol Federal Financial (the "MHC subsidiary
holding company") shall be in the City of Topeka, in the State of Kansas.
ARTICLE II
SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the MHC subsidiary holding
company or at such other convenient place as the board of directors may
determine.
Section 2. Annual Meeting. A meeting of the shareholders of the MHC
subsidiary holding company for the election of directors and for the transaction
of any other business of the MHC subsidiary holding company shall be held
annually within 150 days after the end of the MHC subsidiary holding company's
fiscal year.
Section 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the MHC subsidiary holding company
entitled to vote at the meeting. Such written request shall state the purpose or
purposes of the meeting and shall be delivered to the home office of the MHC
subsidiary holding company addressed to the chairman of the board, the
president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
board of directors adopts another written procedure for the conduct of meetings.
The board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, or the secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the MHC subsidiary holding company as of the record date
<PAGE>
prescribed in Section 6 of this Article II with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned for 30 days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken. Compliance with the provisions of this Section 5
shall not be applicable for so long as the MHC subsidiary holding company is a
wholly-owned institution.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of shareholders. Such date in any case shall be
not more than 60 days and, in case of a meeting of shareholders, not fewer than
10 days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the MHC subsidiary holding company shall make a complete list of the
shareholders of record entitled to vote at such meeting, or any adjournment
thereof, arranged in alphabetical order, with the address and the number of
shares held by each. This list of shareholders shall be kept on file at the home
office of the MHC subsidiary holding company and shall be subject to inspection
by any shareholder of record or the shareholder's agent at any time during usual
business hours for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to inspection by any shareholder of record or any shareholder's agent
during the entire time of the meeting. The original stock transfer book shall
constitute prima facie evidence of the shareholders entitled to examine such
list or transfer books or to vote at any meeting of shareholders. In lieu of
making the shareholder list available for inspection by shareholders as provided
in this paragraph, the board of directors may elect to follow the procedures
prescribed in ss. 552.6(d) of the Office's regulations as now or hereafter in
effect. Compliance with the provisions of this Section 7 shall not be applicable
for so long as the MHC subsidiary holding company is a wholly-owned institution.
Section 8. Quorum. A majority of the outstanding shares of the MHC
subsidiary holding company entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of shareholders. If less than a majority
of the outstanding shares is represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum. If a quorum is present,
the affirmative vote of the majority of the shares represented at the meeting
and entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the charter. Directors, however, are elected by a
plurality of the votes cast at an election of directors.
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Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote in person or by proxy executed in writing by the shareholder or by his or
her duly authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. A proxy may designate as holder a corporation, partnership
or company as prescribed in ss. 552.6(f) of the Office's regulations, or other
person. Proxies solicited on behalf of the management shall be voted as directed
by the shareholder or, in the absence of such direction, as determined by a
majority of the board of directors. No proxy shall be valid more than eleven
months from the date of its execution except for a proxy coupled with an
interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the MHC subsidiary holding company to the contrary, at any meeting
of the shareholders of the MHC subsidiary holding company any one or more of
such shareholders may cast, in person or by proxy, all votes to which such
ownership is entitled. In the event an attempt is made to cast conflicting
votes, in person or by proxy, by the several persons in whose names shares of
stock stand, the vote or votes to which those persons are entitled shall be cast
as directed by a majority of those holding such and present in person or by
proxy at such meeting, but no votes shall be cast for such stock if a majority
cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares held in trust in an IRA or Keogh Account, however, may be voted by the
MHC subsidiary holding company if no other instructions are received. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or under the control of a receiver may be voted by such receiver without
the transfer into his or her name if authority to do so is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the MHC subsidiary
holding company nor shares held by another corporation, if a majority of the
shares entitled to vote for the election of directors of such other corporation
are held by the MHC subsidiary holding company, shall be voted at any meeting or
counted in determining the total number of outstanding shares at any given time
for purposes of any meeting.
Section 12. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting,
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the majority of the votes present shall determine whether one or three
inspectors are to be appointed. In case any person appointed as inspector fails
to appear or fails or refuses to act, the vacancy may be filled by appointment
by the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 13. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of nominee substituted as a result of the death or
other incapacity of a management nominee, the nominating committee shall deliver
written nominations to the secretary at least 20 days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a conspicuous
place in each office of the MHC subsidiary holding company. No nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the secretary of the MHC subsidiary holding company at least
five days prior to the date of the annual meeting. Upon delivery, such
nominations shall be posted in a conspicuous place in each office of the MHC
subsidiary holding company. Ballots bearing the names of all persons nominated
by the nominating committee and by shareholders shall be provided for use at the
annual meeting. However, if the nominating committee shall fail or refuse to act
at least 20 days prior to the annual meeting, nominations for directors may be
made at the annual meeting by any shareholder entitled to vote and shall be
voted upon.
Section 14. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the MHC
subsidiary holding company at least five days before the date of the annual
meeting, and all business so stated, proposed, and filed shall be considered at
the annual meeting; but no other proposal shall be acted upon at the annual
meeting. Any shareholder may make any other proposal at the annual meeting and
the same may be discussed and considered, but unless stated in writing and filed
with the secretary at least five days before the meeting, such proposal shall be
laid over for action at an adjourned, special, or annual meeting of the
shareholders taking place 30 days or more thereafter. This provision shall not
prevent the consideration and approval or disapproval at the annual meeting of
reports of officers, directors, and committees; but in connection with such
reports, no new business shall be acted upon at such annual meeting unless
stated and filed as herein provided.
Section 15. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action that may be taken at
a meeting of shareholders, may be taken without a meeting if consent in writing,
setting forth the action so taken, shall be given by all of the shareholders
entitled to vote with respect to the subject matter.
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ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the MHC
subsidiary holding company shall be under the direction of its board of
directors. The board of directors shall annually elect a chairman of the board
and a president from among its members and shall designate, when present, either
the chairman of the board or the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
seven members, and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually. Directors may be elected for a term of office to
expire earlier than the third succeeding annual meeting of stockholders after
their election if necessary to balance the classes of directors.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw following the
annual meeting of shareholders. The board of directors may provide, by
resolution, the time and place, for the holding of additional regular meetings
without other notice than such resolution. Directors may participate in a
meeting by means of a conference telephone or similar communications device
through which all persons participating can hear each other at the same time.
Participation by such means shall constitute presence in person for all
purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the MHC
subsidiary holding company unless the MHC subsidiary holding company is a wholly
owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the MHC subsidiary holding
company's normal business area, as the place for holding any special meeting of
the board of directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear and speak to each other. Such
participation shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the MHC subsidiary holding company receives notice of delivery if
electronically transmitted. Any director may waive notice of any meeting by a
writing filed with the secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully
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called or convened. Neither the business to be transacted at, nor the purpose
of, any meeting of the board of directors need be specified in the notice or
waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 5 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the MHC subsidiary
holding company addressed to the chairman of the board or the president. Unless
otherwise specified, such resignation shall take effect upon receipt by the
chairman of the board or the president. More than three consecutive absences
from regular meetings of the board of directors, unless excused by resolution of
the board of directors, shall automatically constitute a resignation, effective
when such resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
attendance at committee meetings as the board of directors may determine.
Section 13. Presumption of Assent. A director of the MHC subsidiary
holding company who is present at a meeting of the board of directors at which
action on any MHC subsidiary holding company matter is taken shall be presumed
to have assented to the action taken unless his or her dissent or abstention
shall be entered in the minutes of the meeting or unless he or she shall file a
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the MHC subsidiary holding company within
five days after the date a copy of the minutes of the meeting is received. Such
right to dissent shall not apply to a director who voted in favor of such
action.
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Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed only for cause by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. Whenever the holders of the shares of any class are entitled to
elect one or more directors by the provisions of the charter or supplemental
sections thereto, the provisions of this section shall apply, in respect to the
removal of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class and not to the vote of the outstanding shares
as a whole.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer and
two or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the MHC subsidiary holding company, or recommending to the
shareholders a plan of merger, consolidation, or conversion; the sale, lease, or
other disposition of all or substantially all of the property and assets of the
MHC subsidiary holding company otherwise than in the usual and regular course of
its business; a voluntary dissolution of the MHC subsidiary holding company; a
revocation of any of the foregoing; or the approval of a transaction in which
any member of the executive committee, directly or indirectly, has any material
beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date, and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive com mittee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
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Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the MHC subsidiary holding company.
Unless otherwise specified, such resignation shall take effect upon its receipt;
the acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
MHC subsidiary holding company and may prescribe the duties, constitution and
procedures thereof.
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the MHC subsidiary holding
company shall be a president, one or more vice presidents, a secretary, and a
treasurer or comptroller, each of whom shall be elected by the board of
directors. The board of directors may also designate the chairman of the board
as an officer. The offices of the secretary and treasurer or comptroller may be
held by the same person and a vice president may also be either the secretary or
the treasurer or comptroller. The board of directors may designate one or more
vice presidents as executive vice president or senior vice president. The board
of directors may also elect or authorize the appointment of such other officers
as the business of the MHC subsidiary holding company may require. The officers
shall have such authority and perform such duties as the board of directors may
from time to time authorize or determine. In the absence of action by the board
of directors, the officers shall have such powers and duties as generally
pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the MHC
subsidiary holding company shall be elected annually at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until a successor
has been duly elected and qualified or until the officer's death, resignation,
or removal in the manner hereinafter provided. Election or appointment of an
officer, employee or agent shall not of itself create contractual rights. The
board of directors may authorize the MHC subsidiary holding company to
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<PAGE>
enter into an employment contract with any officer in accordance with
regulations of the Office; but no such contract shall impair the right of the
board of directors to remove any officer at any time in accordance with Section
3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the MHC subsidiary
holding company will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contractual rights, if any, of the person so
removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the MHC subsidiary holding company to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the MHC subsidiary holding company. Such authority may be general or confined to
specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the MHC
subsidiary holding company and no evidence of indebtedness shall be issued in
its name unless authorized by the board of directors. Such authority may be
general or confined to specific instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the MHC subsidiary holding company shall be signed by one or more
officers, employees or agents of the MHC subsidiary holding company in such
manner as shall from time to time be determined by the board of directors.
Section 4. Deposits. All funds of the MHC subsidiary holding company
not otherwise employed shall be deposited from time to time to the credit of the
MHC subsidiary holding company in any duly authorized depositories as the board
of directors may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the MHC subsidiary holding company shall be in such form as
shall be determined by the board of directors and approved by the Office. Such
certificates shall be signed by the chief executive officer or by any other
officer of the MHC subsidiary holding company authorized by the board of
directors,
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attested by the secretary or an assistant secretary, and sealed with the
corporate seal or a facsimile thereof. The signatures of such officers upon a
certificate may be facsimiles if the certificate is manually signed on behalf of
a transfer agent or a registrar other than the MHC subsidiary holding company
itself or one of its employees. Each certificate for shares of capital stock
shall be consecutively numbered or otherwise identified. The name and address of
the person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the MHC subsidiary
holding company. All certificates surrendered to the MHC subsidiary holding
company for transfer shall be cancelled and no new certificate shall be issued
until the former certificate for a like number of shares has been surrendered
and cancelled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the MHC subsidiary
holding company as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the MHC subsidiary holding company shall be made only on its stock transfer
books. Authority for such transfer shall be given only by the holder of record
or by his or her legal representative, who shall furnish proper evidence of such
authority, or by his or her attorney authorized by a duly executed power of
attorney and filed with the MHC subsidiary holding company. Such transfer shall
be made only on surrender for cancellation of the certificate for such shares.
The person in whose name shares of capital stock stand on the books of the MHC
subsidiary holding company shall be deemed by the MHC subsidiary holding company
to be the owner for all purposes.
ARTICLE VIII
FISCAL YEAR; APPOINTMENT OF ACCOUNTANTS
The fiscal year of the MHC subsidiary holding company shall end on
September 30 of each year. The appointment of accountants shall be subject to
annual ratification by the shareholders.
ARTICLE IX
DIVIDENDS
Subject to the terms of the MHC subsidiary holding company's charter
and the regulations and orders of the Office, the board of directors may, from
time to time, declare, and the MHC subsidiary holding company may pay, dividends
on its outstanding shares of capital stock.
ARTICLE X
CORPORATE SEAL
The board of directors shall provide a corporate seal which shall be
two concentric circles between which shall be the name of the MHC subsidiary
holding company. The year of incorporation or an emblem may appear in the
center.
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ARTICLE XI
AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of
the Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized board of directors, or by a majority vote of the
votes cast by the shareholders of the MHC subsidiary holding company at any
legal meeting, and (ii) receipt of any applicable regulatory approval. When the
MHC subsidiary holding company fails to meet its quorum requirements, solely due
to vacancies on the board, then the affirmative vote of a majority of the
sitting board will be required to amend the bylaws.
11
Exhibit 4
(FORM OF STOCK CERTIFICATE - FRONT SIDE)
NUMBER SHARES
COMMON STOCK CUSIP
See reverse for certain definitions
CAPITOL FEDERAL FINANCIAL
INCORPORATED UNDER THE LAWS OF THE UNITED STATES
This certifies that ___________________________________ is the
registered holder of _________________ fully paid and non-assessable shares of
the common stock, par value $.01 per share, of Capitol Federal Financial,
Topeka, Kansas (the "Company"), a federal MHC subsidiary holding company
chartered by the Office of Thrift Supervision, Department of the Treasury.
This Certificate is transferable only on the books of the Company upon
the surrender of the same properly endorsed. The interest in said Company
represented by this Certificate may not be retired or withdrawn except as
provided in the Charter and Bylaws of the Company. SUCH INTEREST IS NOT OF AN
INSURABLE TYPE AND IS NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR
THE FEDERAL DEPOSIT INSURANCE CORPORATION.
IN WITNESS WHEREOF, Capitol Federal Financial has caused this
Certificate to be executed by its duly authorized officers and has caused its
seal to be hereunto affixed this _______ day of ________, ____.
CAPITOL FEDERAL FINANCIAL
_____________________________(SEAL) ____________________________________
Mary R. Falter John C. Dicus
Corporate Secretary Chairman and Chief Executive Officer
<PAGE>
(FORM OF STOCK CERTIFICATE - BACK SIDE)
The Company is authorized to issue more than one class of stock,
including a class of preferred stock which may be issued in one or more series.
The Company will furnish to any stockholder, upon written request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class authorized to be issued and, with
respect to the issuance of any preferred stock to be issued in series, the
relative rights, preferences and limitations between the shares of each series
so far as the rights, preferences and limitations have been fixed and determined
and the authority of the Board of Directors to fix and determine the relative
rights, preferences and limitations of subsequent series.
The Charter of the Company includes a provision which generally
prohibits any person other than Capitol Federal Savings Bank MHC, the parent
mutual holding company of the Company from directly or indirectly offering to
acquire or acquiring the beneficial ownership of more than 10% of any class of
equity securities of the Company. (Any person includes an individual, company or
group acting in concert). In the event that stock is acquired in violation of
this 10% limitation, the excess shares will no longer be counted in determining
the total number of outstanding shares for purposes of any matter involving
stockholder action and the Board of Directors of the Company may cause such
excess shares to be transferred to an independent trustee for sale in the open
market or otherwise, with the expenses of such sale to be paid out of the
proceeds of the sale.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT- _________________________ Custodian ___________________ under
(Cust) (Minor)
Uniform Gifts to Minor Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
2
<PAGE>
For value received,______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
| |
| |
- ------------------------------------
________________________________________________________________________________
(Please print or type the name and address including postal zip code of
assignee)
___________________ shares of Common Stock represented by this Certificate, and
do hereby irrevocably constitute and appoint _______________ as Attorney, to
transfer the said shares on the books of the within named Company, with full
power of substitution.
Dated: __________ ___, _______
__________________________________
Signature
__________________________________
Signature
NOTICE: The signature(s) to this assignment must correspond with the
name(s) as written upon the face of this Certificate in every particular,
without alteration or enlargement, or any change whatsoever. The signature(s)
should be guaranteed by an eligible guarantor institution (bank, stockbroker,
savings and loan association or credit union) with membership in an approved
signature medallion program, pursuant to S.E.C. Rule 17Ad-15.
3
Exhibit 5
December 2, 1998
VIA EDGAR
Board of Directors
Capitol Federal Financial
700 Kansas Avenue
Topeka, Kansas 66601
Members of the Board of Directors:
We have acted as special counsel to Capitol Federal Financial, a
federal corporation in organization (the "Stock Holding Company"), in connection
with the preparation and filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended, of the Registration
Statement on Form S-1 (the "Registration Statement"), relating to the issuance
of up to 52,000,000 shares of the Stock Holding Company's common stock, par
value $.01 per share (the "Common Stock"), in connection with the reorganization
of Capitol Federal Savings and Loan Association, a federally chartered mutual
savings and loan association (the "Association"), into the federal mutual
holding company form of organization, whereby the Association will convert to a
federally chartered stock savings bank as a wholly-owned subsidiary of the Stock
Holding Company and the Stock Holding Company will become a majority-owned
subsidiary of Capitol Federal Savings Bank MHC (the "MHC"), a federally
chartered mutual holding company (the "Reorganization"). The Reorganization and
the offering of the shares of Common Stock for sale to the public are being made
in accordance with an amended Plan of Reorganization and Stock Issuance Plan
(the "Plan"). In this regard, we have examined the Federal Stock Charter and
Bylaws of the Stock Holding Company, resolutions of the Board of Directors of
the Association, the Plan and such other documents and matters of law as we
deemed appropriate for the purpose of this opinion.
Based upon the foregoing, we are of the opinion as of the date hereof
that the Common Stock has been duly and validly authorized, and when issued in
accordance with the terms of the Plan, and upon the receipt of the consideration
required thereby, will be legally issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Stock Holding Company's Registration Statement and to the references to Silver,
Freedman & Taff, L.L.P. under the heading "Legal and Tax Opinions" in the
Prospectus contained in the Registration Statement.
Very truly yours,
SILVER, FREEDMAN & TAFF, L.L.P.
By: /s/ James S. Fleischer, P.C.
---------------------------------------
James S. Fleischer, P.C., a partner
Exhibit 8.3
RP FINANCIAL, L.C.
_______________________________________
Financial Services Industry Consultants
November 20, 1998
Board of Directors
Capitol Federal Savings and Loan Association
700 Kansas Avenue
Topeka, Kansas 66603
Re: Plan of Reorganization and Stock Issuance Plan: Subscription Rights
-------------------------------------------------------------------
Members of the Board of Directors:
All capitalized terms not otherwise defined in this letter have the
meanings given to such terms in an amended Plan of Reorganization and Stock
Issuance Plan (the "Plan") adopted by the Board of Directors of Capitol Federal
Savings and Loan Association ("Capitol Federal Savings") on August 25, 1998.
Pursuant to the Plan, Capitol Federal Savings will become a wholly-owned
subsidiary of Capitol Federal Financial (the "Company"), a federal corporation
in organization, and the Company will issue a majority of its Common Stock to
Capitol Federal Savings Bank MHC (the "MHC"), and will sell a minority of its
Common Stock to the public.
We understand that, in accordance with the Plan, Subscription Rights to
purchase shares of Common Stock in the Company are to be issued to: (1) Eligible
Account Holders; (2) the Tax-Qualified Employee Plans; (3) Supplemental Eligible
Account Holders; (4) Other Members; and (5) Directors, Officers and Employees.
Based solely upon our observation that the Subscription Rights will be available
to such parties without cost, will be legally non-transferable and of short
duration, and will afford such parties the right only to purchase shares of
Common Stock at the same price as will be paid by members of the general public
in the Direct Community Offering, but without undertaking any independent
investigation of state or federal law or the position of the Internal Revenue
Service with respect to this issue, we are of the belief that, as a factual
matter:
1. the Subscription Rights will have no ascertainable market value;
and
2. the price at which the Subscription Rights are exercisable will
not be more or less than the estimated pro forma market value of
the shares upon issuance.
Changes in the local and national economy, the legislative and
regulatory environment, the stock market, interest rates and other external
forces (such as natural disasters or significant world events) may occur from
time to time, often with great unpredictability, and may materially impact the
value of thrift stock as a whole or the Company's value alone. Accordingly, no
assurance can be given that persons who subscribe to shares of Common Stock in
the Subscription Offering will thereafter be able to buy or sell such shares at
the same price paid in the Subscription Offering.
Respectfully submitted,
/s/ RP FINANCIAL, LC.
-----------------------------
RP FINANCIAL, LC.
September 17, 1998
Board of Directors
Capitol Federal Savings & Loan Association
700 Kansas Avenue
Topeka, Kansas 66603-3809
Dear Members of the Board:
This letter sets forth the agreement between Capitol Federal Savings & Loan
Association, Topeka, Kansas ("Capitol Federal" or the "Association"), and RP
Financial, LC. ("RP Financial") for the independent appraisal services
pertaining to the Association's formation of a "two-tier" mutual holding company
(the "Reorganization"), including a mid-tier stock holding company and minority
stock offering by the mid-tier stock holding company (the "Stock Offering"). The
specific appraisal services to be rendered by RP Financial are described below.
These appraisal services will be rendered by a team of two to three senior
consultants on staff and will be directed by the undersigned.
Description of Conversion Appraisal Services
- --------------------------------------------
Prior to preparing the valuation report, RP Financial will conduct a
financial due diligence, including on-site interviews of senior management and
reviews of financial and other documents and records, to gain insight into the
Association's operations, financial condition, profitability, market area, risks
and various internal and external factors which impact the pro forma value of
the Association. RP Financial will prepare a written detailed valuation report
of Capitol Federal which will be fully consistent with applicable regulatory
guidelines and standard pro forma valuation practices. The appraisal report will
include an in-depth analysis of the Association's financial condition and
operating results, as well as an assessment of the Association's interest rate
risk, credit risk and liquidity risk. The appraisal report will describe the
Association's business strategies, market area, prospects for the future and the
intended use of proceeds both in the short term and over the longer term. A peer
group analysis relative to publicly-traded savings institutions will be
conducted for the purpose of determining appropriate valuation adjustments
relative to the group. We will review pertinent sections of the applications and
offering documents to obtain necessary data and information for the appraisal,
including the impact of key deal elements on the appraised value, such as
dividend policy, use of proceeds and reinvestment rate, tax rate, conversion
expenses and characteristics of stock plans. The appraisal report will conclude
with a midpoint pro forma value which will establish the range of value, and
reflect the Stock Offering size determined by the Association's Board of
Directors. The appraisal report may be periodically updated throughout the
conversion process and there will be at least one updated valuation prepared at
the time of the closing of the Stock Offering.
<PAGE>
Board of Directors
September 17, 1998
Page 2
RP Financial agrees to deliver the valuation appraisal and subsequent
updates, in writing, to Capitol Federal at the above address in conjunction with
the filing of the regulatory application. Subsequent updates will be filed
promptly as certain events occur which would warrant the preparation and filing
of such valuation updates. Further, RP Financial agrees to perform such other
services as are necessary or required in connection with the regulatory review
of the appraisal and respond to the regulatory comments, if any, regarding the
valuation appraisal and subsequent updates.
Fee Structure and Payment Schedule
- ----------------------------------
Capitol Federal agrees to pay RP Financial a fixed fee of $100,000 for
these appraisal services, plus reimbursable expenses. Payment of these fees
shall be made according to the following schedule:
o $10,000 upon execution of the letter of agreement engaging RP
Financial's appraisal services;
o $80,000 upon delivery of the completed original appraisal report; and
o $10,000 upon completion of the Reorganization and Stock Offering to
cover all subsequent valuation updates that may be required, provided
that the transaction is not delayed for reasons described below.
The Association will reimburse RP Financial for out-of-pocket expenses
incurred in preparation of the valuation. Such out-of-pocket expenses will
likely include travel, printing, telephone, facsimile, shipping, computer and
data services. RP Financial will agree to limit reimbursable expenses in
connection with this engagement and in connection with the preparation of a
regulatory business plan as described in the accompanying letter, subject to
written authorization from the Association to exceed such level.
In the event Capitol Federal shall, for any reason, discontinue the
proposed Reorganization and Stock Offering prior to delivery of the completed
documents set forth above and payment of the respective progress payment fees,
Capitol Federal agrees to compensate RP Financial according to RP Financial's
standard billing rates for consulting services based on accumulated and
verifiable time expenses, not to exceed the respective fee caps noted above,
after giving full credit to the initial retainer fee. RP Financial's standard
billing rates range from $75 per hour for research associates to $250 per hour
for managing directors.
If during the course of the proposed transaction, unforeseen events occur
so as to materially change the nature or the work content of the services
described in this contract, the terms of said contract shall be subject to
renegotiation by Capitol Federal and RP Financial. Such unforeseen events shall
include, but not be limited to, major changes in the conversion regulations,
appraisal guidelines or processing procedures as they relate to appraisals,
major changes in management or procedures, operating policies or philosophies,
and excessive delays or suspension of processing of conversion applications by
the regulators such that completion of the transaction requires the preparation
by RP Financial of a new appraisal or financial projections.
<PAGE>
Board of Directors
September 17, 1998
Page 3
Representations and Warranties
- ------------------------------
Capitol Federal and RP Financial agree to the following:
1. The Association agrees to make available or to supply to RP Financial
such information with respect to its business and financial condition as RP
Financial may reasonably request in order to provide the aforesaid valuation.
Such information heretofore or hereafter supplied or made available to RP
Financial shall include: annual financial statements, periodic regulatory
filings and material agreements, debt instruments, off balance sheet assets or
liabilities, commitments and contingencies, unrealized gains or losses and
corporate books and records. All information provided by the Association to RP
Financial shall remain strictly confidential (unless such information is
otherwise made available to the public), and if the Reorganization and Stock
Offering are not consummated or the services of RP Financial are terminated
hereunder, RP Financial shall upon request promptly return to the Association
the original and any copies of such information.
2. The Association hereby represents and warrants to RP Financial that any
information provided to RP Financial does not and will not, to the best of the
Association's knowledge, at the times it is provided to RP Financial, contain
any untrue statement of a material fact or fail to state a material fact
necessary to make the statements therein not false or misleading in light of the
circumstances under which they were made.
3. (a) The Association agrees that it will indemnify and hold harmless RP
Financial, any affiliates of RP Financial, the respective directors, officers,
agents and employees of RP Financial or their successors and assigns who act for
or on behalf of RP Financial in connection with the services called for under
this agreement (hereinafter referred to as "RP Financial"), from and against any
and all losses, claims, damages and liabilities (including, but not limited to,
all losses and expenses in connection with claims under the federal securities
laws) attributable to (i) any untrue statement or alleged untrue statement of a
material fact contained in the financial statements or other information
furnished or otherwise provided by the Association to RP Financial, either
orally or in writing; (ii) the omission or alleged omission of a material fact
from the financial statements or other information furnished or otherwise made
available by the Association to RP Financial; or (iii) any action or omission to
act by the Association, or the Association's respective officers, Directors,
employees or agents which action or omission is willful or negligent. The
Association will be under no obligation to indemnify RP Financial hereunder if a
court determines that RP Financial was negligent or acted in bad faith with
respect to any actions or omissions of RP Financial related to a matter for
which indemnification is sought hereunder. Any time devoted by employees of RP
Financial to situations for which indemnification is provided hereunder, shall
be an indemnifiable cost payable by the Association at the normal hourly
professional rate chargeable by such employee.
<PAGE>
Board of Directors
September 17, 1998
Page 4
(b) RP Financial shall give written notice to the Association of such
claim or facts within thirty days of the assertion of any claim or
discovery of material facts upon which RP Financial intends to base a claim
for indemnification hereunder. In the event the Association elects, within
ten business days of the receipt of the original notice thereof, to contest
such claim by written notice to RP Financial, RP Financial will be entitled
to be paid any amounts payable by the Association hereunder within five
days after the final determination of such contest either by written
acknowledgement of the Association or a final judgment (including all
appeals therefrom) of a court of competent jurisdiction. If the Association
does not so elect, RP Financial shall be paid promptly and in any event
within thirty days after receipt by the Association of the notice of the
claim.
(c) The Association shall pay for or reimburse the reasonable
expenses, including attorneys' fees, incurred by RP Financial in advance of
the final disposition of any proceeding within thirty days of the receipt
of such request if RP Financial furnishes the Association: (1) a written
statement of RP Financial's good faith belief that it is entitled to
indemnification hereunder; and (2) a written undertaking to repay the
advance if it ultimately is determined in a final adjudication of such
proceeding that it or he is not entitled to such indemnification. The
Association may assume the defense of any claim (as to which notice is
given in accordance with 3(b)) with counsel reasonably satisfactory to RP
Financial, and after notice from the Association to RP Financial of its
election to assume the defense thereof, the Association will not be liable
to RP Financial for any legal or other expenses subsequently incurred by RP
Financial (other than reasonable costs of investigation and assistance in
discovery and document production matters). Notwithstanding the foregoing,
RP Financial shall have the right to employ their own counsel in any action
or proceeding if RP Financial shall have concluded that a conflict of
interest exists between the Association and RP Financial which would
materially impact the effective representation of RP Financial. In the
event that RP Financial concludes that a conflict of interest exists, RP
Financial shall have the right to select counsel reasonably satisfactory to
the Association which will represent RP Financial in any such action or
proceeding and the Association shall reimburse RP Financial for the
reasonable legal fees and expenses of such counsel and other expenses
reasonably incurred by RP Financial. In no event shall the Association be
liable for the fees and expenses of more than one counsel, separate from
its own counsel, for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same allegations or circumstances. The Association will
not be liable under the foregoing indemnification provision in respect of
any compromise or settlement of any action or proceeding made without its
consent, which consent shall not be unreasonably withheld.
(d) In the event the Association does not pay any indemnified loss or
make advance reimbursements of expenses in accordance with the terms of
this agreement, RP Financial shall have all remedies available at law or in
equity to enforce such obligation.
It is understood that, in connection with RP Financial's above-mentioned
engagement, RP Financial may also be engaged to act for the Association in one
or more additional capacities, and that the terms of the original engagement may
be incorporated by reference in one or more separate agreements. The provisions
of Paragraph 3 herein shall apply to the original engagement, any such
additional engagement, any modification of the original engagement or such
additional engagement and shall remain in full force and effect following the
completion or termination of RP Financial's engagement(s). This agreement
constitutes the entire understanding of the Association and RP Financial
concerning the subject matter addressed herein, and such contract shall be
governed and construed in accordance with the laws of the State of Virginia.
This agreement may not be modified, supplemented or amended except by written
agreement executed by both parties.
<PAGE>
Board of Directors
September 17, 1998
Page 5
Capitol Federal and RP Financial are not affiliated, and neither Capitol
Federal nor RP Financial has an economic interest in, or is held in common with,
the other and has not derived a significant portion of its gross revenues,
receipts or net income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter, together with
the initial retainer fee of $10,000.
Sincerely,
/s/ Ronald S. Riggins
-------------------------------
Ronald S. Riggins
President and Managing Director
Agreed To and Accepted By: /s/ John B. Dicus
-------------------------------
John B. Dicus
President
Upon Authorization by the Board of Directors For:
Capitol Federal Savings & Loan Association
Topeka, Kansas
Date Executed: November 16, 1998
-----------------
September 17, 1998
Board of Directors
Capitol Federal Savings & Loan Association
700 Kansas Avenue
Topeka, Kansas 66603-3809
Dear Members of the Board:
This letter sets forth the agreement between Capitol Federal Savings & Loan
Association, Topeka, Kansas ("Capitol Federal" or the "Association"), and RP
Financial, LC. ("RP Financial"), whereby the Association has engaged RP
Financial to prepare the regulatory business plan and financial projections to
be adopted by the Association's Board of Directors in conjunction with the
concurrent mutual holding company reorganization and minority stock offering.
These services are described in greater detail below.
Description of Proposed Services
- --------------------------------
RP Financial's business planning services will include the following areas:
(1) evaluating Capitol Federal's current financial and operating condition,
business strategies and anticipated strategies in the future; (2) analyzing and
quantifying the impact of business strategies, incorporating the use of net
offering proceeds both in the short and long term; (3) preparing detailed
financial projections on a quarterly basis for a period of at least three fiscal
years to reflect the impact of Board approved business strategies and use of
proceeds; (4) preparing the written business plan document which conforms with
applicable regulatory guidelines including a description of the use of proceeds
and how the convenience and needs of the community will be addressed; and (5)
preparing the detailed schedules of the capitalization of the Association and
mutual holding company and related cash flows.
Contents of the business plan will include: Philosophy/Goals; Economic
Environment and Background; Lending, Leasing and Investment Activities; Deposit,
Savings and Borrowing Activity; Asset and Liability Management; Operations;
Records, Systems and Controls; Growth, Profitability and Capital; Responsibility
for Monitoring this Plan.
RP Financial agrees to prepare the business plan and accompanying financial
projections in writing such that the business plan can be filed with the
appropriate regulatory agencies prior to filing the appropriate applications.
<PAGE>
Board of Directors
September 17, 1998
Page 2
Fee Structure and Payment Schedule
- ----------------------------------
The Association agrees to compensate RP Financial for preparation of the
business plan on a fixed fee basis of $20,000. Payment of the professional fees
shall be made upon delivery of the completed business plan.
The Association also agrees to reimburse RP Financial for those direct
out-of-pocket expenses necessary and incidental to providing the business
planning services. Reimbursable expenses will likely include shipping,
telephone/facsimile printing, computer and data services, and shall be paid to
RP Financial as incurred and billed. RP Financial will agree to limit
reimbursable expenses in conjunction with the appraisal engagement, subject to
written authorization from the Association to exceed such level.
In the event the Association shall, for any reason, discontinue this
planning engagement prior to delivery of the completed business plan and payment
of the progress payment fee, the Association agrees to compensate RP Financial
according to RP Financial's standard billing rates for consulting services based
on accumulated and verifiable time expenses, not to exceed the fixed fee
described above, plus reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so
as to materially change the nature or the work content of the business planning
services described in this contract, the terms of said contract shall be subject
to renegotiation by the Association and RP Financial. Such unforeseen events may
include changes in regulatory requirements as it specifically relates to Capitol
Federal or potential transactions which will dramatically impact the Association
such as a pending acquisition or branch transaction.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ Ronald S. Riggins
-------------------------------
Ronald S. Riggins
President and Managing Director
Agreed To and Accepted By: /s/ John B. Dicus
-------------------------------
John B. Dicus
President
Upon Authorization by the Board of Directors For:
Capitol Federal Savings & Loan Association
Topeka, Kansas
Date Executed: November 16, 1998
-----------------
September 17, 1998
Board of Directors
Capitol Federal Savings & Loan Association
700 Kansas Avenue
Topeka, Kansas 66603-3809
Dear Members of the Board:
This letter sets forth the agreement between Capitol Federal Savings & Loan
Association, Topeka, Kansas ("Capitol Federal" or the "Association"), and RP
Financial, LC. ("RP Financial"), whereby the Association has engaged RP
Financial to prepare the regulatory business plan and financial projections for
the private charitable foundation to be formed in conjunction with the
concurrent mutual holding company reorganization and minority stock offering.
These services are described in greater detail below.
Description of Proposed Services
- --------------------------------
RP Financial's business planning services will include the following areas:
(1) describing potential charitable organizations to receive grants or donations
based on parties identified by the Association; (2) describing the potential
cash flows of the foundation over a five year period; (3) preparing detailed
financial projections on an annual basis for a period of five fiscal years to
reflect the impact of the anticipated cash flows; (4) describing the corporate
governance of the foundation, including the management of the charitable
foundation on a day-to-day basis; (5) preparing the written business plan
document which conforms with applicable regulatory guidelines; and (6)
describing the general policies and procedures of the charitable foundation.
RP Financial agrees to prepare the business plan and accompanying financial
projections in writing such that the business plan can be filed with the
appropriate regulatory agencies in accordance with the scheduled filing date.
Fee Structure and Payment Schedule
- ----------------------------------
The Association agrees to compensate RP Financial for preparation of the
business plan for the charitable foundation on a fixed fee basis of $20,000.
Payment of the professional fees shall be made upon delivery of the completed
business plan.
<PAGE>
Board of Directors
September 17, 1998
Page 2
The Association also agrees to reimburse RP Financial for those direct
out-of-pocket expenses necessary and incidental to providing the business
planning services. Reimbursable expenses will likely include shipping,
telephone/facsimile printing, computer and data services, and shall be paid to
RP Financial as incurred and billed. RP Financial will agree to limit
reimbursable expenses in conjunction with the appraisal engagement, subject to
written authorization from the Association to exceed such level.
In the event the Association shall, for any reason, discontinue this
planning engagement prior to delivery of the completed business plan and payment
of the progress payment fee, the Association agrees to compensate RP Financial
according to RP Financial's standard billing rates for consulting services based
on accumulated and verifiable time expenses, not to exceed the fixed fee
described above, plus reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so
as to materially change the nature or the work content of the business planning
services described in this contract, the terms of said contract shall be subject
to renegotiation by the Association and RP Financial. Such unforeseen events may
include changes in regulatory requirements as it specifically relates to Capitol
Federal or changes in the amount of the contribution or structure of the
foundation, which will dramatically impact the charitable foundation's cash
flows, corporate governance or operations.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ Ronald S. Riggins
-------------------------------
Ronald S. Riggins
President and Managing Director
Agreed To and Accepted By: /s/ John B. Dicus
-------------------------------
John B. Dicus
President
Upon Authorization by the Board of Directors For:
Capitol Federal Savings & Loan Association
Topeka, Kansas
Date Executed: November 16, 1998
SUBSIDIARIES OF THE REGISTRANT
(Upon the completion of Transaction)
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- ---------- -------------
<S> <C> <C> <C>
Capitol Federal Financial Capitol Federal Savings Bank 100% Federal
Capitol Federal Savings Bank Capitol Funds, Inc. 100% Kansas
</TABLE>
It is contemplated that the financial statements of the Registrant will be
consolidated with Capitol Federal Savings Bank.
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
Capitol Federal Savings and Loan Association
Topeka, Kansas
We consent to the use in this Registration Statement on Form S-1 for Capitol
Federal Financial and in Forms MHC-1 and MHC-2 for Capitol Federal Savings and
Loan Association, of our report of Capitol Federal Savings and Loan Association
dated November 17, 1998, appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the heading of
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Kansas City, Missouri
December 2, 1998
Exhibit 23.3
RP FINANCIAL, LC.
_______________________________________
Financial Services Industry Consultants
November 20, 1998
Board of Directors
Capitol Federal Savings and Loan Association
700 Kansas Avenue
Topeka, Kansas 66603
Members of the Board of Directors:
We hereby consent to the use of our firm's name in the Form MHC-1 for
Capitol Federal Savings and Loan Association and Form MHC-2 and Application on
Form H-e(1) for Capitol Federal Financial and any amendments thereto, and in the
Form S-1 Registration Statement and any amendments thereto for Capitol Federal
Financial. We also hereby consent to the inclusion of, summary of and references
to our Appraisal Report and our statement concerning subscription rights in such
filings including the Prospectus of Capitol Federal Financial.
Respectfully submitted,
RP FINANCIAL, LC.
/s/ Ronald S. Riggins
-----------------------------------
Ronald S. Riggins
President and Managing Director
________________________________________________________________________________
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No: (703) 528-1788
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1998 OF
CAPITOL FEDERAL SAVINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 12,254
<INT-BEARING-DEPOSITS> 12,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 160,569
<INVESTMENTS-MARKET> 160,712
<LOANS> 3,729,811
<ALLOWANCE> 4,981
<TOTAL-ASSETS> 5,314,901
<DEPOSITS> 3,894,180
<SHORT-TERM> 0
<LIABILITIES-OTHER> 83,389
<LONG-TERM> 675,000
0
0
<COMMON> 0
<OTHER-SE> 662,332
<TOTAL-LIABILITIES-AND-EQUITY> 5,314,901
<INTEREST-LOAN> 268,446
<INTEREST-INVEST> 23,025
<INTEREST-OTHER> 14,206
<INTEREST-TOTAL> 363,644
<INTEREST-DEPOSIT> 203,426
<INTEREST-EXPENSE> 31,471
<INTEREST-INCOME-NET> 128,747
<LOAN-LOSSES> 3,362
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 49,466
<INCOME-PRETAX> 88,772
<INCOME-PRE-EXTRAORDINARY> 88,772
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,991
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 6,229
<LOANS-PAST> 18,985
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,639
<CHARGE-OFFS> 20
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,981
<ALLOWANCE-DOMESTIC> 4,981
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,265
</TABLE>
CAPITOL FEDERAL SAVINGS BANK REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF Capitol Federal
Savings and Loan ("Capitol Federal Savings Bank" OR THE "BANK") FOR USE ONLY AT
A SPECIAL MEETING OF MEMBERS TO BE HELD ON MARCH XX, 1999 AND ANY ADJOURNMENT
THEREOF.
The undersigned being a member of Capitol Federal Savings Bank, hereby
authorizes the Board of Directors of Capitol Federal Savings Bank or any
successors in their respective positions, as proxy, with full powers of
substitution, to represent the undersigned at the Special Meeting of Members of
Capitol Federal Savings Bank to be held at the (name of location) on March XX,
1999, at (Time), Central Time, and at any adjournment of said meeting, and
thereat to act with respect to all votes that the undersigned would be entitled
to cast, if then personally present, as set forth below:
(1) To vote FOR or AGAINST a Plan of Reorganization ("Plan of
Reorganization") pursuant to which Capitol Federal Savings would be converted to
a federally chartered stock savings bank as a wholly owned subsidiary of Capitol
Federal Financial (the "Company"), and the Company would become a majority-owned
subsidiary of Capitol Federal Financial Mutual Holding Company (the "MHC"), a
federally chartered mutual holding company, and the transactions provided for in
such Plan of Reorganization.
FOR [ ] AGAINST [ ]
(2) To approve the creation of The Capitol Federal Foundation and the
Company's contribution to the Foundation of shares of Company Common Stock
pursuant to the Plan of Reorganization.
FOR [ ] AGAINST [ ]
This Proxy, if executed, will be voted FOR adoption of the Plan of
Reorganization, FOR the creation of the Foundation and for adjournment of the
Special Meeting if necessary if no choice is made herein. Please date and sign
this proxy on the reverse side and return it in the enclosed envelope.
- --------------------------------------------------------------------------------
CAPITOL FEDERAL SAVINGS BANK REVOCABLE PROXY
Any Member giving a proxy may revoke it at any time before it is voted by
delivering to the Secretary of Capitol Federal Savings Bank either a written
revocation of the proxy, or a duly executed proxy bearing a later date, or by
voting in person at the Special Meeting.
The undersigned hereby acknowledges receipt of a Notice of Special Meeting of
the Members of Capitol Federal Savings Bank called for the XX day of March, 1999
and a Proxy Statement for the Special Meeting prior to the signing of this
Proxy.
-------------------------------------------
Signature Date
-------------------------------------------
Signature Date
NOTE: Please sign exactly as your name
appears on this Proxy. Only one signature
is required in the case of a joint account.
When signing in a representative capacity,
please give title.
IMPORTANT: PLEASE VOTE, DATE AND SIGN ALL PROXIES
AND RETURN IN THE ENCLOSED ENVELOPE
- --------------------------------------------------------------------------------
<PAGE>
CAPITOL FEDERAL FINANCIAL
Stock Sales Center
700 Kansas Avenue
Topeka, Kansas
(XXX)-XXX-XXXX
STOCK ORDER FORM
- --------------------------------------------------------------------------------
Deadline: The Subscription Offering ends at 12:00 noon, Central Time, on March
xx, 1999. Your original Stock Order Form and Certification Form, properly
executed and with the correct payment, must be received (not postmarked) at the
address on the top of this form, or at any Capitol Federal Savings Bank branch
office, by the deadline, or it will be considered void. Faxes or copies of this
form will not be accepted.
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount Due
- -------------------- --------------------
X $10.00 =
- -------------------- --------------------
Minimum -- 25 Shares Maximum -- See the Stock Ownership Guide
and Stock Order Form Instructions and the Prospectus
- --------------------------------------------------------------------------------
Method of Payment
(3) [ ] Enclosed is a check, bank draft or money order payable to Capitol
Federal Financial for $___________.
(4) [ ] I authorize Capitol Federal Savings Bank to make withdrawals from my
Capitol Federal Savings Bank certificate or savings account(s) shown
below, and understand that the amounts will not otherwise be available
for withdrawal:
Account Number(s) Amount(s)
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
Total Withdrawal
---------
There is NO penalty for early withdrawal.
- --------------------------------------------------------------------------------
(5) Purchaser Information (check one)
a. [ ] Eligible Account Holder - Check here if you were a depositor with $50.00
or more on deposit with Capitol Federal Savings Bank as of June 30, 1997.
Enter information below for all deposit accounts that you had at Capitol
Federal Savings on June 30, 1997.
b. [ ] Supplemental Eligible Account Holder - Check here if you were a depositor
with $50.00 or more on deposit with Capitol Federal Savings Bank as of
Month XX, 1999 but are not an Eligible Account Holder. Enter information
below for all deposit accounts that you had at Capitol Federal Savings
Bank on Month XX, 199X.
c. [ ] Other Member - Check here if you were a depositor of Capitol Federal
Savings Bank as of Month XX, 199X or a borrower whose loan was
outstanding as of Month XX, 199X which continued to be outstanding at
Month XX, 199X, but are not an Eligible Account Holder or a Supplemental
Eligible Account Holder. Enter information below for all deposit accounts
that you had at Capitol Federal Savings Bank on Month XX, 199X.
d. [ ] Directors, Officers and Employees - Check here if you are a Director,
Officer or Employee of Capitol Federal Savings Bank.
-----------------------------------
o These account numbers correspond to the
preprinted registration in the top left
hand corner of this form.
-----------------------------------
Account Title (Names on Accounts) Account Number
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Please Note: Failure to list all of your accounts may result in the loss of
part or all of your subscription rights. (additional space on back of form)
o These may not be all of your qualifying accounts.
o You must list any account numbers from other stock order forms you have
received in the mail and any other accounts that you have or have had at
Capitol Federal Savings Bank.
o All Subscription orders are subject to the provisions of the Plan of
Reorganization and the related Plan of Stock issuance.
- --------------------------------------------------------------------------------
<PAGE>
(6) [ ] Check here if you are a director, officer or employee of Capitol Federal
Savings Bank or a member of such person's immediate family (same
household).
- --------------------------------------------------------------------------------
(7) [ ] NASD Affiliation - see description on reverse side hereof.
- --------------------------------------------------------------------------------
(8) Stock Registration - Please Print Legibly and Fill Out Completely
(Note: The Stock Certificate and all correspondence related to this stock
order will be mailed to the address provided below)
[ ] Individual [ ] Corporation
[ ] Joint Tenants [ ] Partnership
[ ] Tenants in Common [ ] Individual Retirement Account
[ ] Uniform Transfer to Minors [ ] Fiduciary/Trust (Under
[ ] Uniform Gift to Minors Agreement Dated______________)
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Mailing Daytime
Address Telephone
----------------------------------------------------------------------------
Zip Evening
City State Code County Telephone
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acknowledgment: By signing below, I acknowledge receipt of the Prospectus dated
February XX, 1999 and understand I may not change or revoke my order once it is
received by Capitol Federal Financial I also certify that this stock order is
for my account and there is no agreement or understanding regarding any further
sale or transfer of these shares. Applicable regulations prohibit any persons
from transferring, or entering into any agreement directly or indirectly to
transfer, the legal or beneficial ownership of subscription rights or the
underlying securities to the account of another person. Capitol Federal
Financial will pursue any and all legal and equitable remedies in the event it
becomes aware of the transfer of subscription rights and will not honor orders
known by it to involve such transfer. Under penalties of perjury, I further
certify that: (1) the social security number or taxpayer identification number
given above is correct and (2) I am not subject to backup withholding. You must
cross out this item (2) above if you have been notified by the Internal Revenue
Service that you are subject to backup withholding because of under-reporting
interest or dividends on your tax return. By signing below, I also acknowledge
that I have not waived any rights under the Securities Act of 1933 and the
Securities Exchange Act of 1934.
Signature: THIS FORM MUST BE SIGNED AND DATED TWICE: Here and on the
Certification Form. This order is not valid if the Stock Order Form and
Certification Form are not both signed and properly completed. Your order will
be filled in accordance with the provisions of the Plan of Reorganization and
Plan of Stock Issuance as described in the Prospectus. An additional signature
is required only if payment is by withdrawal from an account that requires more
than one signature to withdraw funds.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
OFFICE USE Date Rec'd ___/___/___ Check # ______________
Amount $______________ Category ______________
Batch # _____-_____________ Order # ______________ Deposit $______________
- --------------------------------------------------------------------------------
<PAGE>
CAPITOL FEDERAL FINANCIAL
- --------------------------------------------------------------------------------
Item (5) continued; Purchaser Information
Account Title (Names on Accounts) Account Number
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Item (7) continued - NASD Affiliation (This section only applies to those
individuals who meet the delineated criteria)
Check box if you are a member of the National Association of Securities Dealers,
Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a
period of three months following the issuance and (2) to report this
subscription in writing to the applicable NASD member within one day of the
payment therefor.
- --------------------------------------------------------------------------------
CERTIFICATION FORM
(This Certification Must Be Signed In Addition to the Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF
CAPITOL FEDERAL FINANCIAL ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY CAPITOL FEDERAL SAVINGS BANK OR BY THE FEDERAL
GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Office of
Thrift Supervision Regional Director, Name and Phone Number.
I further certify that, before purchasing the Common Stock of Capitol Federal
Financial I received a copy of the Prospectus dated February XX, 1999 which
discloses the nature of the Common Stock being offered thereby and describes the
following risks involved in an investment in the Common Stock under the heading
"Risk Factors" beginning on page 12 of the Prospectus:
1. Control of the Company by the MHC
2. Waiver of Dividends by the MHC
3. Impact of Wholesale Leverage Strategy
4. Potential Low Return on Equity Following the Reorganization; Uncertainty as
to Future Growth Opportunities
5. Dilutive Effect of Issuance of Additional Shares
6. Establishment of the Foundation
7. Potential Effects of Changes in Interest Rates and the Current Interest
Rate Environment
8. Strong Competition Within the Bank's Market Area
9. Geographic Concentration of Loans
10. Regulatory Oversight and Legislation
11. Absence of Market for the Common Stock
12. Possible Increase in Number of Shares of Common Stock Issued in the
Reorganization
13. Potential Increased Compensation Expense After the Reorganization
14. Year 2000 Compliance
15. Irrevocability of Orders; Potential Delay in Completion of Offerings
- ------------------------------------ ------------------------------------
Signature Date Signataure Date
- ------------------------------------ ------------------------------------
(Note: If shares are to be held jointly; both parties must sign)
EXECUTION OF THIS CERTIFICATION FORM WILL NOT CONSTITUTE A WAIVER OF ANY RIGHTS
THAT A PURCHASER MAY HAVE UNDER THE SECURITIES ACT OF 1933. THE COMMON SHARES
OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR
ANY OTHER GOVERNMENT AGENCY.
================================================================================
Capitol Federal
Financial
the holding company for
Capitol Federal Savings
Become a Shareholder!
================================================================================
<PAGE>
Capital Requirements
Tangible Capital Core Capital Risk-Based Capital
---------------- ------------ ------------------
Required ................. 1.50% 3.00% 8.00%
9/30/98 .................. 12.20% 12.20% 27.23%
Pro Forma* ............... 0.00% 0.00% 0.00%
* At the midpoint of the offering range
As of September 30, 1998, Capitol Federal Savings Bank (the "Bank") exceeded all
regulatory capital requirements.
- --------------------------------------------------------------------------------
Loan Portfolio Composition
The Bank's loan portfolio primarily consists of loans secured by single-family
residence. To a much lesser extent, the Bank also makes home equity loans,
commercial and multi-family real estate loans, construction loans, commerical
business loans and consumer loans.
At 9/30/98 % of Total
---------- ----------
One- to four-family $3,504,799 93.5%
Commercial RE 9,069 0.2%
Multi-family Residential 40,361 1.1%
Construction 52,086 1.4%
Consumer 143,349 3.8%
Comercial Business 10 0.0%
---------- -----
$3,749,674 100.0%
========== =====
- --------------------------------------------------------------------------------
Efficiency Ratio
The Bank is very effective at controlling operations costs. The efficiency
ratio, a commonly used industry ratio measuring the cost of producing each
dollar of revenue, is significantly better than peer group and national
averages.
For the years ended September 30,
------------------------------------------
1998 1997 1996* 1995 1994
------ ------ ------ ------ ------
Efficiency Ratio .................. 35.80% 34.63% 62.51% 47.43% 41.74%
* Fiscal 1996 results include the effect of a one-time SAIF recapitalization
assessment of approximately $24.2 million, or $14.5 million net of taxes.
Excluding this non-recurring assessment, the efficiency ratio would have been
41.39%.
<PAGE>
PRO FORMA DATA*
At or For the Year Ended September 30, 1998
<TABLE>
<CAPTION>
MINIMUM MIDPOINT MAXIMUM MAXIMUM
OF RANGE OF RANGE OF RANGE OF RANGE (adj.)
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Shares Sold in Offerings ... 32,136,106 37,807,183 43,478,261 50,000,000
Shares Outstanding ......... 77,785,445 91,512,287 105,239,131 121,025,001
Sale Price Per Share ....... $10.00 $10.00 $10.00 $10.00
Gross Proceeds ............. $321,361,059 $378,071,830 $434,782,609 $500,000,000
Pro Forma Shareholders'
Equity ................... $922,484,444 $970,711,287 $1,018,938,130 $1,074,399,000
Pro Forma Shareholders'
Equity per Share ......... $11.86 $10.61 $9.68 $8.88
Price/Book Ratio (a) ....... 84.32% 94.27% 103.28% 112.64%
Pro Forma Net Earnings
per Share ................ $0.75 $0.65 $0.57 $0.50
Price/Earnings Ratio (a) ... 13.30x 15.43x 17.51x 19.83x
</TABLE>
- ----------
* Information based upon assumptions in the Prospectus under "Pro Forma Data".
(a) This is not intended to represent potential price appreciation. There are no
assurances that the market price will be at or above the offering price once
the shares are issued.
SELECTED FINANCIAL RATIOS
At or for the Years Ended June 30,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Return on average assets ............... 1.05% 1.12% 0.60% 0.73% 1.01%
Return on average equity ............... 8.68% 9.26% 5.03% 6.07% 8.56%
Interest rate spread ................... 1.83% 1.97% 1.86% 1.39% 1.46%
Average equity to average assets ....... 12.15% 12.13% 12.02% 11.98% 11.75%
Non-performing assets to total assets .. 0.15% 0.18% 0.17% 0.41% 0.21%
Allowance for loan losses to
nonperforming loans .................. 60.76% 18.81% 20.71% 7.54% 47.10%
The stock offered in connection with the conversion is not a deposit or account
and is not federally insured or guaranteed. This is not an offer to sell or a
solicitation of an offer to buy stock. The offer will be made only by the
Prospectus accompanied by a Stock Order Form and Certification Form.
<PAGE>
================================================================================
Stock Sales Center
(XXX)-XXX-XXXX
================================================================================
<PAGE>
- --------------------
STOCK OFFERING
QUESTIONS
AND ANSWERS
- --------------------
Capitol Federal Financial
(The proposed holding company for Capitol Federal Savings Bank)
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER
GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS
FACTS ABOUT THE REORGANIZATION
- ------------------------------
The Board of Directors of Capitol Federal Savings and Loan Association (the
"Bank") unanimously adopted a Plan of Reorganization to reorganize (the
"Reorganization") from a federally chartered mutual savings institution to a
federally chartered stock institution, which will be a subsidiary of Capitol
Federal Financial (the "Company"), and the Company will be a subsidiary of
Capitol Federal Financial MHC (the "MHC").
This brochure answers some of the most frequently asked questions about the
Reorganization and about your opportunity to invest in the Company.
Investment in the stock of Capitol Federal Financial involves certain risks. For
a discussion of these risks and other factors, including a complete description
of the offering, investors are urged to read the accompanying Prospectus,
especially the discussion under the heading "Risk Factors".
WHY IS THE BANK REORGANIZING?
- -----------------------------
Through the sale of stock, the Company will raise capital, which will provide
further support to the Bank and will facilitate the Bank's efforts to expand its
current financial and other services.
The Reorganization also will allow customers and friends to purchase stock and
share in the Company's and the Bank's future.
WILL THE REORGANIZATION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
- -------------------------------------------------------------------
No. The Conversion will have no effect on the balance or terms of any savings
account or loan, and your deposits will continue to be federally insured by the
Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. Your
savings account is not being converted to stock.
WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERINGS?
- ----------------------------------------------------------------
Certain past and present depositors of the Bank and the Company's Employee Stock
Ownership Plan.
HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
- -------------------------------------------------------------
Capitol Federal Financial is offering through the Prospectus up to 50,000,000
shares of common stock, subject to adjustment as described in the Prospectus, at
a price of $10.00 per share.
HOW MUCH STOCK MAY I BUY?
- -------------------------
The minimum order is 25 shares. No person may purchase more than $500,000 of
common stock in the subscription offering and no person, together with
associates of and persons acting in concert with such person, may purchase more
than $5,000,000 of common stock.
DO MEMBERS HAVE TO BUY STOCK?
- -----------------------------
No. However, the Reorganization will allow the Bank's depositors an opportunity
to buy stock and become charter shareholders of the Company, which will be the
holding company for the local financial institution with which they do business.
HOW DO I ORDER STOCK?
- ---------------------
You must complete the enclosed Stock Order Form and Certification Form.
Instructions for completing your Stock Order Form and Certification Form are
contained in this packet. Your order must be received by the Bank prior to 12:00
noon, Central Time, on March XX, 1999.
<PAGE>
HOW MAY I PAY FOR MY SHARES OF STOCK?
- -------------------------------------
First, you may pay for stock by check, cash or money order. Interest will be
paid by the Bank on these funds at the passbook rate from the day the funds are
received until the completion or termination of the Reorganization. Second, you
may authorize us to withdraw funds from your Capitol Federal savings account or
certificate of deposit for the amount of funds you specify for payment. You will
not have access to these funds from the day we receive your order until
completion or termination of the Reorganization.
CAN I PURCHASE SHARES USING FUNDS IN MY CAPITOL FEDERAL SAVINGS IRA ACCOUNT?
- ----------------------------------------------------------------------------
Federal regulations do not permit the purchase of stock from your existing
Capitol Federal IRA account. To accommodate our depositors, we have made
arrangements with an outside trustee to allow such purchases. Please call our
Stock Sales Center for additional information.
WILL THE STOCK BE INSURED?
- --------------------------
No. Like any other common stock, the Company's stock will not be insured.
WILL DIVIDENDS BE PAID ON THE STOCK?
- ------------------------------------
The Board of Directors of the Company will consider whether to pay a cash
dividend in the future, subject to regulatory limits and requirements. No
decision has been made as to the amount or timing of such dividends, if any.
HOW WILL THE STOCK BE TRADED?
- -----------------------------
The Company's stock is expected to trade on The Nasdaq National Market under the
symbol "CFTK". However, no assurance can be given that an active and liquid
market will develop.
ARE OFFICERS AND DIRECTORS OF THE BANK PLANNING TO PURCHASE STOCK?
- ------------------------------------------------------------------
Yes! The Bank's officers and directors plan to purchase, in the aggregate, $X.X
million worth of stock or approximately X.X% of the stock offered at the
midpoint of the offering range.
MUST I PAY A COMMISSION?
- ------------------------
No. You will not be charged a commission or fee on the purchase of shares in the
Reorganization.
SHOULD I VOTE?
- --------------
Yes. Your "YES" vote is very important!
PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS!
WHY DID I GET SEVERAL PROXY CARDS?
- ----------------------------------
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts.
HOW MANY VOTES DO I HAVE?
- -------------------------
Your proxy card(s) show(s) the number of votes you have. Every depositor
entitled to vote may cast one vote for each $100 or fraction thereof, on deposit
as of the voting record date up to 1,000 votes.
Borrowers of the Bank entitled to vote may cast one vote in addition to any
votes they may have as depositors.
MAY I VOTE IN PERSON AT THE SPECIAL MEETING?
- --------------------------------------------
Yes, but we would still like you to sign and mail your proxy today. If you
decide to revoke your proxy you may do so by giving notice at the special
meeting.
FOR ADDITIONAL INFORMATION YOU MAY CALL OUR STOCK SALES CENTER BETWEEN 9:00 A.M.
AND 5:00 P.M. MONDAY THROUGH FRIDAY.
- --------------------------------------------------------------------------------
STOCK SALES CENTER
(XXX)-XXX-XXXXX
- --------------------------------------------------------------------------------
Capitol Federal Financial
Location
Location
<PAGE>
February XX, 1999
Dear Member:
We are pleased to announce that Capitol Federal Savings and Loan
Association (the "Bank") is reorganizing from a federally chartered mutual
savings institution to a federal mutual holding company form of ownership (the
"Reorganization"). In conjunction with the Reorganization, Capitol Federal
Financial, the newly formed corporation that will serve as holding company for
the Bank, is offering shares of common stock in a subscription offering and
community offering and to our Employee Stock Ownership Plan pursuant to a Plan
of Reorganization.
Unfortunately, Capitol Federal Financial is unable to either offer or sell
its common stock to you because the small number of eligible subscribers in your
jurisdiction makes registration or qualification of the common stock under the
securities laws of your jurisdiction impractical, for reasons of cost or
otherwise. Accordingly, this letter should not be considered an offer to sell or
a solicitation of an offer to buy the common stock of Capitol Federal Financial.
However, as a member of Capitol Federal Savings you have the right to vote
on the Plan of Reorganization at the Special Meeting of Members to be held on
March XX, 1999. Therefore, enclosed is a proxy card, a Proxy Statement (which
includes the Notice of the Special Meeting), a Prospectus (which contains
information incorporated into the Proxy Statement) including a complete
discussion of the offering and a return envelope for your proxy card.
I invite you to attend the Special Meeting on March XX, 1999. However,
whether or not you are able to attend, please complete the enclosed proxy card
and return it in the enclosed envelope to ensure your vote is counted at the
Special Meeting.
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
<PAGE>
February XX, 1999
Dear Prospective Investor:
We are pleased to announce that Capitol Federal Savings and Loan
Association (the "Bank") is reorganizing from a federally chartered mutual
savings institution to a federal mutual holding company form of ownership (the
"Reorganization"). In conjunction with the Reorganization, Capitol Federal
Financial, the newly formed corporation that will serve as holding company for
the Bank, is offering shares of common stock in a subscription offering and to
our Employee Stock Ownership Plan pursuant to a Plan of Reorganization. The sale
of stock in connection with the Reorganization will enable the Bank to raise
additional capital to support and enhance its current operations.
We have enclosed the following materials that will help you learn more
about the merits of Capitol Federal Financial common stock as an investment.
Please read and review the materials carefully.
PROSPECTUS: This document provides detailed information about operations at
the Bank and a complete discussion on the proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock offering
are found in this pamphlet.
STOCK ORDER FORM & CERTIFICATION FORM: This form is used to purchase stock
by returning it with your payment in the enclosed business reply envelope.
The deadline for ordering stock is 12:00 noon, Central Time, March XX,
1999.
We invite our loyal customers and local community members to become charter
shareholders of Capitol Federal Financial. Through this offering you have the
opportunity to buy stock directly from Capitol Federal Financial without a
commission or a fee. The board of directors and senior management of the Bank
fully support the stock offering.
Should you have additional questions regarding the Reorganization and stock
offering, please call us at (XXX) XXX-XXXX, Monday through Friday from 9:00 a.m.
to 5:00 p.m., or stop by the Stock Sales Center located at (Locations)
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
================================================================================
STOCKGRAM
We are pleased to announce that Capitol Federal Financial, the proposed holding
company for Capitol Federal Savings Bank, is offering shares of common stock in
a subscription offering. The sale of stock in connection with the offering will
enable Capitol Federal Savings Bank to raise additional capital to support and
enhance its current franchise.
We previously mailed to you a Prospectus providing detailed information about
Capitol Federal Savings' operations and the proposed stock offering. We urge you
to read the Prospectus carefully.
We invite our loyal customers and community members to become shareholders of
Capitol Federal Financial. If you are interested in purchasing the common stock
of Capitol Federal Financial, your Stock Order Form, Certification Form and
payment must be received by the Bank prior to 12:00 noon, Central Time, on March
XX, 1999.
Should you have additional questions regarding the stock offering or need
additional materials, please call the Stock Sales Center at (XXX) XXX-XXXX or
stop by the Stock Sales Center at 700 Kansas Avenue, Topeka, Kansas.
The shares of common stock being offered are not savings accounts or deposits
and are not insured by the Federal Deposit Insurance Corporation, the Bank
Insurance Fund, the Savings Association Insurance Fund or any other governmental
agency. This is not an offer to sell or a solicitation of an offer to buy stock.
The offer is made only by the Prospectus.
================================================================================
<PAGE>
CAPITOL FEDERAL FINANCIAL
Stock Ownership Guide and Stock Order Form Instructions
Stock Order Form Instructions -- All subscription orders are subject to the
provisions of the Plan of Reorganization and the related Plan of Stock Issuance.
- --------------------------------------------------------------------------------
Item 1 and 2 - Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares ordered by the subscription price of $10.00 per share. The minimum
purchase is 25 shares. Generally, the maximum purchase for any person is 50,000
shares. No person, together with associates, as defined, and no person acting in
concert may purchase more than 50,000 shares. For additional information, see
"The Reorganization and Stock Issuance Limitations on Stock Issuance" in the
Prospectus.
Item 3 - Payment for shares may be made in cash (only if delivered by you in
person), by check, bank draft or money order payable to CAPITOL FEDERAL
FINANCIAL. DO NOT MAIL CASH. Your funds will earn interest at Capitol Federal
Savings (the "Bank") current passbook rate.
Item 4 - To pay by withdrawal from a savings account or certificate at the Bank,
insert the account number(s) and the amount(s) you wish to withdraw from each
account. If more than one signature is required for a withdrawal, all
signatories must sign in the signature box on the front of this form. To
withdraw from an account with checking privileges, please write a check. The
Bank will waive any applicable penalties for early withdrawal from certificate
accounts. A hold will be placed on the account(s) for the amount(s) you indicate
to be withdrawn. Payments will remain in account(s) until the stock offering
closes. If a partial withdrawal reduces the balance of a certificate account to
less than the applicable minimum, the remaining balance will thereafter earn
interest at the passbook rate.
Item 5 - Please check the appropriate box to tell us the earliest of the three
dates as of which you were a depositor. The preprinted account numbers
correspond to the preprinted name(s) and address at the top of the order form.
These may not be all of your qualifying accounts. Registered holder(s) noted in
Item 8 on the Stock Order Form must list every account they have or had at the
Bank as of the earliest of the three dates. If you do not list all of your
accounts, you may not receive all of the shares for which you are eligible.
Item 6 - Please check this box to indicate whether you are a director, officer
or employee of the Bank, or a member of such person's immediate family.
Item 7 - Please check this box if you have a NASD ("National Association of
Securities Dealers, Inc.") affiliation (as defined on the reverse side of the
Stock Order Form.
Item 8 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Capitol Federal
Financial common stock. Please complete this section as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number(s)
and your daytime and evening phone numbers. We will need to call you if we can
not execute you order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Subscription
rights are not transferable. If you are a qualified member, to protect your
priority over other purchasers as described in the Prospectus, you must take
ownership in at least one of the account holder's names.
<PAGE>
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual - The Stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with rights of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Uniform Gift to Minors - For residents of many states, stock may by held in the
name of a custodian for the benefit of a minor under the Uniform Gift to Minors
Act. For residents in other states, stock may be held in a similar type of
ownership under the Uniform Transfer to Minors Act of the individual state. For
either ownership, the minor is the actual owner of the stock with the adult
custodian being responsible for the investment until the child reaches legal
age. Only one custodian and one minor may be designated.
Instructions: On the first name line, print the first name, middle initial and
last name of the custodian, with the abbreviation "CUST" after the name. Print
the first name, middle initial and last name of the minor on the second name
line. Use the minor's social security number.
Corporation/Partnership - Corporation/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
The Bank does not offer a self-directed IRA. Please contact the Stock
Information Center if you have any questions about your IRA account.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first name line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first name line. Following the
name, print the fiduciary title such as trustee, executor, personal
representative, etc. On the second name line, print the name of the maker, donor
or testator or the name of the beneficiary. Following the name, indicate the
type of legal document establishing the fiduciary relationship (agreement, court
order, etc.). In the blank after "Under Agreement Dated", fill in the date of
the document governing the relationship. The date of the document need not be
provided for a trust created by a will.
<PAGE>
[KBW LOGO]
Charles Webb & Company
A Division of
KEEFE, BRUYETTE & WOODS, INC.
To Members and Friends of
Capitol Federal Savings and Loan Association
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Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc., a member of
the National Association of Securities Dealers, Inc. ("NASD"), is assisting
Capitol Federal Savings (the "Bank") in its reorganization from a federally
chartered mutual savings institution into the federal mutual holding company
form of ownership and the concurrent offering of shares of common stock by
Capitol Federal Financial (the "Company"), the newly formed corporation that
will serve as holding company for the Bank following the Reorganization.
At the request of the Company, we are enclosing materials explaining this
process and your options, including an opportunity to invest in shares of the
Company's common stock being offered to customers through March XX, 1999. Please
read the enclosed offering materials carefully including the prospectus for a
complete discussion of the offering. The Company has asked us to forward these
documents to you in view of certain requirements of the securities laws in your
state.
Should you have any questions, please visit our Stock Sales Center at
(locations) or feel free to call the Stock Information Center at (XXX)-XXX-XXXX.
Very truly yours,
Charles Webb & Company
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<PAGE>
February XX, 1999
Dear Member:
We are pleased to announce that Capitol Federal Savings and Loan
Association (the "Bank") is reorganizing from a federally chartered mutual
savings institution to a federal mutual holding company form of ownership (the
"Reorganization"). In conjunction with the Reorganization, Capitol Federal
Financial, the newly formed corporation that will serve as holding company for
the Bank, is offering shares of common stock in a subscription offering and to
our Employee Stock Ownership Plan pursuant to a Plan of Reorganization.
To accomplish the Reorganization, we need your participation in an
important vote. Enclosed is a proxy statement describing the Plan of
Reorganization and your voting and subscription rights. The Plan of
Reorganization has been approved by the Office of Thrift Supervision and now
must be approved by you. YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the proxy material, is your proxy card located behind
the window of your mailing envelope. This proxy should be signed and returned to
us prior to the Special Meeting to be held on March XX, 1999. Please take a
moment to sign the enclosed proxy card and return it to us in the postage-paid
envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE
REORGANIZATION.
The Board of Directors of the Bank believe the Reorganization will offer a
number of advantages such as an opportunity for depositors and customers of the
Bank to become shareholders. Please remember:
o Your accounts at the Bank will continue to be insured up to the
maximum legal limit by the Federal Deposit Insurance Corporation
("FDIC").
o There will be no change in the balance, interest rate, or maturity of
any deposit accounts because of the Reorganization.
o Members have a right, but no obligation, to buy stock before it is
offered to the public.
o Like all stock, stock issued in this offering will not be insured by
the FDIC.
Enclosed is a prospectus containing a complete discussion of the stock
offering. We urge you to read these materials carefully. If you are interested
in purchasing the common stock of Capitol Federal Financial, your Stock Order
Form and Certification Form and payment must be received by the Bank prior to
12:00, noon, Central Time, on March XX, 1999.
If you have additional questions regarding the stock offering, please call
us at (XXX) xxx-xxxx, Monday through Friday from 9:00 a.m. to 5:00 p.m., or stop
by the Stock Sales Center located at (Locations).
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND
OR ANY OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
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PROXYGRAM
We recently forwarded to you a proxy statement and related materials regarding a
proposal to reorganize Capitol Federal Savings and Loan Association from a
federally chartered mutual savings bank to a federally chartered mutual holding
company form of ownership.
Your vote on our Plan of Reorganization has not yet been received.
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Failure to Vote has the Same Effect as Voting Against the Reorganization.
Your vote is important to us. Therefore, we are requesting that you sign the
enclosed proxy card and return it promptly in the enclosed postage-paid
envelope.
Voting for the Reorganization does not obligate you to purchase stock or affect
the terms or insurance on your accounts.
The Board of Directors unanimously recommend you vote "FOR" the Reorganization.
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Capitol Federal Savings and Loan Association
Topeka, Kansas
John C. Dicus
Chairman and Chief Executive Officer
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If you mailed the proxy, please accept our thanks and disregard this request.
For further information call (XXX) XXX-XXXX.
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