UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-24118
CAPITOL FEDERAL FINANCIAL
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(Exact name of registrant as specified in its charter)
UNITED STATES 48-1212142
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
700 Kansas Avenue, Topeka, Kansas 66603
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (785) 235-1341
----------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and asked
price of such stock on the Nasdaq National Market as of December 1, 1999, was
$942.2 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
As of December 1, 1999, there were issued and outstanding 91,462,287 shares of
the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the year ended September 30, 1999. Part III of Form 10-K - Portions of the proxy
statement for the Annual Meeting of Stockholders for the year ended September
30, 1999.
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FORWARD-LOOKING STATEMENTS
Capitol Federal Financial, and its wholly-owned subsidiary, Capitol
Federal Savings Bank, may from time to time make written or oral
"forward-looking statements", including statements contained in their filings
with the Securities and Exchange Commission ("SEC"). These forward-looking
statements may be included in this Annual Report on Form 10-K and the exhibits
attached to it, in Capitol Federal Financial's reports to stockholders and in
other communications by the company, which are made in good faith by us pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the U.S. economy in general and the strength of
the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal
Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for our products and services;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and
regulations, including laws concerning taxes, banking, securities
and insurance;
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not all inclusive. We do not undertake
to update any forward-looking statement, whether written or oral, that may be
made from time to time by or on behalf of Capitol Federal Financial or Capitol
Federal Savings.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Capitol Federal Financial is a federally chartered mid-tier holding
company that completed its initial public offering in March 1999 in the
reorganization of Capitol Federal Savings from a federally chartered mutual
savings and loan association into the federal mutual holding company form of
organization. Pursuant to the reorganization, Capitol Federal Savings converted
to a federally chartered stock savings bank as a wholly-owned subsidiary of
Capitol Federal Financial, which is majority owned by Capitol Federal Savings
Bank MHC, a federally chartered mutual holding company. Capitol Federal
Financial's common stock is traded on the Nasdaq-Amex National Market under the
symbol "CFFN."
Capitol Federal Savings Bank is the only operating subsidiary of Capitol
Federal Financial. Capitol Federal Savings Bank is a federally-chartered and
insured savings bank headquartered in Topeka, Kansas and is examined and
regulated by the Office of Thrift Supervision ("OTS"), its primary regulator. It
is also regulated by the Federal Deposit Insurance Corporation ("FDIC"). We
currently serve 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 25 full service and six limited
service banking offices. At September 30, 1999, we had total assets of $6.54
billion, deposits of $3.90 billion and total equity of $1.05 billion.
We have been, and 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 attract retail deposits from the general public and
invest those funds primarily in permanent loans secured by first mortgages on
owner-occupied, 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
purchase whole loans and invest in certain investment and mortgage-related
securities funded through retail deposits and Federal Home Loan Bank ("FHLB")
advances.
Our revenues are derived principally from interest on loans and
mortgage-related and investment 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.
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Our executive offices are located at 700 Kansas Avenue, Topeka, Kansas
66603 and our telephone number at that address is (785) 235-1341.
MARKET AREA
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 or
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, 1999, our net loan portfolio totaled $4.29
billion, which constituted 65.6% 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 asset and liability management committee 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 the borrower and the estimated value of the
subject property. Information pertaining to creditworthiness of the 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.
At September 30, 1999, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities was approximately $143.5
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 four loans totaling $27.8 million at September 30, 1999.
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, 1999 was
$7.1 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
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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 Capitol Federal
Savings, in addition to personal guarantees of up to $2.3 million. The loan
terms require additional contingent interest payments to Capitol Federal Savings
of 25% of the net profits of the development, if any. At September 30, 1999,
five of a planned eight phases have been developed, with 264 lots sold. 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 78%. 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, and Capitol
Federal Savings has an assignment of leases. The remaining two loans to this
group of related borrowers 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, 1999.
The second largest lending relationship at September 30, 1999, consisted
of loans totaling $14.6 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, 1999.
5
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OUR LOAN PORTFOLIO. The following table presents information concerning
the composition of our 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,
----------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
REAL ESTATE LOANS:
One- to four-family........................... $4,083,148 94.10% $3,504,799 93.47% $3,145,799 93.69%
Multi-family.................................. 31,114 0.72 40,361 1.08 26,688 0.79
Commercial.................................... 11,415 0.26 9,069 0.24 5,924 0.18
Construction and development.................. 56,660 1.30 52,086 1.39 51,157 1.52
------------ -------- ---------- -------- ---------- ------
Total real estate loans.................. 4,182,337 96.38 3,606,315 96.18 3,229,568 96.18
----------- -------- ---------- -------- ---------- ------
OTHER LOANS:
Consumer Loans:
Savings.................................... 15,281 0.35 16,446 0.44 16,314 0.49
Student.................................... 16,424 0.38 20,120 0.54 23,365 0.70
Home improvement........................... 2,072 0.05 2,776 0.07 3,341 0.10
Automobile................................. 7,122 0.16 5,758 0.15 4,120 0.12
Home equity................................ 115,779 2.67 97,829 2.61 80,640 2.40
Other...................................... 330 0.01 420 0.01 294 0.01
------------ -------- ---------- -------- ---------- ------
Total consumer loans..................... 157,008 3.62 143,349 3.82 128,074 3.82
Commercial business loans..................... --- --- 10 --- --- ---
------------ -------- ---------- -------- ---------- ------
Total other loans........................ 157,008 3.62 143,359 3.82 128,074 3.82
------------ ------- ---------- -------- ---------- ------
Total loans receivable 4,339,345 100.00% 3,749,674 100.00% 3,357,642 100.00%
======= ======== ======
LESS:
Loans in process.............................. 29,043 21,690 21,872
Deferred fees and discounts................... 14,607 12,751 12,029
Allowance for losses.......................... 4,407 4,081 1,639
------------ ---------- ----------
Total loans receivable, net................... $ 4,291,288 $3,711,152 $3,322,102
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1996 1995
----------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
REAL ESTATE LOANS:
One- to four-family...........................$2,794,342 93.80% $2,611,554 94.29%
Multi-family.................................. 29,341 0.98 32,795 1.18
Commercial.................................... 4,999 0.17 4,721 0.17
Construction and development.................. 38,488 1.29 14,088 0.51
---------- ------- ---------- ------
Total real estate loans.................. 2,867,170 96.24 2,663,158 96.15
---------- ------- ---------- ------
OTHER LOANS:
Consumer Loans:
Savings.................................... 16,703 0.56 16,016 0.58
Student.................................... 27,703 0.93 32,765 1.18
Home improvement........................... 2,183 0.07 2,221 0.08
Automobile................................. 2,372 0.08 2,183 0.08
Home equity................................ 62,895 2.11 53,107 1.92
Other...................................... 309 0.01 234 0.01
---------- ------- ---------- ------
Total consumer loans..................... 112,165 3.76 106,526 3.85
Commercial business loans..................... --- --- --- ---
---------- ------- ---------- ------
Total other loans........................ 112,165 3.76 106,526 3.85
---------- ------- ---------- ------
Total loans receivable 2,979,335 100.00% 2,769,684 100.00%
======= ======
LESS:
Loans in process.............................. 21,047 5,773
Deferred fees and discounts................... 11,799 10,918
Allowance for losses.......................... 1,583 1,359
---------- ----------
Total loans receivable, net...................$2,944,906 $2,751,634
========== ==========
</TABLE>
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The following table shows the composition of our loan portfolio by fixed-
and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------ --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
FIXED-RATE LOANS:
Real estate:
One- to four-family...........................$ 2,618,998 60.35% $2,010,809 53.64% $1,403,790 41.81%
Multi-family.................................. 28,467 0.66 34,266 0.91 19,069 0.57
Commercial.................................... 5,556 0.12 8,208 0.22 4,667 0.14
Construction and development.................. 29,976 0.69 19,829 0.53 9,404 0.28
----------- -------- ---------- ------ ---------- ------
Total real estate loans.................... 2,682,997 61.82 2,073,112 55.29 1,436,930 42.80
Consumer....................................... 33,043 0.76 29,970 0.80 27,335 0.81
Commercial business............................ --- --- 10 --- --- ---
----------- -------- ---------- ------ ---------- ------
Total fixed-rate loans..................... 2,716,040 62.58 2,103,092 56.09 1,464,265 43.61
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family........................... 1,464,150 33.75 1,493,990 39.85 1,742,009 51.88
Multi-family.................................. 2,647 0.06 6,095 0.16 7,619 0.23
Commercial.................................... 5,859 0.14 861 0.02 1,257 0.04
Construction and development.................. 26,684 0.61 32,257 0.86 41,753 1.24
----------- -------- ---------- ------ ---------- ------
Total real estate loans.................... 1,499,340 34.56 1,533,203 40.89 1,792,638 53.39
Consumer....................................... 123,965 2.86 113,379 3.02 100,739 3.00
----------- -------- ---------- ------ ---------- ------
Total adjustable-rate loans................ 1,623,305 37.42 1,646,582 43.91 1,893,377 56.39
----------- -------- ---------- ------ ---------- ------
Total loans................................ 4,339,345 100.00% 3,749,674 100.00% 3,357,642 100.00%
======== ====== ======
LESS:
Loans in process............................... 29,043 21,690 21,872
Deferred fees and discounts.................... 14,607 12,751 12,029
Allowance for loan losses...................... 4,407 4,081 1,639
----------- ---------- ----------
Total loans receivable, net................. $4,291,288 $3,711,152 $3,322,102
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1996 1995
-------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
FIXED-RATE LOANS:
Real estate:
One- to four-family...........................$1,085,992 36.45% $ 817,233 29.51%
Multi-family.................................. 16,113 0.54 18,469 0.67
Commercial.................................... 3,463 0.12 2,734 0.10
Construction and development.................. 6,315 0.21 5,292 0.19
---------- ------ ---------- -------
Total real estate loans.................... 1,111,883 37.32 843,728 30.47
Consumer....................................... 22,585 0.76 21,586 0.78
Commercial business............................ --- --- --- ---
---------- ------ ---------- -------
Total fixed-rate loans..................... 1,134,468 38.08 865,314 31.25
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family........................... 1,708,350 57.34 1,794,322 64.77
Multi-family.................................. 13,228 0.44 14,326 0.52
Commercial.................................... 1,536 0.05 1,987 0.07
Construction and development.................. 32,173 1.08 8,796 0.32
---------- ------ ---------- -------
Total real estate loans.................... 1,755,287 58.91 1,819,431 65.68
Consumer....................................... 89,580 3.01 84,939 3.07
Total adjustable-rate loans................---------- ------ ---------- -------
1,844,867 61.92 1,904,370 68.75
---------- ------ ---------- -------
Total loans................................ 2,979,335 100.00% 2,769,684 100.00%
====== =======
LESS:
Loans in process............................... 21,047 5,773
Deferred fees and discounts.................... 11,799 10,918
Allowance for loan losses...................... 1,583 1,359
---------- ----------
Total loans receivable, net.................$2,944,906 $2,751,634
========== ==========
</TABLE>
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The following schedule illustrates the contractual maturity of our loan
portfolio at September 30, 1999. 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
One- to Four-Family Commercial and Development
------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------- ------------ ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During
Years Ending
September 30,
1999(1)......................... $ 4,898 7.68% $ --- ---% $ 10,688 6.63%
2000............................ 5,937 7.30 --- --- 45,072 7.40
2001............................ 4,577 8.78 --- --- 900 6.88
2002 and 2003................... 15,461 7.74 6,244 9.13 --- ---
2004 to 2005.................... 18,787 7.71 1,176 7.71 --- ---
2006 to 2020.................... 1,152,487 7.10 30,752 7.79 --- ---
2021 and beyond................. 2,881,001 7.01 4,357 7.69 --- ---
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------------- ------------ ------------- ------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
September 30,
1999(1)......................... $ --- ---% $--- ---% $ 15,586 6.96%
2000............................ 12,317 7.61 --- --- 63,326 7.43
2001............................ 3,650 8.20 --- --- 9,127 8.36
2002 and 2003................... 8,704 8.46 --- --- 30,409 8.23
2004 to 2005.................... 4,451 8.23 --- --- 24,414 7.80
2006 to 2020.................... 90,032 8.68 --- --- 1,273,271 7.23
2021 and beyond................. 37,854 9.06 --- --- 2,923,212 7.04
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
The total amount of loans due after September 30, 2000 which have
predetermined interest rates is $2.7 billion, while the total amount of loans
due after such date which have floating or adjustable interest rates is $1.6
billion.
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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 generally throughout
the Midwest. These purchases allow us to attain geographic diversification and
manage credit concentration risks in the loan portfolio. At September 30, 1999,
one- to four-family residential mortgage loans totaled $4.08 billion, or 94.1%
of our gross loan portfolio.
We generally underwrite our one- to four-family loans based on the
applicant's employment and credit history, and the 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 loss exposure. 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-rate basis, as consumer demand dictates. Our pricing
strategy for mortgage loans includes setting interest rates that are competitive
with Fannie Mae and Freddie Mac and local financial institutions, and consistent
with our internal needs. Adjustable-rate mortgage ("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
indices to reprice our ARM loans. During the 1999 and 1998 fiscal years, we
originated $306.3 million and $198.9 million of one- to four-family ARM loans,
and $905.7 million and $878.6 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 and Market
Risk" in the Annual Report to Stockholders attached as Exhibit 13 to this Annual
Report on Form 10-K.
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
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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.
In order to remain competitive in our market areas, we currently originate
ARM loans at initial rates below the fully indexed rate. We 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 "-- Classified Assets." At September 30, 1999, our one- to four-family ARM
loan portfolio totaled $1.46 billion, or 33.7% of our gross loan portfolio. At
that date the fixed-rate one- to four-family mortgage loan portfolio totaled
$2.62 billion, or 60.4% 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, 1999, multi-family and
commercial real estate loans totaled $42.5 million or 1.0% 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 indices, 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, which is 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."
We do not generally maintain a tax or insurance escrow account for 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
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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 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, or 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. We also
make 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, 1999, we had $56.7 million in
construction loans outstanding, representing 1.3% of our gross loan portfolio.
Construction loans are obtained principally through continued business
with builders who have previously borrowed from us. 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, including the land and the
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 us.
At September 30, 1999, Capitol Federal Savings had three acquisition and
development loans totaling $12.9 million.
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 our 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
11
<PAGE>
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.
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,
which reduces 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, 1999, our consumer loan portfolio totaled $157.0 million, or 3.6% of our
gross loan portfolio.
We offer 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. Our
home equity loans, including lines of credit, and home improvement loans
comprised approximately 75.1% of our total consumer loan portfolio at September
30, 1999. 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 our 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. Indirect
loans are contracts purchased from retailers of goods or services which have
extended credit to their customers.
Our underwriting standards 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.
12
<PAGE>
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.
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. As a result of the reorganization, we have also expanded
our leverage strategy by increasing our wholesale borrowings and the purchase of
mortgage-related securities.
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 us. 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 us, to originate or purchase large dollar volumes of real estate loans
may be substantially reduced or restricted, with a resultant decrease in
interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" in the Annual
Report to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
13
<PAGE>
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
(In Thousands)
ORIGINATIONS BY TYPE:
Adjustable rate:
Real estate - one- to four-family........ $ 306,322 $ 198,857 $315,314
- multi-family......... 4,855 --- 6,240
- commercial........... --- --- ---
Non-real estate - consumer............... 96,147 86,848 71,536
- commercial business.. --- 10 ---
---------- ---------- --------
Total adjustable-rate............. 407,324 285,715 393,090
---------- ---------- --------
Fixed rate:
Real estate - one- to four-family........ 905,720 878,567 412,960
- multi-family......... --- --- 250
- commercial........... --- 350 ---
Non-real estate - consumer............... 31,835 26,312 26,514
---------- ---------- --------
Total fixed-rate.................. 937,555 905,229 439,724
---------- ---------- --------
TOTAL LOANS ORIGINATED............ 1,344,879 1,190,944 832,814
---------- ---------- --------
PURCHASES:
Real estate - one- to four-family........ 215,942 124,724 117,424
- multi-family......... --- --- ---
- commercial........... --- --- ---
Non-real estate - consumer............... 17 30 ---
---------- ---------- --------
Total loans purchased............. 215,959 124,754 117,424
Mortgage-related securities available for
sale(excluding REMICs and CMOs) 962,182 256,076 245,102
Mortgage-related securities held to
maturity(excluding REMICs and CMOs) 103,426 --- ---
REMICs and CMOs.......................... 833,166 363,068 112,442
---------- ---------- --------
TOTAL PURCHASED................... 2,114,733 743,898 474,968
---------- ---------- --------
SALES AND REPAYMENTS:
Real estate - one- to four-family........ 15,306 23,160 4,563
Non-real estate - consumer (student loans 12,818 13,620 15,059
---------- ---------- --------
Total loans sold.................. 28,124 36,780 19,622
Mortgage-related securities.............. --- --- ---
---------- ---------- --------
Total sales....................... 28,124 36,780 19,622
PRINCIPAL REPAYMENTS..................... 1,624,735 1,113,628 558,990
---------- ---------- --------
Total reductions.................. 1,652,859 1,150,408 578,612
---------- ---------- --------
Increase in other items, net............. 218,719 202,100 102,532
---------- ---------- --------
Net increase...................... $1,588,034 $ 582,334 $626,638
=========== ========== ========
</TABLE>
14
<PAGE>
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 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 our 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, 1999.
Loans Delinquent for
30-89 Days
-----------------------------------------
Percent of
Total Delinquent
Number Amount Loans
----------- ----------- ----------------
(Dollars in Thousands)
Real Estate:
One- to four-family... 281 $17,352 97.95%
Multi-family.......... --- --- ---
Commercial............ --- --- ---
Construction or 1 55 0.31
development.............
Consumer................ 26 308 1.74
Commercial business..... --- --- ---
------ ------- -------
Total.............. 308 $17,715 100.00%
====== ======= =======
15
<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,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Non-accruing loans:
One- to four-family............... $ 4,921 $6,048 $4,989 $3,889 $ 3,950
Multi-family...................... --- --- --- --- ---
Commercial real estate............ --- --- 1,042 --- ---
Construction or development....... --- --- --- 100 228
Consumer.......................... 55 181 78 1 23
Commercial business............... --- --- --- --- ---
------- ------ ------ ------ --------
Total.......................... 4,976 6,229 6,109 3,990 4,201
------- ------ ------ ------ --------
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............... 1,073 1,964 2,435 3,552 1,864
Multi-family...................... --- --- --- --- 11,852
Commercial real estate............ --- --- --- --- ---
Construction or development....... --- --- --- --- ---
Consumer.......................... --- --- --- --- ---
Commercial business............... --- --- --- --- ---
------- ------ ------ ------ -------
Total.......................... 1,073 1,964 2,435 3,552 13,716
------- ------ ------ ------ -------
Total non-performing assets......... $ 6,049 $8,193 $8,544 $7,542 $17,917
======= ====== ====== ====== =======
Total as a percentage of total
assets.............................. .09% 0.15% 0.17% 0.17% 0.41%
======= ====== ====== ====== =======
</TABLE>
For the year ended September 30, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $151,000. The amount that was included in
interest income on such loans was $70,000 for the year ended September 30, 1999.
NON-PERFORMING LOANS. At September 30, 1999, we had $4.9 million in
non-performing loans, which constituted 0.1% 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 $1.0 million, either individually or in the
aggregate.
16
<PAGE>
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above, as of September 30, 1999, there was also an aggregate of
$8.3 million 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 assets classification 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, 1999, we had classified $6.1
million of our assets as substandard, none as doubtful and none as loss. The
amount classified substandard represented 0.6% of our retained earnings and 0.1%
of our assets at September 30, 1999.
PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses in
fiscal 1999 of $395,000, compared to $2.5 million in fiscal 1998 and $56,000 in
fiscal 1997. The provision for loan losses is charged to income to bring our
allowance for loan losses to a level deemed appropriate by management based on
the factors discussed below under "-- Allowance for Loan Losses." The provision
for loan losses in fiscal 1999 was based on management's review of such factors
which indicated that the allowance for loan losses was adequate to cover losses
inherent in the loan portfolio as of September 30, 1999.
17
<PAGE>
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
for identified problem loans and portfolio segments and the unallocated
allowance. In addition, the allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of such loans or pools
of loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors for loans on residential properties with greater
than four units and loans on construction and development and commercial
properties are computed based on an evaluation of inherent losses on these
loans. Pooled loan loss factors are based on expected net charge-offs for one
year and are applied to loans that are homogeneous in nature, such as one- to
four-family residential loans and consumer loans.
The appropriateness of the allowance is reviewed by management based upon
its evaluation of then-existing economic and business conditions affecting our
key lending areas and other conditions, such as credit quality trends (including
trends in nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions
within portfolio segments and recent loss experience in particular segments of
the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of the loan. Senior
management reviews these conditions quarterly in discussions with our senior
credit officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the loss related to this condition is reflected in
the unallocated allowance. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent in
the loan portfolio. The amounts actually observed in respect of these losses can
vary significantly from the estimated amounts. Our methodology as described
permits adjustments to any loss factor used in the computation of the formula
allowance in the event that, in management's judgment, significant factors which
affect the collectibility of the portfolio as of the evaluation date are not
reflected in the current loss factors. By assessing the estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon any more recent information that
has become available.
18
<PAGE>
At September 30, 1999, our allowance for loan losses was $4.4 million or
.10% of the total loan portfolio and approximately 89% of total nonaccrual
loans. This compares with an allowance for loan losses of $4.1 million or .11%
of the total loan portfolio and approximately 66% of the total nonaccrual loans
as of September 30, 1998. At fiscal year end 1999, the unallocated portion of
the allowance for loan losses was $2,000. The allocated portion of the allowance
of $4.4 million is composed of credit losses related to the loan portfolio.
During 1999, changes in assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
affected the assessment of the allocated allowance.
During 1999, our single-family residential loan portfolio increased by
$578.3 million over 1998. In addition, the non-performing single-family loans
decreased by $1.1 million, or 18.3%, from $6.0 million at September 30, 1998 to
$4.9 million at September 30, 1999. The provision for loan losses in fiscal 1999
of $395,000, representing 0.6 % of pretax earnings, was recorded in allocated
allowance to reflect the increase in the single family residential mortgage
loans as a result of the increase in loan originations, which contributed to an
increase in the formula allowance. The provision represents 0.7% of the 1999
increase in the portfolio. We also reviewed the ratio of our non-performing
loans to total loans and compared this to our ratio of allowance for loan losses
to net loans receivable.
During 1999, our multi-family loan portfolio decreased by approximately
23.0% to $30.9 million. This decrease is the result of fewer lending
opportunities in various market areas. We increased our provision for credit
losses to 0.5% of the multi-family loan portfolio. The increase was due to an
increase in the amount of multifamily loans classified as watch. We also
decreased our portfolio of commercial real estate loans by approximately 38.1%
to $5.6 million while maintaining our provision for credit losses to 0.8% of the
commercial real estate loan portfolio. The portfolio of construction and
development loans increased by approximately 3.9% to $32.9 million. However, we
maintained our provision for credit losses at 1.1% of the construction and
development loan portfolio. The increase in the amount of the provision was
partially due to an increase in the amount of construction and development loans
classified as watch. Our consumer loan portfolio increased 13.7% to $156.7
million during 1999 as a result of increased marketing efforts. We maintained
our provision for credit losses on consumer loans to approximately 0.1% of the
consumer loan portfolio. These increases in provision for credit losses properly
allocate the inherent credit loss provision based upon the known risks of the
various loan portfolios in 1999.
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 our loan portfolios.
Based upon the foregoing analysis of our reserving methodology, it is
management's belief that the increase in the formula allowance provided for the
additional losses inherent in the portfolio. Historical net charge-offs are not
necessarily indicative of the amount of net charge-offs that Capitol
19
<PAGE>
Federal Savings will realize in the future related to the increase in the single
family residential loan portfolio.
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at beginning of period....... $4,081 $1,639 $1,583 $1,359 $3,878
Charge offs:
One- to four-family................ 44 20 --- --- ---
Multi-family....................... --- --- --- 641 2,519
Commercial real estate............. --- --- --- --- ---
Construction or development........ --- --- --- --- ---
Consumer........................... 25 --- --- --- ---
Commercial business................ --- --- --- --- ---
------ ------ ------ ------ ------
Total charge-offs................ 69 20 --- 641 2,519
Recoveries........................... --- --- --- --- ---
--- --- --- ---
------ ------ ------ ------ ------
Net charge-offs...................... 69 20 --- 641 2,519
Provisions (recoveries) charged to
operations.......................... 395 2,462 56 865 ---
------ ------ ------ ------ ------
Balance at end of period........... $4,407 $4,081 $1,639 $1,583 $1,359
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period................... ---% ---% ---% 0.02% 0.10%
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average non-performing
assets.............................. .97% 0.06% ---% 1.26% 4.86%
====== ====== ====== ====== ======
Allowance as a percentage of
non-performing loans................. 88.57% 65.52% 26.83% 39.67% 32.35%
====== ====== ====== ====== ======
Allowance as a percentage of total
loans (end of period)............... .10% 0.11% 0.05% 0.05% 0.05%
====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
The distribution of our allowance for loan losses at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Amount of Loans Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance By Category Loans Allowance By Category Loans
--------- ------------- ------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
One- to four-family.......... $ 3,635 $4,069,704 94.74% $3,222 $3,496,699 94.12%
Multi-family................. 146 30,889 .72 200 40,091 1.08
Commercial real estate....... 42 5,574 .13 77 9,006 0.24
Construction or
development................ 375 32,856 .76 348 31,610 0.85
Consumer..................... 207 156,672 3.65 174 137,817 3.71
Commercial business.......... --- --- --- --- 10 ---
Unallocated.................. 2 --- --- 60 ---
-------- ---------- ------ ------ ----------
Total................... $4,407 $4,295,695 100.00% $4,081 $3,715,233 100.00%
======== ========== ====== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------------------------
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
--------- ------------ ------- --------- ------------ ------- --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
One- to four-family.......... $1,208 $3,137,101 94.38% $1,011 $2,784,247 94.49% 994 $2,602,296 94.53%
Multi-family................. 66 26,416 0.79 427 29,341 1.00 63 32,795 1.19
Commercial real estate....... 18 5,864 0.18 9 4,999 0.17 17 4,646 0.17
Construction or
development................ 67 30,900 0.93 85 17,547 0.60 29 8,333 0.30
Consumer..................... 41 123,460 3.71 42 110,355 3.75 21 104,923 3.81
Commercial business.......... --- --- --- --- --- --- --- --- ---
Unallocated.................. 239 --- --- 9 --- --- 234 --- ---
------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Total................... $1,639 $3,323,741 100.00% $1,583 $2,946,489 100.00% $1,358 $2,752,993 100.00%
====== ========== ====== ====== ========== ====== ====== ========== ======
</TABLE>
21
<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 OTS regulations and
at 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, 1999, our regulatory liquidity ratio, which is our liquid assets
as a percentage of net withdrawable savings deposits with a maturity of one year
or less and current borrowings, was 62.5%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. 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 --Capitol Federal Savings" 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 our investment portfolio, subject to the direction and guidance of
the asset and liability management committee. 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 provide
liquidity when loan demand is high, to assist in maintaining earnings when loan
demand is low and to 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 and Market Risk" in the Annual
Report to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
Our investment securities currently consist of U.S. Government and agency
securities. See Note 2 of the Notes to Consolidated Financial Statements. Our
mortgage-related securities portfolio consists of securities issued by
government-sponsored agencies. A portion of the 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-related securities are used to create
investment classes with different maturities and, in some cases, different
amortization schedules, as well as a residual interest, with each such class
22
<PAGE>
possessing different risk characteristics. We do not purchase any residual
interest bonds. See Notes 4 and 5 of the Notes to Consolidated Financial
Statements.
During fiscal year 1999 we increased our portfolio of these securities by
$1.01 billion. In conjunction with the reorganization, we purchased $352.8
million of adjustable rate mortgage-backed securities, with an average yield of
6.51%, funded primarily by the proceeds received in the reorganization. These
securities had various terms to their initial reprice date, but are annually
adjustable following their initial repricing. Following the reorganization, we
implemented our capital utilization plan by purchasing a total of $725.0 million
of these securities, comprised of $621.6 million of fixed rate CMOs and $103.4
million of fixed rate mortgage-backed securities. The CMOs, when purchased, had
an average life of 5.2 years and an average yield of 6.57%. The mortgage-backed
securities, when purchased, had an average life of approximately 8.3 years and
an average yield of 7.35%. The composite average life of these securities was
5.6 years and the average rate was 6.69%. These purchases were completed with a
spread over the cost to fund the purchases of 1.09%. See "Sources of Funds --
Borrowings" for a discussion regarding the funding of these purchases.
The average life of our fixed rate mortgage-related securities is generally
five years at the time of purchase. Premiums associated with mortgage-related
securities 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
mortgage-related securities. At September 30, 1999, we held CMOs totaling $837.5
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, 1999, all but $13.1 million of our CMOs
did not qualify as high risk mortgage securities as defined under OTS
regulations. We do not invest in residual interests of CMOs.
While 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.
23
<PAGE>
The following table sets forth the composition of our investment and
mortgage-related securities portfolio at the dates indicated. Our investment
securities portfolio at September 30, 1999, 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 government or its
agencies.
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
--------------------- --------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
---------- ------- --------- -------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale, at fair value:
Mortgage-related securities............... $1,136,776 100.00% $747,991 100.00% $754,179 100.00%
U.S. government and agency securities..... --- --- --- --- --- ---
---------- ------ -------- ------ -------- ------
Total securities available for sale.... $1,136,776 100.00% $747,991 100.00% $754,179 100.00%
========== ====== ======== ====== ======== ======
Investment securities, at amortized cost:
Mortgage-related securities............... $ 101,977 10.68% --- --- --- ---
U.S. government and agency securities..... 15,000 1.57 $160,469 33.37 $585,294 82.97
CMOs and REMICs........................... 837,515 87.74 320,379 66.61 120,007 17.01
Other investment securities............... 100 .01 100 0.02 100 0.02
---------- ------ -------- ------ -------- ------
Total investment securities............ $ 954,592 100.00% $480,948 100.00% $705,401 100.00%
========== ====== ======== ====== ======== ======
Investment securities, at fair value........ $ 929,574 $479,840 $704,935
========== ======== ========
</TABLE>
24
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding Federal Home Loan Bank stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------------
Less than 1 year 1 to 5 years 5 to 10 years
-------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities..... $12,958 5.98% $ 3,582 9.09% $119,898 6.67%
------- ------ ------- ------ -------- -------
Total securities available for sale.... $12,958 5.98% $ 3,582 9.09% $119,898 6.67%
======= ====== ======= ====== ======== =======
Investment securities:
Mortgage Backed securities................ $ --- --- $ --- --- $ --- ---
U.S. government and agency securities..... --- --- --- --- --- ---
Securities purchased under agreement
to resell................................ --- --- --- --- --- ---
CMOs and REMICs........................... --- --- 52,951 6.40 66,286 7.00
Other investment securities............... --- --- 100 1.50 --- ---
------- ----- ------- ------ -------- ------
Total investment securities........... $ --- ---% $53,051 6.39 $ 66,286 7.00%
======= ===== ======= ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------
Over 10 years Total Securities
-------------------------------------------------------------
Fair
Balance Rate Balance Rate Value
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities..... $986,031 6.63% $1,122,469 6.63% $1,136,776
-------- ------ ---------- ----- ----------
Total securities available for sale.... $986,031 6.63% $1,122,469 6.63% $1,136,776
======== ====== ========== ===== ==========
Investment securities:
Mortgage Backed securities................ $101,977 7.50% $ 101,977 7.50% $ 101,033
U.S. government and agency securities..... 15,000 6.13 15,000 6.13 14,654
Securities purchased under agreement
to resell................................ ---
CMOs and REMICs........................... 718,278 6.40 837,515 6.45 813,787
Other investment securities............... --- --- 100 1.50 100
-------- ------ ---------- ----- ----------
Total investment securities........... $835,255 6.53% $ 954,592 6.56% $ 929,574
======== ====== ========== ===== ==========
</TABLE>
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.
25
<PAGE>
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 our deposit flows during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1999 1998 1997
------------ ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................. $3,894,180 $3,787,123 $3,740,718
Deposits.................................... 5,154,745 4,725,985 4,367,361
Withdrawals................................. 5,321,757 4,795,516 4,496,198
Interest credited........................... 172,397 176,588 175,242
---------- ---------- ----------
Ending balance.............................. $3,899,565 $3,894,180 $3,787,123
========== ========== ==========
Net increase................................ $ 5,385 $ 107,057 $ 46,405
========== ========== ==========
Percent increase............................ .14% 2.83% 1.24%
=== ==== ====
</TABLE>
26
<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,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Demand deposits............................ $ 278,722 7.14% $ 260,440 6.68% $ 249,585 6.58%
Passbook and Passcard...................... 123,479 3.16 129,180 3.31 131,854 3.48
Money market select........................ 322,660 8.26 213,181 5.47 30,405 0.80
Cash fund.................................. 201,275 5.16 225,356 5.78 293,108 7.73
----------- -------- ----------- ------ ---------- ------
Total non-certificates..................... 926,136 23.72 $ 828,157 21.24 704,952 18.59
----------- -------- ----------- ------ ---------- ------
Certificates (by rate):
0.00 - 2.99%.............................. 46 --- --- --- --- ---
3.00 - 3.99%.............................. 5,732 .15 5,900 0.15 7,866 0.21
4.00 - 4.99%.............................. 573,440 14.69 429,108 11.01 25,822 0.68
5.00 - 5.99%.............................. 1,644,605 42.13 1,684,996 43.22 2,224,325 58.67
6.00 - 6.99%.............................. 514,167 13.17 715,234 18.34 598,005 15.77
7.00 - 7.99%.............................. 234,901 6.02 227,695 5.84 220,048 5.80
8.00 - 8.99%.............................. 538 .01 2,405 0.06 5,398 0.14
9.00 - 9.99%.............................. --- --- 685 0.02 707 0.02
----------- ----- ----------- ------ ---------- ------
Total certificates......................... 2,973,429 76.17 3,066,023 78.64 3,082,171 81.29
----------- ------ ----------- ------ ---------- ------
Accrued interest........................... 4,404 .11 4,674 0.12 4,718 0.12
----------- ------ ----------- ------- ---------- ------
Total deposits............................. $ 3,903,969 100.00% $ 3,898,854 100.00% $3,791,841 100.00%
=========== ====== =========== ====== ========== ======
</TABLE>
27
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of September 30, 1999.
<TABLE>
<CAPTION>
0.00- 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, 1999.............. $ 5,756 $ 325,532 $ 145,983 $ 262 $ 477,533 16.06%
March 31, 2000................. 22 478,915 130,782 46 609,765 20.51
June 30, 2000.................. --- 330,900 158,397 39 489,336 16.46
September 30, 2000............. --- 253,170 110,700 179 365,049 12.28
December 31, 2000.............. --- 124,173 135 12 124,320 4.18
March 31, 2001................. --- 174,382 68 --- 174,450 5.87
June 30, 2001.................. --- 71,948 135 --- 72,083 2.42
September 30, 2001............. --- 107,681 42,877 --- 150,558 5.06
December 31, 2001.............. --- 125,852 52,052 --- 177,904 5.98
March 31, 2002................. --- 55,890 67 --- 55,957 1.88
June 30, 2002.................. --- 31,490 11,795 --- 43,285 1.46
September 30, 2002............. --- 44,321 13,320 --- 57,641 1.94
Thereafter..................... --- 93,791 81,757 --- 175,548 5.90
-------- ---------- -------- ----- ---------- -------
Total....................... $5,778 $2,218,045 $749,068 $ 538 $2,973,429 100.00%
====== ========== ======== ===== ========== ======
Percent of total............ .19% 74.60% 25.19% 0.02%
====== ======= ======== =====
</TABLE>
The following table indicates the amount of our certificates of deposit and
other deposits by time remaining until maturity as of September 30, 1999.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000.................................... $427,664 $547,120 $765,504 $ 922,051 $2,662,339
Certificates of deposit of $100,000 or
more........................................ 49,869 62,345 88,880 109,695 310,789
Public Funds................................. 301 301
-------- -------- -------- ---------- ----------
Total certificates of deposit................ $477,533 $609,766 $854,384 $1,031,746 $2,973,429
======== ========= ======== ========== ==========
</TABLE>
Borrowings. Although deposits are our main source of funds, we utilize
borrowings when they are a less costly source of funds, and can be invested at a
positive rate spread, when we desire additional capacity to fund loan demand or
when they meet our asset/liability management goals. Our borrowings have
historically consisted of advances from the FHLB and securities sold under
agreement to repurchase. See Notes 11 and 12 of the Notes to Consolidated
Financial Statements. Following our reorganization, we borrowed $725.0 million
from the FHLB for the purpose of implementing our capital utilization plan.
These advances carry an average cost of 5.60%, are fixed
28
<PAGE>
rate for ten years and each have a call feature which can be exercised on the
fifth anniversary date. If the advances are called by the FHLB, they
automatically convert to a short term variable rate advance. These borrowings
were used because they allow us to lengthen our liability portfolio, which
improves our interest rate risk position, relative to the savings portfolio by
itself. In addition, callable advances typically carry a discounted rate because
of the call option which helps to minimize our cost of funds. At September 30,
1999 we had also utilized $100.0 million of the line-of-credit that we maintain
at the FHLB to fund retail loan production.
We may obtain advances from the Federal Home Loan Bank 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, 1999, we had $1.35 billion in Federal Home Loan Bank advances
outstanding.
The following table sets forth the maximum month-end balance and average
balance of Federal Home Loan Bank advances and securities sold under agreement
to repurchase for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
-------------- --------------- -----------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
Federal Home Loan Bank advances......................... $1,345,000 $500,000 $275,000
Securities sold under agreement to repurchase........... 175,000 175,000 175,000
Average Balance:
Federal Home Loan Bank advances......................... $ 789,510 $365,000 $ 24,167
Securities sold under agreement to repurchase........... 175,000 175,000 82,692
</TABLE>
The following table sets forth certain information as to our borrowings at
the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1999 1998 1997
------------- ---------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal Home Loan Bank advances........................... $ 1,345,000 $500,000 $275,000
Securities sold under agreement to repurchase............. 175,000 175,000 175,000
----------- --------- ---------
Total borrowings..................................... $ 1,520,000 $675,000 $450,000
=========== ======== ========
Weighted average interest rate of Federal Home
Loan Bank advances....................................... 5.61% 5.72% 5.76%
Weighted average interest rate of securities sold
under agreement to repurchase............................ 5.73% 5.73% 5.73%
</TABLE>
29
<PAGE>
Subsidiary and Other Activities
As a federally chartered savings bank, we are permitted by Office of Thrift
Supervision regulations to invest up to 2% of our assets, or $130.8 million at
September 30, 1999, 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.
At September 30, 1999, 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. This loan is described and included under "Lending Activities --
General." As of September 30, 1999, our total investment in this subsidiary was
$11.9 million. During fiscal 1999, Capitol Funds, Inc. reported net income of
$462,000 which consisted of interest funded from loan proceeds, net of income
taxes.
REGULATION
General
Capitol Federal Savings, as a federally chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Capitol Federal Savings also is
subject to regulation and examination by the FDIC, which insures the deposits of
Capitol Federal Savings 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 Office of Thrift
Supervision and are subject to periodic examinations by the Office of Thrift
Supervision 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.
The Office of Thrift Supervision regularly examines Capitol Federal Savings
and prepares reports for the consideration of Capitol Federal Savings' board of
directors on any deficiencies that it may find in Capitol Federal Savings'
operations. The FDIC also has the authority to examine Capitol Federal Savings
in its role as the administrator of the Savings Association Insurance Fund.
Capitol Federal Savings' 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 Capitol
Federal Savings' mortgage requirements. Any change in such regulations, whether
by the FDIC, the Office of Thrift Supervision or Congress, could have a material
adverse impact on Capitol Federal Savings Bank MHC, Capitol Federal Financial
and Capitol Federal Savings and their operations.
Capitol Federal Savings Bank MHC
Capitol Federal Savings Bank MHC is a federal mutual holding company within
the meaning of Section 10(o) of the Home Owners Loan Act. As such, Capitol
Federal Savings Bank MHC is
30
<PAGE>
required to register with and be subject to Office of Thrift Supervision
examination and supervision as well as certain reporting requirements. In
addition, the Office of Thrift Supervision has enforcement authority over
Capitol Federal Savings Bank MHC and its non-savings institution subsidiaries,
if any. Among other things, this authority permits the Office of Thrift
Supervision 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.
A mutual holding company is permitted to, among other things:
o invest in the stock of a savings institution;
o 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;
o merge with or acquire another mutual holding company, one of whose
subsidiaries is a savings institution;
o acquire non-controlling amounts of the stock of savings institutions
and savings institution holding companies, subject to certain
restrictions;
o 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;
o furnish or perform management services for a savings institution
subsidiary of such company;
o hold, manage or liquidate assets owned or acquired from a savings
institution subsidiary of such company;
o hold or manage properties used or occupied by a savings institution
subsidiary of such company; and
o 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
Office of Thrift Supervision 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,
subject to prior approval by the Office of Thrift Supervision.
31
<PAGE>
Capitol Federal Financial
Pursuant to regulations of the Office of Thrift Supervision and the terms
of Capitol Federal Financial's federal stock charter, the purpose and powers of
Capitol Federal Financial are to pursue any or all of the lawful objectives of a
federal mutual holding company subsidiary and to exercise any of the powers
accorded to a mutual holding company subsidiary.
If Capitol Federal Savings fails the qualified thrift lender test, Capitol
Federal Financial must obtain the approval of the Office of Thrift Supervision
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 Capitol Federal Savings Bank MHC and Capitol Federal
Financial 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."
Capitol Federal Savings Bank MHC and Capitol Federal Financial must obtain
approval from the Office of Thrift Supervision before acquiring control of any
other Savings Association Insurance Fund 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.
Capitol Federal Savings
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Capitol Federal
Savings is required to file periodic reports with the Office of Thrift
Supervision and is subject to periodic examinations by the Office of Thrift
Supervision and the FDIC. The last regular Office of Thrift Supervision
examination of Capitol Federal Savings was as of 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
Office of Thrift Supervision and the FDIC, the examiners may require Capitol
Federal Savings 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 Office of
Thrift Supervision. Capitol Federal Savings' Office of Thrift Supervision
assessment for the fiscal year ended September 30, 1999 was $750,800.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including Capitol
Federal Savings, Capitol Federal Financial and Capitol Federal Savings Bank 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 Office of Thrift
Supervision. Except under certain circumstances, public disclosure of final
enforcement actions by the Office of Thrift Supervision is required.
32
<PAGE>
In addition, the investment, lending and branching authority of Capitol
Federal Savings 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 Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Capitol Federal
Savings is in compliance with the noted restrictions.
Capitol Federal Savings' 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, 1999, Capitol Federal Savings'
lending limit under this restriction was $143.5 million. Capitol Federal Savings
is in compliance with the loans-to-one- borrower limitation.
The Office of Thrift Supervision, 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
Capitol Federal Savings is a member of the Savings Association Insurance
Fund, 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 Savings Association Insurance Fund or the
Bank Insurance Fund. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the Office of Thrift
Supervision an opportunity to 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.
33
<PAGE>
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund 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 Savings Association Insurance Fund
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" in the Annual Report
to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K for an
explanation on the special Savings Association Insurance Fund assessment amount
paid by Capitol Federal Savings in 1996.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions ranges from 0 to 27
basis points. However, Savings Association Insurance Fund insured institutions
are required to pay a Financing Corporation assessment, in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s, equal to
approximately 6 basis points for each $100 in domestic deposits, while Bank
Insurance Fund insured institutions pay an assessment equal to approximately 1
basis point for each $100 in domestic deposits. The Savings Association
Insurance Fund assessment is expected to be reduced to about 2 basis points no
later than January 1, 2000, when Bank Insurance Fund insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits will continue until the bonds mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings institutions, such as Capitol Federal Savings,
are required to maintain a minimum level of regulatory capital. The Office of
Thrift Supervision 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 Office of Thrift Supervision 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, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 1999, Capitol Federal Savings did not have any
intangible assets.
At September 30, 1999, Capitol Federal Savings had tangible capital of
$956.8 million, or 14.6% of adjusted total assets, which is approximately $858.2
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
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The capital standards also require core capital equal to at least 3.0% 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 4.0% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3.0% ratio. At September 30, 1999,
Capitol Federal Savings had no intangibles which were subject to these tests.
At September 30, 1999, Capitol Federal Savings had core capital equal to
$956.8 million, or 14.6% of adjusted total assets, which is $693.9 million above
the minimum requirement of 3.0% in effect on that date.
The Office of Thrift Supervision also 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 Office of Thrift Supervision 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, 1999, Capitol Federal Savings had $4.4 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 Office of Thrift Supervision 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 Fannie Mae or
Freddie Mac.
On September 30, 1999, Capitol Federal Savings had total risk-based capital
of $961.2 million and risk-weighted assets of $2.9 billion; or total capital of
33.9% of risk-weighted assets. This amount was $729.2 million above the 8.0%
requirement in effect on that date.
The Office of Thrift Supervision 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 Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution 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 Office of Thrift Supervision may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
Office of Thrift Supervision is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.
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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 has
Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" must be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision 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 Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision 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 Office of Thrift Supervision or the FDIC of any of
these measures on Capitol Federal Savings may have a substantial adverse effect
on its operations and profitability.
Limitations on Dividends and Other Capital Distributions
Office of Thrift Supervision 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.
Generally, savings institutions, such as Capitol Federal Savings, that
before and after the proposed distribution remain well-capitalized, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Capitol Federal Savings may pay
dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution need only
submit written notice to the Office of Thrift Supervision 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 Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "--
Regulatory Capital Requirements."
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Liquidity
All savings institutions, including Capitol Federal Savings, 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 Capitol Federal
Savings includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Commitments" in
the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report
on Form 10-K. 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, 1999, Capitol Federal Savings was in
compliance with the requirement, with an overall liquid asset ratio of 62.5%.
Qualified Thrift Lender Test
All savings institutions, including Capitol Federal Savings, are required
to meet a qualified thrift lender 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, 1999, Capitol Federal Savings met the test and
has always met the test since its effectiveness.
Any savings institution that fails to meet the qualified thrift lender test
must convert to a national bank charter, unless it requalifies as a qualified
thrift lender and thereafter remains a qualified thrift lender. If an
institution does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund insured until the FDIC permits it to
transfer to the Bank Insurance Fund. 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 Federal
Home Loan Bank 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 Federal Home Loan Bank borrowings, which may
result in prepayment penalties. If any institution that fails the qualified
thrift lender 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 "- Capitol
Federal Financial."
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Community Reinvestment Act
Under the Community Reinvestment Act, 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 Community Reinvestment Act 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 Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with the examination of
Capitol Federal Savings, 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 Capitol Federal Savings. An unsatisfactory rating may be used as the
basis for the denial of an application by the Office of Thrift Supervision. Due
to the heightened attention being given to the Community Reinvestment Act in the
past few years, Capitol Federal Savings may be required to devote additional
funds for investment and lending in our local communities. Capitol Federal
Savings was examined for Community Reinvestment Act compliance in March 8, 1999,
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 Capitol Federal Savings include Capitol
Federal Financial and any company which is under common control with Capitol
Federal Savings. 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 Office of Thrift Supervision 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 Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
Federal Securities Law
The stock of Capitol Federal Financial is registered with the SEC under the
Securities Exchange Act of 1934, as amended. Capitol Federal Financial is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Securities Exchange Act of 1934.
Capitol Federal Financial stock held by persons who are affiliates of
Capitol Federal Financial may not be resold without registration or unless sold
in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal stockholders.
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If Capitol Federal Financial meets specified current public information
requirements, each affiliate of Capitol Federal Financial will be 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, 1999, Capitol Federal Savings 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 Office of Thrift Supervision. 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 Federal Home
Loan Bank borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Capitol Federal Savings is a member of the Federal Home Loan Bank of
Topeka, which is one of 12 regional Federal Home Loan Banks, that administers
the home financing credit function of savings institutions. Each Federal Home
Loan Bank 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 Federal Home Loan Bank System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required to be fully secured by sufficient collateral as
determined by the Federal Home Loan Bank. In addition, all long-term advances
are required to provide funds for residential home financing.
As a member, Capitol Federal Savings is required to purchase and maintain
stock in the Federal Home Loan Bank of Topeka. For the year ended September 30,
1999, Capitol Federal Savings had an average outstanding balance of $49.3
million in Federal Home Loan Bank stock, which was in compliance with this
requirement. In past years, Capitol Federal Savings has received substantial
dividends on its Federal Home Loan Bank stock. Over the past three fiscal years
such dividends have averaged 7.16% and were 6.99% for fiscal year 1999.
Under federal law the Federal Home Loan Banks 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 Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in
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the future. A reduction in value of Capitol Federal Savings' Federal Home Loan
Bank stock may result in a corresponding reduction in Capitol Federal Savings'
capital.
For the year ended September 30, 1999, dividends paid by the Federal Home
Loan Bank of Topeka to Capitol Federal Savings totaled $3.4 million, which was
an increase over the amount of dividends received in fiscal year 1998.
TAXATION
Federal Taxation
General. We are 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 Capitol Federal Financial or Capitol Federal Savings. Our
federal income tax returns have been closed without audit as of the close of
business on December 15, 1999 by the IRS through its fiscal year ended September
30, 1996.
We file consolidated federal income tax return using the accrual method of
accounting. To the extent of Capitol Federal's accumulated earnings and profits,
any cash distributions made by Capitol Federal Financial to its stockholders is
considered to be taxable dividends and not as a non-taxable return of capital to
stockholders for federal and state tax purposes.
Bad Debt Reserves. Prior to the Small Business Job Protection Act, Capitol
Federal Savings 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 Small
Business Job Protection 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 Capitol Federal
Savings 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 remaining amount of such reserve
subject to recapture as of September 30, 1999 for Capitol Federal Savings is
approximately $28 million. Capitol Federal Savings continues to utilize the
reserve method in determining its privilege tax obligations to the State of
Kansas.
Taxable Distributions and Recapture. Prior to the Small Business Job
Protection Act, bad debt reserves created prior to the year ended September 30,
1997, were subject to recapture into taxable income should Capitol Federal
Savings 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 Capitol
Federal Savings make certain non-dividend distributions or cease to maintain a
thrift charter.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum
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taxable income. The alternative minimum tax is payable to the extent such
alternative minimum taxable income is in excess of an exemption amount. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. Capitol Federal Savings has not
been subject to the alternative minimum tax, nor do we 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, 1999, Capitol Federal Savings
had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Capitol Federal Financial may
eliminate from its income dividends received from Capitol Federal Savings as a
wholly-owned subsidiary of Capitol Federal Financial. 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, depending 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
Capitol Federal Savings 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 Capitol Federal Financial may be
combined with Capitol Federal Savings for purposes of the Kansas privilege tax.
If combined Kansas privilege tax returns are not filed, Capitol Federal
Financial will file Kansas income tax returns with other non-thrift members of
the affiliated group.
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.
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Employees
At September 30, 1999, we had a total of 782 employees, including 143
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Executive Officers
John C. Dicus. Age 66 years. Mr. Dicus is Chairman of the Board of
Directors and Chief Executive Officer of Capitol Federal Savings and Capitol
Federal Financial. He has served in such capacities for Capitol Federal Savings
since 1989 and with Capitol Federal Financial since its inception in March 1999.
He has served Capitol Federal Savings in various capacities since 1959. He also
served as President of Capitol Federal Savings from 1969 until 1996.
John B. Dicus. Age 38 years. Mr. Dicus is President and Chief Operating
Officer of Capitol Federal Savings and Capitol Federal Financial. He has served
in such capacities for Capitol Federal Savings since 1996 and for Capitol
Federal Financial since its inception in March 1999. Prior to that, he served as
the Executive Vice President of Corporate Services for Capitol Federal Savings
for four years. He has been with Capitol Federal Savings in various other
positions since 1985. Mr. John B. Dicus is the son of Mr. John C. Dicus.
Stanley F. Mick. Age 60 years. Mr. Mick has served as Executive Vice
President and Chief Lending Officer of Capitol Federal Savings since 1991. Since
1994, he has also served as President of Capitol Funds Inc., a subsidiary of
Capitol Federal Savings.
Neil F.M. McKay. Age 58 years. Mr. McKay serves as Executive Vice
President, Chief Financial Officer and Treasurer of Capitol Federal Savings and
Capitol Federal Financial. He has served in such positions with Capitol Federal
Savings since 1994 and Capitol Federal Financial since its inception in March
1999. 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 52 years. Mr. Brubaker has been employed with
Capitol Federal Savings since 1971 and currently serves as Executive Vice
President for Corporate Services of Capitol Federal Savings, a position he has
held since 1997. Prior to that, he was employed by Capitol Federal Savings as
the Eastern Region Manager for seven years.
R. Joe Aleshire. Age 52 years. Mr. Aleshire has been employed with Capitol
Federal Savings since 1973 and currently serves as Executive Vice President for
Retail Operations of Capitol Federal Savings, a position he has held since 1997.
Prior to that, he was employed by Capitol Federal Savings as the Wichita Area
Manager for 17 years.
Kent G. Townsend. Age 38 years. Mr. Townsend serves as Senior Vice
President and Controller of Capitol Federal Financial, a position he has held
since March 1999. He has also served in similar positions with Capitol Federal
Savings since September 1995. Prior to that, he served as the Financial Planning
and Analysis Officer with Capitol Federal Savings for three years.
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Item 2. Properties
At September 30, 1999, we had 25 full service offices and six limited
service offices. Capitol Federal Savings owns the office building in which its
home office and executive offices are located. At September 30, 1999, Capitol
Federal Savings owned 22 of its other branch offices and the remaining eight
branch offices, including six supermarket locations and a warehouse were leased.
As of September 30, 1999, the net book value of Capitol Federal Savings'
investment in premises, equipment and leaseholds, excluding computer equipment,
was approximately $21.1 million.
Capitol Federal Savings believes that our current facilities are adequate
to meet the present and immediately foreseeable needs of Capitol Federal Savings
and Capitol Federal Financial.
Capitol Federal Savings 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 Capitol Federal Savings at September 30, 1999 was
$2.9 million.
Item 3. Legal Proceedings
Capitol Federal Financial is involved as plaintiff or defendant in various
legal actions arising in the normal course of business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with our counsel representing us in
the proceedings, that the resolution of these proceedings should not have a
material effect on our results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The section entitled "Shareholder Information - Market" of the attached
Annual Report to Stockholders for year ended September 30, 1999 is incorporated
herein by reference.
Item 6. Selected Financial Data
The section entitled "Selected Consolidated Financial Information" of the
attached Annual Report to Stockholders for year ended September 30, 1999 is
incorporated herein by reference.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the attached Annual Report to
Stockholders for year ended September 30, 1999 is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The section entitled "Management Discussion of Financial Condition and
Results of Operations - Asset/Liability Management" of the attached Annual
Report to Stockholders for year ended September 30, 1999 is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
The section entitled "Consolidated Financial Statements" of the attached
Annual Report to Stockholders for year ended September 30, 1999 is incorporated
herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of Capitol Federal Financial is
incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Shareholders to be held in January 2000, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Executive Officers
Information concerning executive officers of Capitol Federal Financial is
set forth under the caption "Executive Officers of Capitol Federal Financial"
contained in Part I of this Form 10-K.
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Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires Capitol Federal Financial's
directors and executive officers, and persons who own more than 10% of a
registered class of Capitol Federal Financial's equity securities, to file with
the SEC reports of ownership and reports of changes in ownership of common stock
and other equity securities of Capitol Federal Financial. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish
Capitol Federal Financial with copies of all Section 16(a) forms they file.
To Capitol Federal Financial's knowledge, based solely on a review of the
copies of such reports furnished to Capitol Federal Financial and written
representations that no other reports were required during the fiscal year ended
September 30, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive proxy statement for the Annual Meeting of
Shareholders to be held in January 2000, except for information contained under
the heading "Compensation Committee Report on Executive Compensation" and
"Shareholder Return Performance Presentation", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held in January 2000,
except for information contained under the heading "Compensation Committee
Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Shareholders to be held in January 2000, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are included under Part II, Item 8 of this
Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheet as of September 30, 1999 and 1998.
3. Consolidated Statements of Income for the Years ended September 30, 1999,
1998 and 1997.
4. Consolidated Statements of Equity for the Years ended September 30, 1999,
1998 and 1997.
5. Consolidated Statements of Cash Flows for the Years ended September 30,
1999, 1998 and 1997.
6. Notes to Consolidated Financial Statements for the Years ended September
30, 1999, 1998 and 1997.
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
(3) Exhibits:
See Index to Exhibits.
(b) Reports on Form 8-K:
1. No reports on Form 8-K have been filed for the three months ended
September 30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITOL FEDERAL FINANCIAL
Date: December 29, 1999 By: /s/ John C. Dicus
----------------- ---------------------------------------------
John C. Dicus
Chairman of the Board and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ John C. Dicus By: /s/ Kent G. Townsend
------------------------------------------- ----------------------------------------
John C. Dicus, Chairman of Kent G. Townsend, Senior Vice
the Board and Chief Executive Officer President and Controller
(Principal Executive Officer) (Principal Accounting Officer)
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ John B. Dicus By: /s/ B. B. Andersen
----------------------------------------- ---------------------------------------
John B. Dicus, President, Chief B. B. Andersen, Director
Operating Officer and Director
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ Neil F. M. McKay By: /s/ Robert B. Maupin
----------------------------------------- ---------------------------------------
Neil F.M. McKay, Executive Vice Robert B. Maupin, Director
President and Chief Financial Officer
(Principal Financial Officer)
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
<PAGE>
By: /s/ Frederick P. Reynolds By: /s/ Marilyn S. Ward
----------------------------------------- ---------------------------------------
Frederick P. Reynolds, Director Marilyn S. Ward, Director
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ Carl W. Quarnstrom
-----------------------------------------
Carl W. Quarnstrom, Director
Date: December 29, 1999
-----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number Document
<S> <C>
2.0 *Plan of Reorganization and Stock Issuance Plan
3(i) *Federal Stock Charter of Capitol Federal Financial
3(ii) *Bylaws of Capitol Federal Financial
4 *Form of Stock Certificate of Capitol Federal Financial
10 Registrant's Employee Stock Ownership Plan
11 Statement re: computation of per share earnings
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule (electronic filing only)
</TABLE>
- --------------
*Incorporated by reference from Capitol Federal Financial's Registration
Statement on Form S-1 (File No. 333-68363) filed on February 11, 1999, as
amended and declared effective on the same date.
CAPITOL FEDERAL FINANCIAL
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of October 1, 1998
<PAGE>
CAPITOL FEDERAL FINANCIAL
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
PREAMBLE.....................................................................1
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION......................................2
1.1 Definitions...................................................2
(a) Account.......................................................2
(b) Act...........................................................2
(c) Administrator.................................................2
(d) Annual Additions..............................................2
(e) Authorized Leave of Absence...................................2
(f) Beneficiary...................................................3
(g) Board of Directors............................................3
(h) Break.........................................................3
(i) Code..........................................................3
(j) Compensation..................................................3
(k) Date of Hire..................................................3
(l) Disability....................................................3
(m) Disability Retirement Date....................................4
(n) Early Retirement Date.........................................4
(o) Effective Date................................................4
(p) Eligibility Period............................................4
(q) Employee......................................................4
(r) Employee Stock Ownership Account..............................4
(s) Employee Stock Ownership Contribution.........................4
(t) Employee Stock Ownership Suspense Account.....................4
(u) Employer......................................................4
(v) Employer Securities...........................................4
(w) Entry Date....................................................5
(x) Exempt Loan...................................................5
(y) Exempt Loan Suspense Account..................................5
(z) Financed Shares...............................................5
(aa) Former Participant............................................5
(bb) Fund..........................................................5
(cc) Hour of Service...............................................5
(dd) Investment Adjustments........................................6
(ee) Limitation Year...............................................6
i
<PAGE>
(ff) Normal Retirement Date........................................6
(gg) Participant...................................................6
(hh) Plan..........................................................6
(ii) Plan Year.....................................................6
(jj) Qualified Domestic Relations Order............................6
(kk) Related Employer..............................................7
(ll) Retirement....................................................7
(mm) Service.......................................................7
(nn) Sponsor.......................................................7
(oo) Trust Agreement...............................................7
(pp) Trustee.......................................................7
(qq) Valuation Date................................................7
(rr) Year of Eligibility Service...................................7
(ss) Year of Vesting Service.......................................7
1.2 Plurals and Gender..................................................8
1.3 Incorporation of Trust Agreement....................................8
1.4 Headings............................................................8
1.5 Severability........................................................8
1.6 References to Governmental Regulations..............................8
1.7 Notices.............................................................8
1.8 Evidence............................................................8
1.9 Action by Employer..................................................9
ARTICLE II
PARTICIPATION............................................................10
2.1 Commencement of Participation......................................10
2.2 Termination of Participation.......................................10
2.3 Resumption of Participation........................................10
2.4 Determination of Eligibility.......................................11
2.5 Restricted Participation...........................................11
ii
<PAGE>
ARTICLE III
CREDITED SERVICE.........................................................12
3.1 Service Counted for Eligibility Purposes...........................12
3.2 Service Counted for Vesting Purposes...............................12
3.3 Credit for Pre-Break Service.......................................12
3.4 Service Credit During Authorized Leaves............................12
3.5 Service Credit During Maternity or Paternity Leave.................13
3.6 Ineligible Employees...............................................13
ARTICLE IV
CONTRIBUTIONS............................................................14
4.1 Employee Stock Ownership Contribution..............................14
4.2 Time and Manner of Employee Stock Ownership Contribution...........14
4.3 Records of Contributions...........................................15
4.4 Erroneous Contributions............................................15
ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS....................................17
5.1 Establishment of Separate Participant Accounts.....................17
5.2 Establishment of Suspense Accounts.................................17
5.3 Allocation of Earnings, Losses and Expenses........................18
5.4 Allocation of Forfeitures..........................................18
5.5 Allocation of Employee Stock Ownership Contribution................18
5.6 Limitation on Annual Additions.....................................19
iii
<PAGE>
5.7 Erroneous Allocations..............................................22
5.8 Value of Participant's Account.....................................22
5.9 Investment of Account Balances.....................................22
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY.........................23
6.1 Normal Retirement..................................................23
6.2 Early Retirement...................................................23
6.3 Disability Retirement..............................................23
6.4 Death Benefits.....................................................23
6.5 Designation of Beneficiary and Manner of Payment...................24
ARTICLE VII
VESTING AND FORFEITURES..................................................25
7.1 Vesting on Death, Disability and Normal Retirement.................25
7.2 Vesting on Termination of Participation............................25
7.3 Disposition of Forfeitures.........................................25
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS......................................27
8.1 Right to Demand Employer Securities................................27
8.2 Voting Rights......................................................27
8.3 Nondiscrimination in Employee Stock Ownership Contribution.........27
8.4 Dividends..........................................................28
8.5 Exempt Loans.......................................................28
8.6 Exempt Loan Payments...............................................30
iv
<PAGE>
8.7 Put Option.........................................................31
8.8 Diversification Requirements.......................................31
8.9 Independent Appraiser..............................................32
8.10 Nonterminable Rights...............................................32
ARTICLE IX
PAYMENTS AND DISTRIBUTIONS...............................................33
9.1 Payments on Termination of Service - In General....................33
9.2 Commencement of Payments...........................................33
9.3 Mandatory Commencement of Benefits.................................33
9.4 Required Beginning Dates...........................................36
9.5 Form of Payment....................................................36
9.6 Payments Upon Termination of Plan..................................36
9.7 Distributions Pursuant to Qualified Domestic Relations Orders......37
9.8 Cash-Out Distributions.............................................37
9.9 ESOP Distribution Rules............................................37
9.10 Direct Rollover....................................................38
9.11 Waiver of 30-day Notice............................................39
9.12 Re-employed Veterans...............................................39
9.13 Share Legend.......................................................39
ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS...................................40
10.1 Top-Heavy Rules to Control.........................................40
v
<PAGE>
10.2 Top-Heavy Plan Definitions.........................................40
10.3 Calculation of Accrued Benefits....................................41
10.4 Determination of Top-Heavy Status..................................43
10.5 Determination of Super Top-Heavy Status............................43
10.6 Minimum Contribution...............................................43
10.7 Vesting............................................................44
10.8 Maximum Benefit Limitation.........................................45
ARTICLE XI
ADMINISTRATION...........................................................46
11.1 Appointment of Administrator.......................................46
11.2 Resignation or Removal of Administrator............................46
11.3 Appointment of Successors: Terms of Office, Etc...................46
11.4 Powers and Duties of Administrator.................................46
11.5 Action by Administrator............................................48
11.6 Participation by Administrator.....................................48
11.7 Agents.............................................................48
11.8 Allocation of Duties...............................................48
11.9 Delegation of Duties...............................................48
11.10 Administrator's Action Conclusive..................................49
11.11 Compensation and Expenses of Administrator.........................49
11.12 Records and Reports................................................49
11.13 Reports of Fund Open to Participants...............................49
11.14 Named Fiduciary....................................................49
vi
<PAGE>
11.15 Information from Employer..........................................50
11.16 Reservation of Rights by Employer..................................50
11.17 Liability and Indemnification......................................50
ARTICLE XII
CLAIMS PROCEDURE.........................................................51
12.1 Notice of Denial...................................................51
12.2 Right to Reconsideration...........................................51
12.3 Review of Documents................................................51
12.4 Decision by Administrator..........................................51
12.5 Notice by Administrator............................................51
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER.......................................53
13.1 Amendments.........................................................53
13.2 Effect of Change In Control........................................53
13.3 Consolidation or Merger of Trust...................................55
13.4 Bankruptcy or Insolvency of Employer...............................55
13.5 Voluntary Termination..............................................56
13.6 Partial Termination of Plan or Permanent Discontinuance
of Contributions...................................................56
ARTICLE XIV
MISCELLANEOUS............................................................57
14.1 No Diversion of Funds..............................................57
14.2 Liability Limited..................................................57
vii
<PAGE>
14.3 Facility of Payment................................................57
14.4 Spendthrift Clause.................................................57
14.5 Benefits Limited to Fund...........................................58
14.6 Cooperation of Parties.............................................58
14.7 Payments Due Missing Persons.......................................58
14.8 Governing Law......................................................58
14.9 Nonguarantee of Employment.........................................58
14.10 Counsel............................................................59
viii
<PAGE>
CAPITOL FEDERAL FINANCIAL
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of October 1, 1998, Capitol Federal Financial, a
federally-chartered corporation (the "Sponsor"), has adopted the Capitol Federal
Financial Employee Stock Ownership Plan in order to enable Participants to share
in the growth and prosperity of the Sponsor and its wholly owned subsidiary,
Capitol Federal Savings Bank, and to provide Participants with an opportunity to
accumulate capital for their future economic security by accumulating funds to
provide retirement, death and disability benefits. The Plan is a stock bonus
plan designed to meet the applicable requirements of Section 409 of the Code and
of an employee stock ownership plan, as defined in Section 4975(e)(7) of the
Code and Section 407(d)(6) of the Act. The employee stock ownership plan is
intended to invest primarily in "qualifying employer securities" as defined in
Section 4975(e)(8) of the Code. The Sponsor intends that the Plan will qualify
under Sections 401(a) and 501(a) of the Code and will comply with the provisions
of the Act. The Plan has been drafted to comply with all applicable provisions
of law, including the Tax Reform Act of 1986, the Omnibus Budget Reconciliation
Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and
Miscellaneous Revenue Act of 1988, the Revenue Reconciliation Act of 1989, the
Omnibus Budget Reconciliation Act of 1993, the Small Business Job Protection Act
of 1996, and the Taxpayer Relief Act of 1997.
The terms of this Plan shall apply only with respect to Employees of the
Employer on and after October 1, 1998.
1
<PAGE>
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 DEFINITIONS.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Plan shall have the following meanings:
(a) "ACCOUNT" shall mean a Participant's or Former Participant's entire
accrued benefit under the Plan, including the balance credited to his Employee
Stock Ownership Account and any other account described in Section 5.1.
(b) "ACT" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute, together with the
applicable regulations promulgated thereunder.
(c) "ADMINISTRATOR" shall mean the fiduciary provided for in Article XI.
(d) "ANNUAL ADDITIONS" shall mean, with respect to each Participant, the
sum of those amounts allocated to the Participant's Account under this Plan and
accounts under any other qualified defined contribution plan to which the
Employer or a Related Employer contributes for any Limitation Year, consisting
of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Employee contributions (if any).
Annual Additions shall not include any Investment Adjustment. Annual
Additions also shall not include employer contributions which are used by the
Trust to pay interest on an Exempt Loan nor any forfeitures of Employer
Securities purchased with the proceeds of an Exempt Loan, provided that not more
than one-third of the employer contributions are allocated to Participants who
are among the group of employees deemed "highly compensated employees" within
the meaning of Code Section 414(q), as further described in Section 8.3.
(e) "AUTHORIZED LEAVE OF ABSENCE" shall mean an absence from Service with
respect to which the Employee may or may not be entitled to Compensation and
which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up to
36 months, provided that the Employee resumes Service within 90 days after
discharge, or such longer period of time during which such Employee's employment
rights are protected by law; or
2
<PAGE>
(2) Any other absence or leave expressly approved and granted by
the Employer which does not exceed 24 months, provided that the Employee resumes
Service at or before the end of such approved leave period. In approving such
leaves of absence, the Employer shall treat all Employees on a uniform and
nondiscriminatory basis.
(f) "BENEFICIARY" shall mean such legal or natural persons, who may be
designated contingently or successively, as may be designated by the Participant
pursuant to Section 6.5 to receive benefits after the death of the Participant,
or in the absence of a valid designation, such persons specified in Section
6.5(b) to receive benefits after the death of the Participant.
(g) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Sponsor.
(h) "BREAK" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(i) "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute, together with the applicable regulations
promulgated thereunder.
(j) "COMPENSATION" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year, including
base salary and commissions (but only with respect to the amount of commissions
specified as compensation for purposes of the Plan in the current agreement
between an Employee and the Employer), elective deferrals to a cash or deferred
arrangement described in Code Section 401(k), and any amount contributed on a
pre-tax salary reduction basis to a cafeteria plan described in Section 125 of
the Code, but excluding bonuses, overtime, amounts paid by the Employer or
accrued with respect to this Plan or any other qualified or non-qualified
unfunded plan of deferred compensation or other employee welfare plan to which
the Employer contributes, payments for group insurance, medical benefits,
reimbursement for expenses, and other forms of extraordinary pay, and excluding
amounts accrued for a prior Plan Year. Notwithstanding anything herein to the
contrary, the annual Compensation of each Participant taken into account under
the Plan for any purpose during any Plan Year shall not exceed $160,000, as
adjusted from time to time in accordance with Section 415(d) of the Code.
(k) "DATE OF HIRE" shall mean the date on which an Employee shall perform
his first Hour of Service. Notwithstanding the foregoing, in the event that an
Employee incurs one or more consecutive Breaks after his initial Date of Hire
which results in the forfeiture of his pre-Break Service pursuant to Section
3.3, his "Date of Hire" shall thereafter be the date on which he completes his
first Hour of Service after such Break or Breaks.
(l) "DISABILITY" shall mean a physical or mental impairment which prevents
a Participant from performing the duties assigned to him by the Employer and
which either has caused the Social Security Administration to classify the
individual as "disabled" for purposes of Social Security or has been determined
by a qualified physician selected by the Administrator.
3
<PAGE>
(m) "DISABILITY RETIREMENT DATE" shall mean the first day of the month
after which a Participant incurs a Disability.
(n) "EARLY RETIREMENT DATE" shall mean the first day of the month
coincident with or next following the later of the date on which a Participant
attains age 55 and completes 5 Years of Vesting Service.
(o) "EFFECTIVE DATE" shall mean October 1, 1998.
(p) "ELIGIBILITY PERIOD" shall mean the period of 12 consecutive months
commencing on an Employee's Date of Hire. Succeeding Eligibility Periods after
the initial Eligibility Period shall be based on Plan Years, the first of which
shall include the first anniversary of an Employee's Date of Hire.
(q) "EMPLOYEE" shall mean any person who is classified as an employee by
the Employer or a Related Employer, including officers, but excluding directors
in their capacity as such.
(r) "EMPLOYEE STOCK OWNERSHIP ACCOUNT" shall mean the separate bookkeeping
account established for each Participant pursuant to Section 5.1(a).
(s) "EMPLOYEE STOCK OWNERSHIP CONTRIBUTION" shall mean the cash, Employer
Securities, or both that are contributed to the Plan by the Employer pursuant to
Article IV.
(t) "EMPLOYEE STOCK OWNERSHIP SUSPENSE ACCOUNT" shall mean the temporary
account in which the Trustee may maintain any Employee Stock Ownership
Contribution that is made prior to the last day of the Plan Year for which it is
made, as described in Section 5.2.
(u) "EMPLOYER" shall mean Capitol Federal Financial, a federally-chartered
corporation, and its wholly owned subsidiary, Capitol Federal Savings Bank, or
any successors to the aforesaid corporations by merger, consolidation or
otherwise, which may agree to continue this Plan, or any Related Employer or any
other business organization which, with the consent of the Sponsor, shall agree
to become a party to this Plan. To the extent required by the Code or the Act,
references herein to the Employer shall also include all Related Employers,
whether or not they are participating in this Plan.
(v) "EMPLOYER SECURITIES" shall mean the common stock issued by Capitol
Federal Financial, a federally-chartered corporation. Such term shall also mean,
in the discretion of the Board of Directors, any other common stock issued by
the Employer or any Related Employer having voting power and dividend rights
equal to or in excess of:
(1) that class of common stock of the Employer or a Related Employer
having the greatest voting power, and
(2) that class of common stock of the Employer or a Related Employer
having the greatest dividend rights.
4
<PAGE>
Non-callable preferred stock shall be treated as Employer Securities if such
stock is convertible at any time into stock which meets the requirements of (1)
and (2) next above and if such conversion is at a conversion price which (as of
the date of the acquisition by the Plan) is reasonable. For purposes of the last
preceding sentence, preferred stock shall be treated as non-callable if, after
the call, there will be a reasonable opportunity for a conversion which meets
the requirements of the last preceding sentence.
(w) "ENTRY DATE" shall mean each October 1 and April 1.
(x) "EXEMPT LOAN" shall mean a loan described at Section 4975(d)(3) of the
Code to the Trustee to purchase Employer Securities for the Plan, made or
guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the
Code, including, but not limited to, a direct loan of cash, a purchase money
transaction, an assumption of an obligation of the Trustee, an unsecured
guarantee or the use of assets of such disqualified person as collateral for
such a loan.
(y) "EXEMPT LOAN SUSPENSE ACCOUNT" shall mean the account to which Financed
Shares are initially credited until they are released in accordance with Section
8.5.
(z) "FINANCED SHARES" shall mean the Employer Securities acquired by the
Trustee with the proceeds of an Exempt Loan and which are credited to the Exempt
Loan Suspense Account until they are released in accordance with Section 8.5.
(aa) "FORMER PARTICIPANT" shall mean any previous Participant whose
participation has terminated but who has a vested Account in the Plan which has
not been distributed in full.
(bb) "FUND" shall mean the trust fund maintained by the Trustee pursuant to
the Trust Agreement in order to provide for the payment of the benefits
specified in the Plan.
(cc) "HOUR OF SERVICE" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by the Employer or a Related
Employer for the performance of duties or for reasons other than the performance
of duties (such as vacation time, holidays, sickness, disability, paid lay-offs,
jury duty and similar periods of paid nonworking time). To the extent not
otherwise included, Hours of Service shall also include each hour for which back
pay, irrespective of mitigation of damages, is either awarded or agreed to by
the Employer or a Related Employer. Hours of working time shall be credited on
the basis of actual hours worked, even though compensated at a premium rate for
overtime or other reasons. In computing and crediting Hours of Service for an
Employee under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c)
of the Department of Labor Regulations shall apply, said sections being herein
incorporated by reference. Hours of Service shall be credited to the Plan Year
or other relevant period during which the services were performed or the
nonworking time occurred, regardless of the time when compensation therefor may
be paid. Any Employee for whom no hourly employment records are kept by the
Employer or a Related Employer shall be credited with 45 Hours of Service for
each calendar week in which he would have been credited with a least one Hour or
Service under the foregoing provisions, if hourly records were available.
Effective January 1, 1985, for absences commencing on or after that date, solely
5
<PAGE>
for purposes of determining whether a Break for participation and vesting
purposes has occurred in an Eligibility Period or a Plan Year, an individual who
is absent from work for maternity or paternity reasons shall receive credit for
the Hours of Service which would otherwise have been credited to such individual
but for such absence, or in any case in which such hours cannot be determined, 8
Hours of Service per day of such absence. For purposes of this Section 1.1(cc),
an absence from work for maternity or paternity reasons means an absence (1) by
reason of the pregnancy of the individual, (2) by reason of the birth of a child
of the individual, (3) by reason of the placement of a child with the individual
in connection with the adoption of such child by such individual, or (4) for
purposes of caring for such child for a period beginning immediately following
such birth or placement. The Hours of Service credited under this provision
shall be credited (1) in the computation period in which the absence begins if
the crediting is necessary to prevent a Break in that period, or (2) in all
other cases, in the following computation period.
(dd) "INVESTMENT ADJUSTMENTS" shall mean the increases and/or decreases in
the value of a Participant's Account attributable to earnings, gains, losses and
expenses of the Fund, as set forth in Section 5.3.
(ee) "LIMITATION YEAR" shall mean the Plan Year.
(ff) "NORMAL RETIREMENT DATE" shall mean the first day of the month
coincident with or next following the later of the date on which a Participant
attains age 65 or the fifth anniversary of the date he commenced participation
in the Plan.
(gg) "PARTICIPANT" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the Plan
as provided in Article II hereof; provided, however, that the term "Participant"
shall not include (1) leased Employees (as defined in Section 414(n)(2) of the
Code), (2) any Employee who is regularly employed outside the Employer's own
offices in connection with the operation and maintenance of buildings or other
properties acquired through foreclosure or deed, (3) any individual who is
employed by a Related Employer that has not adopted the Plan in accordance with
Section 1.1(u) hereof, (4) any Employee who is a non-resident alien individual
and who has no earned income from sources within the United States, or (5) any
Employee who is included in a unit of Employees covered by a
collective-bargaining agreement with the Employer or a Related Employer that
does not expressly provide for participation of such Employees in the Plan,
where there has been good-faith bargaining between the Employer or a Related
Employer and Employees' representatives on the subject of retirement benefits.
To the extent required by the Code or the Act, or appropriate based on the
context, references herein to Participant shall include Former Participant.
(hh) "PLAN" shall mean the Capitol Federal Financial Employee Stock
Ownership Plan, as described herein or as hereafter amended from time to time.
(ii) "PLAN YEAR" shall mean any 12 consecutive month period commencing on
each October 1 and ending on the next following September 30.
(jj) "QUALIFIED DOMESTIC RELATIONS ORDER" shall mean any judgment, decree
or order that satisfies the requirements to be a "qualified domestic relations
order," as defined in Section 414(p) of the Code.
6
<PAGE>
(kk) "RELATED EMPLOYER" shall mean any entity that is:
(1) a member of a controlled group of corporations that includes the
Employer, while it is a member of such controlled group (within the meaning
of Section 414(b) of the Code);
(2) a member of a group of trades or businesses under common control
with the Employer, while it is under common control (within the meaning of
Section 414(c) of the Code);
(3) a member of an affiliated service group that includes the
Employer, while it is a member of such affiliated service group (within the
meaning of Section 414(m) of the Code); or
(4) a leasing or other organization that is required to be aggregated
with the Employer pursuant to the provisions of Section 414(n) or 414(o) of
the Code.
(ll) "RETIREMENT" shall mean termination of employment which qualifies as
early, normal or Disability retirement as described in Article VI.
(mm) "SERVICE" shall mean, for purposes of eligibility to participate and
vesting, employment with the Employer or any Related Employer, and for purposes
of allocation of the Employee Stock Ownership Contribution and forfeitures,
employment with the Employer.
(nn) "SPONSOR" shall mean Capitol Federal Financial, a federally-chartered
corporation.
(oo) "TRUST AGREEMENT" shall mean the agreement, dated March 29, 1999, by
and between Capitol Federal Financial, a federally-chartered corporation, and
INTRUST Bank, N.A., of Prairie Village, Kansas.
(pp) "TRUSTEE" shall mean the trustee or trustees by whom the assets of the
Plan are held, as provided in the Trust Agreement, or his or their successors.
(qq) "VALUATION DATE" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the direction of the Administrator,
but in no event may the Administrator request additional valuations by the
Trustee more frequently than quarterly. Whenever such date falls on a Saturday,
Sunday or holiday, the preceding business day shall be the Valuation Date.
(rr) "YEAR OF ELIGIBILITY SERVICE" shall mean an Eligibility Period during
which an Employee is credited with at least 1,000 Hours of Service, except as
otherwise specified in Article III.
(ss) "YEAR OF VESTING SERVICE" shall mean a Plan Year during which an
Employee is credited with at least 1,000 Hours of Service, except as otherwise
specified in Article III.
7
<PAGE>
1.2 PLURALS AND GENDER.
Where appearing in the Plan and the Trust Agreement, the masculine gender
shall include the feminine and neuter genders, and the singular shall include
the plural, and vice versa, unless the context clearly indicates a different
meaning.
1.3 INCORPORATION OF TRUST AGREEMENT.
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan. All
contributions made under the Plan will be held, managed and controlled by the
Trustee pursuant to the terms and conditions of the Trust Agreement.
1.4 HEADINGS.
The headings and sub-headings in this Plan are inserted for the convenience
of reference only and are to be ignored in any construction of the provisions
hereof.
1.5 SEVERABILITY.
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this Plan,
but shall be fully severable, and the Plan shall be construed and enforced as if
said illegal or invalid provisions had never been inserted herein.
1.6 REFERENCES TO GOVERNMENTAL REGULATIONS.
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
1.7 NOTICES.
Any notice or document required to be filed with the Administrator or
Trustee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Administrator in care of the Sponsor or
to the Trustee, each at its principal business offices. Any notice required
under the Plan may be waived in writing by the person entitled to notice.
1.8 EVIDENCE.
Evidence required of anyone under the Plan may be by certificate,
affidavit, document or other information which the person acting on it considers
pertinent and reliable, and signed, made or presented by the proper party or
parties.
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1.9 ACTION BY EMPLOYER.
Any action required or permitted to be taken by any entity constituting the
Employer under the Plan shall be by resolution of its Board of Directors or by a
person or persons authorized by its Board of Directors.
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ARTICLE II
PARTICIPATION
2.1 COMMENCEMENT OF PARTICIPATION.
(a) Any Employee who is otherwise eligible to become a Participant in
accordance with Section 1.1(gg) hereof shall initially become a Participant on
the Entry Date coincident with or next following the later of the following
dates, provided he is employed by the Employer on that Entry Date:
(1) The date on which he completes a Year of Eligibility Service; and
(2) The date on which he attains age 21.
(b) Any Employee who had satisfied the requirements set forth in Section
2.1(a) during the 12 consecutive month period prior to the Effective Date shall
become a Participant on the Effective Date, provided he is still employed by the
Employer on the Effective Date.
2.2 TERMINATION OF PARTICIPATION.
After commencement or resumption of his participation, an Employee shall
remain a Participant during each consecutive Plan Year thereafter until the
earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 RESUMPTION OF PARTICIPATION.
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes a
Year of Eligibility Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service, but
whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3,
shall be treated as a new Employee and shall again be required to satisfy the
eligibility requirements contained in Section 2.1(a) before resuming
participation on the appropriate Entry Date, as specified in Section 2.1(a).
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2.4 DETERMINATION OF ELIGIBILITY.
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the Employer
shall furnish the Administrator a list of all Employees, indicating their Date
of Hire, their Hours of Service during their Eligibility Period, their date of
birth, the original date of their reemployment with the Employer, if any, and
any Breaks they may have incurred.
2.5 RESTRICTED PARTICIPATION
Subject to the terms and conditions of the Plan, during the period between
the Participant's date of termination of participation in the Plan (as described
in Section 2.2) and the distribution of his entire Account (as described in
Article IX), and during any period that a Participant does not meet the
requirements of Section 2.1(a) or is employed by a Related Employer that is not
participating in the Plan, the Participant or, in the event of the Participant's
death, the Beneficiary of the Participant, will be considered and treated as a
Participant for all purposes of the Plan, except as follows:
(a) the Participant will not share in the Employee Stock Ownership
Contribution and forfeitures (as described in Sections 7.2 and 7.3), except
as provided in Sections 5.4 and 5.5; and
(b) the Beneficiary of a deceased Participant cannot designate a
Beneficiary under Section 6.5.
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ARTICLE III
CREDITED SERVICE
3.1 SERVICE COUNTED FOR ELIGIBILITY PURPOSES.
Except as provided in Section 3.3, all Years of Eligibility Service
completed by an Employee shall be counted in determining his eligibility to
become a Participant on and after the Effective Date, whether such Service was
completed before or after the Effective Date.
3.2 SERVICE COUNTED FOR VESTING PURPOSES.
All Years of Vesting Service completed by an Employee (including Years of
Vesting Service completed prior to the Effective Date) shall be counted in
determining his vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3;
(b) Service prior to the Effective Date of this Plan if such Service would
have been disregarded under the "break in service" rules (within the meaning of
Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 CREDIT FOR PRE-BREAK SERVICE.
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for eligibility and vesting purposes only if either:
(a) He was vested in any portion of his accrued benefit at the time the
Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of 5 or the number of his Years of Eligibility Service or Years of
Vesting Service, as the case may be, credited to him before the Breaks began.
Except as provided in the foregoing, none of an Employee's Service prior to
one or a series of consecutive Breaks shall be counted for any purpose in
connection with his participation in this Plan thereafter.
3.4 SERVICE CREDIT DURING AUTHORIZED LEAVES.
An Employee shall receive no Service credit under Section 3.1 or 3.2 during
any Authorized Leave of Absence. However, solely for the purpose of determining
whether he has incurred a Break during any Plan Year in which he is absent from
Service for one or more Authorized Leaves of Absence, he shall be credited with
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45 Hours of Service for each week during any such leave period. Notwithstanding
the foregoing, if an Employee fails to return to Service on or before the end of
a leave period, he shall be deemed to have terminated Service as of the first
day of such leave period and his credit for Hours of Service, determined under
this Section 3.4, shall be revoked. Notwithstanding anything contained herein to
the contrary, an Employee who is absent by reason of military service as set
forth in Section 1.1(e)(1) shall be given Service credit under this Plan for
such military leave period to the extent, and for all purposes, required by law.
3.5 SERVICE CREDIT DURING MATERNITY OR PATERNITY LEAVE.
Effective for absences beginning on or after January 1, 1985, for purposes
of determining whether a Break has occurred for participation and vesting
purposes, an individual who is on maternity or paternity leave as described in
Section 1.1(cc), shall be deemed to have completed Hours of Service during such
period of absence, all in accordance with Section 1.1(cc). Notwithstanding the
foregoing, no credit shall be given for such Hours of Service unless the
individual furnishes to the Administrator such timely information as the
Administrator may reasonably require to determine:
(a) that the absence from Service was attributable to one of the maternity
or paternity reasons enumerated in Section 1.1(cc); and
(b) the number of days of such absence.
In no event, however, shall any credit be given for such leave other than for
determining whether a Break has occurred.
3.6 INELIGIBLE EMPLOYEES.
Notwithstanding any provisions of this Plan to the contrary, any Employee
who is ineligible to participate in this Plan either because of his failure
(a) To meet the eligibility requirements contained in Article II; or
(b) To be a Participant, as defined in Section 1.1(gg),
shall, nevertheless, earn Years of Eligibility Service and Years of Vesting
Service pursuant to the rules contained in this Article III. However, such
Employee shall not be entitled to an allocation of any contributions or
forfeitures hereunder unless and until he becomes a Participant in this Plan,
and then, only during his period of participation.
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ARTICLE IV
CONTRIBUTIONS
4.1 EMPLOYEE STOCK OWNERSHIP CONTRIBUTION.
(a) Subject to all of the provisions of this Article IV, for each Plan Year
commencing on or after the Effective Date, the Employer shall make an Employee
Stock Ownership Contribution to the Fund in such amount as may be determined by
resolution of the Board of Directors in its discretion; provided, however, that
the Employer shall contribute an amount in cash not less than the amount
required to enable the Trustee to discharge any indebtedness incurred with
respect to an Exempt Loan in accordance with Section 8.6(c). If any part of the
Employee Stock Ownership Contribution under this Section 4.1 for any Plan Year
is in cash in an amount exceeding the amount needed to pay the amount due during
or prior to such Plan Year with respect to an Exempt Loan, such cash shall be
applied by the Trustee, as directed by the Administrator in its sole discretion,
either to the purchase of Employer Securities or to repay an Exempt Loan.
Contributions hereunder shall be in the form of cash, Employer Securities or any
combination thereof. In determining the value of Employer Securities transferred
to the Fund as an Employee Stock Ownership Contribution, the Administrator may
determine the average of closing prices of such securities for a period of up to
90 consecutive days immediately preceding the date on which the securities are
contributed to the Fund. In the event that the Employer Securities are not
readily tradable on an established securities market, the value of the Employer
Securities transferred to the Fund shall be determined by an independent
appraiser in accordance with Section 8.9.
(b) In no event shall the Employee Stock Ownership Contribution exceed for
any Plan Year the maximum amount that may be deducted by the Employer under
Section 404 of the Code, nor shall such contribution cause the Employer to
violate its regulatory capital requirements. Each Employee Stock Ownership
Contribution by the Employer shall be deemed to be made on the express condition
that the Plan, as then in effect, shall be qualified under Sections 401(a) and
501(a) of the Code and that the amount of such contribution shall be deductible
from the Employer's income under Section 404 of the Code.
4.2 TIME AND MANNER OF EMPLOYEE STOCK OWNERSHIP CONTRIBUTION.
(a) The Employee Stock Ownership Contribution (if any) for each Plan Year
shall be paid to the Trustee in one lump sum or installments at any time on or
before the expiration of the time prescribed by law (including any extensions)
for filing of the Employer's federal income tax return for its fiscal year
ending concurrent with or during such Plan Year; provided, however, that the
Employee Stock Ownership Contribution (if any) for a Plan Year shall be made in
a timely manner to make any required payment of principal and/or interest on an
Exempt Loan for such Plan Year. Any portion of the Employee Stock Ownership
Contribution for each Plan Year that may be made prior to the last day of the
Plan Year shall, if there is an Exempt Loan outstanding at such time, at the
election of the Administrator, either (i) be applied immediately to make
payments on such Exempt Loan or (ii) be maintained by the Trustee in the
Employee Stock Ownership Suspense Account described in Section 5.2 until the
last day of such Plan Year.
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(b) If an Employee Stock Ownership Contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or prior to the due date (including any extensions)
for filing of the Employer's federal income tax return for such fiscal year, it
shall be considered, for allocation purposes, as an Employee Stock Ownership
Contribution to the Fund for the Plan Year for which it was computed and
accrued, unless such contribution is accompanied by a statement to the Trustee,
signed by the Employer, which specifies that the Employee Stock Ownership
Contribution is made with respect to the Plan Year in which it is received by
the Trustee. Any Employee Stock Ownership Contribution paid by the Employer
during any Plan Year but after the due date (including any extensions) for
filing of its federal income tax return for the fiscal year of the Employer
ending on or before the last day of the preceding Plan Year shall be treated,
for allocation purposes, as an Employee Stock Ownership Contribution to the Fund
for the Plan Year in which the contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no Employee
Stock Ownership Contribution shall be made for any Plan Year during which a
limitations account created pursuant to Section 5.6(c)(3) is in existence until
the balance of such limitations account has been reallocated in accordance with
Section 5.6(c)(3).
4.3 RECORDS OF CONTRIBUTIONS.
The Employer shall deliver at least annually to the Trustee, with respect
to the Employee Stock Ownership Contribution contemplated in Section 4.1, a
certificate of the Administrator, in such form as the Trustee shall approve,
setting forth:
(a) The aggregate amount of such contribution, if any, to the Fund for such
Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current
residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such
Participant; and
(d) Any other information reasonably required for the proper operation of
the Plan.
4.4 ERRONEOUS CONTRIBUTIONS.
(a) Notwithstanding anything herein to the contrary, upon the Employer's
written request, a contribution which was made by a mistake of fact, or
conditioned upon the initial qualification of the Plan, under Code Section
401(a), or upon the deductibility of the contribution under Section 404 of the
Code, shall be returned to the Employer by the Trustee within one year after the
payment of the contribution, the denial of the qualification or the disallowance
of the deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial qualification of the Plan, a
contribution shall not be returned unless an Application for Determination has
been timely filed with the Internal Revenue Service. Any portion of a
contribution returned pursuant to this Section 4.4 shall be adjusted to reflect
its proportionate share of the losses of the Fund, but shall not be adjusted to
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reflect any earnings or gains. Notwithstanding any provisions of this Plan to
the contrary, the right or claim of any Participant or Beneficiary to any asset
of the Fund or any benefit under this Plan shall be subject to and limited by
this Section 4.4.
(b) In no event shall Employee contributions be accepted. Any such Employee
contributions (and any earnings attributable thereto) mistakenly received by the
Trustee shall promptly be returned to the Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 ESTABLISHMENT OF SEPARATE PARTICIPANT ACCOUNTS.
The Administrator shall establish and maintain a separate Account for each
Participant in the Plan and for each Former Participant in accordance with the
provisions of this Article V. Such separate Account shall be for bookkeeping
purposes only and shall not require a segregation of the Fund, and no
Participant, Former Participant or Beneficiary shall acquire any right to or
interest in any specific assets of the Fund as a result of the allocations
provided for under this Plan.
(a) EMPLOYEE STOCK OWNERSHIP ACCOUNTS.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The Administrator may establish
subaccounts hereunder, an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust, and an Other Investments
Account reflecting the Participant's interest in his Employee Stock Ownership
Account other than Employer Securities. Each Participant's Employer Stock
Account shall reflect his share of any Employee Stock Ownership Contribution
made in Employer Securities, his allocable share of forfeitures (as described in
Section 5.4), and any Employer Securities attributable to earnings on such
stock. Each Participant's Other Investments Account shall reflect any Employee
Stock Ownership Contribution made in cash, any cash dividends on Employer
Securities allocated and credited to his Employee Stock Ownership Account (other
than currently distributable dividends) and his share of corresponding cash
forfeitures, and any income, gains, losses, appreciation, or depreciation
attributable thereto.
(b) DISTRIBUTION ACCOUNTS.
In any case where distribution of a terminated Participant's vested Account
is to be deferred, the Administrator shall establish a separate, nonforfeitable
account in the Fund to which the balance in his Employee Stock Ownership Account
in the Plan shall be transferred after such Participant incurs a Break. Unless
the Former Participant's distribution accounts are segregated for investment
purposes pursuant to Article IX, they shall share in Investment Adjustments.
(c) OTHER ACCOUNTS.
The Administrator shall establish such other separate accounts for each
Participant as may be necessary or desirable for the convenient administration
of the Fund.
5.2 ESTABLISHMENT OF SUSPENSE ACCOUNTS.
The Administrator shall establish a separate Employee Stock Ownership
Suspense Account. There shall be credited to such account any Employee Stock
Ownership Contribution that may be made prior to the last day of the Plan Year
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and that are allocable to the Employee Stock Ownership Suspense Account pursuant
to Section 4.2(a). The Employee Stock Ownership Suspense Account shall share
proportionately as to time and amount in any Investment Adjustments. As of the
last day of each Plan Year, the balance of the Employee Stock Ownership Suspense
Account shall be added to the Employee Stock Ownership Contribution and
allocated to the Employee Stock Ownership Accounts of Participants as provided
in Section 5.5, except as provided herein. In the event that the Plan takes an
Exempt Loan, the Employer Securities purchased thereby shall be allocated as
Financed Shares to a separate Exempt Loan Suspense Account, from which Employer
Securities shall be released in accordance with Section 8.5 and shall be
allocated in accordance with Section 8.6(b).
5.3 ALLOCATION OF EARNINGS, LOSSES AND EXPENSES.
As of each Valuation Date, any increase or decrease in the net worth of the
aggregate Employee Stock Ownership Accounts held in the Fund attributable to
earnings, losses, expenses and unrealized appreciation or depreciation in each
such aggregate account, as determined by the Trustee pursuant to the Trust
Agreement, shall be credited to or deducted from the appropriate suspense
accounts and all Participants' Employee Stock Ownership Accounts (except
segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(3)) in the proportion that the
value of each such account (determined immediately prior to such allocation and
before crediting any Employee Stock Ownership Contribution and forfeitures for
the current Plan Year but after adjustment for any transfer to or from such
accounts and for the time such funds were in such accounts) bears to the value
of all Employee Stock Ownership Accounts.
5.4 ALLOCATION OF FORFEITURES.
As of the last day of each Plan Year, all forfeitures attributable to the
Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership Contribution (if
any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 ALLOCATION OF EMPLOYEE STOCK OWNERSHIP CONTRIBUTION.
As of the last day of each Plan Year for which the Employer shall make an
Employee Stock Ownership Contribution, the Administrator shall allocate the
Employee Stock Ownership Contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership Account of each Participant who
completed a Year of Vesting Service during that Plan Year, provided that he is
still employed by the Employer on the last day of the Plan Year. Such allocation
shall be made in the same proportion that each such Participant's Compensation
for such Plan Year bears to the total Compensation of all such Participants for
such Plan Year, subject to Section 5.6. Notwithstanding the foregoing, if a
Participant attains his Normal Retirement Date and terminates Service prior to
the last day of the Plan Year but after completing a Year of Vesting Service, he
shall be entitled to an allocation based on his Compensation earned prior to his
termination and during the Plan Year. Furthermore, if a Participant completes a
Year of Vesting Service and is on a Leave of Absence on the last day of the Plan
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Year because of pregnancy or other medical reason, such a Participant shall be
entitled to an allocation based on his Compensation earned during such Plan
Year.
5.6 LIMITATION ON ANNUAL ADDITIONS.
(a) Notwithstanding any provisions of this Plan to the contrary, the total
Annual Additions credited to a Participant's Account under this Plan (and
accounts under any other defined contribution plan maintained by the Employer or
a Related Employer) for any Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation (as defined below) for such
Limitation Year; or
(2) $30,000. Whenever otherwise allowed by law, the maximum amount of
$30,000 shall be automatically adjusted annually for cost-of-living
increases in accordance with Section 415(d) of the Code, and the highest
such increase effective at any time during the Limitation Year shall be
effective for the entire Limitation Year, without any amendment to this
Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation" is
defined as wages, salaries, and fees for professional services, pre-tax elective
deferrals and salary reduction contributions under a plan described in Section
401(k) or 125 of the Code, and other amounts received (without regard to whether
or not an amount is paid in cash) for personal services actually rendered in the
course of employment with the Employer or a Related Employer, to the extent that
the amounts are includable in gross income (including, but not limited to,
commissions paid to salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, bonuses, fringe
benefits, and reimbursements or other expense allowances under a nonaccountable
plan (as described in Treas. Regs. Section 1.62-2(c)), and excluding the
following:
(1) Employer contributions by the Employer or a Related Employer to a
plan of deferred compensation (other than elective deferrals under a plan
described in Section 401(k) of the Code) which are not includable in the
Employee's gross income for the taxable year in which contributed, or
employer contributions by the Employer or a Related Employer under a
simplified employee pension plan to the extent such contributions are
deductible by the Employee, or any distributions from a plan of deferred
compensation;
(2) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the Employee either
becomes freely transferable or is no longer subject to a substantial risk
of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
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(4) Other amounts which received special tax benefits (other than
pre-tax salary reduction contributions under a plan described in Section
125 of the Code), or contributions made by the employer (whether or not
under a salary reduction agreement) towards the purchase of an annuity
contract described in section 403(b) of the Code (whether or not the
contributions are actually excludable from the gross income of the
Employee).
(c) In the event that the limitations on Annual Additions described in
Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
Limitation Year shall be reduced to the minimum extent required by such
limitations, in the following order of priority:
(1) The Administrator shall determine to what extent the Annual
Additions to any Participant's Employee Stock Ownership Account must be
reduced in each Limitation Year. The Administrator shall reduce the Annual
Additions to all other qualified, tax-exempt retirement plans maintained by
the Employer or a Related Employer in accordance with the terms contained
therein for required reductions or reallocations mandated by Section 415 of
the Code before reducing any Annual Additions in this Plan.
(2) If any further reductions in Annual Additions are necessary, then
the Employee Stock Ownership Contribution and forfeitures allocated during
such Limitation Year to the Participant's Employee Stock Ownership Account
shall be reduced. The amount of any such reductions in the Employee Stock
Ownership Contribution and forfeitures shall be reallocated to all other
Participants in the same manner as set forth under Sections 5.4 and 5.5.
(3) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(2) above because
of the limitations contained in Sections 5.6(a) and (d) shall be credited
to an account designated as the "limitations account" and carried forward
to the next and subsequent Limitation Years until it can be reallocated to
all Participants as set forth in Sections 5.4 and 5.5, as appropriate. No
Investment Adjustments shall be allocated to this limitations account. In
the next and subsequent Limitation Years, all amounts in the limitations
account must be allocated in the manner described in Sections 5.4 and 5.5,
as appropriate, before any Employee Stock Ownership Contribution may be
made to this Plan for that Limitation Year.
(4) In the event this Plan is voluntarily terminated by the Employer
under Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(3) above which have not be reallocated as set
forth herein shall be distributed to the Participants who are still
employed by the Employer on the date of termination, in the proportion that
each Participant's Compensation bears to the Compensation of all
Participants.
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(d) The Annual Additions credited to a Participant's Account for each
Limitation Year are further limited so that in the case of an Employee who is a
Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer or Related
Employer, the sum of (1) and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a
Participant under the pension plan, divided by
(B) The lesser of:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under Section
415(b)(1)(B) of the Code for the Participant for such Limitation
Year; plus
(2) (A) The sum of Annual Additions credited to the Participant under
this Plan for all Limitation Years, divided by:
(B) The sum of the lesser of the following amounts determined for such
Limitation Year and for each prior year of service with the Employer or a
Related Employer:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under Section
415(b)(1)(B) of the Code for the Participant for such Limitation
Year.
The Administrator may, in calculating the defined contribution plan
fraction described in Section 5.6(d)(2), elect to use the transitional rule
pursuant to Section 415(e)(7) of the Code, if applicable. If the sum of the
fractions produced above will exceed 1.0, even after the use of the "fresh
start" rule contained in Section 235 of the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), if applicable, then the same provisions as stated in
Section 5.6(c) above shall apply. If, even after the reductions provided for in
Section 5.6(c), the sum of the fractions still exceeds 1.0, then the benefits of
the Participant provided under the pension plan shall be reduced to the extent
necessary, in accordance with Treasury Regulations issued under the Code. Solely
for the purposes of this Section 5.6(d), the term "years of service" shall mean
all years of service defined by Treasury Regulations issued under Section 415 of
the Code. Notwithstanding the foregoing, the provisions of this Section 5.6(d)
shall expire with respect to all Limitation Years beginning after December 31,
1999.
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5.7 ERRONEOUS ALLOCATIONS.
No Participant shall be entitled to any Annual Additions or other
allocations to his Account in excess of those permitted under Sections 5.3, 5.4,
5.5, and 5.6. If it is determined at any time that the Administrator and/or
Trustee have erred in accepting and allocating any contributions or forfeitures
under this Plan, or in allocating Investment Adjustments, or in excluding or
including any person as a Participant, then the Administrator, in a uniform and
nondiscriminatory manner, shall determine the manner in which such error shall
be corrected and shall promptly advise the Trustee in writing of such error and
of the method for correcting such error. The accounts of any or all Participants
may be revised, if necessary, in order to correct such error. To the extent
applicable, such correction shall be made in accordance with the provisions of
IRS Revenue Procedure 98-22 (or any amendment or successor thereto).
5.8 VALUE OF PARTICIPANT'S ACCOUNT.
At any time, the value of a Participant's Account shall consist of the
aggregate value of his Employee Stock Ownership Account and his distribution
account, if any, determined as of the next-preceding Valuation Date. The
Administrator shall maintain adequate records of the cost basis of Employer
Securities allocated to each Participant's Employee Stock Ownership Account.
5.9 INVESTMENT OF ACCOUNT BALANCES.
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. All sales of Employer Securities by the Trustee
attributable to the Employee Stock Ownership Accounts of all Participants shall
be charged PRO RATA to the Employee Stock Ownership Accounts of all
Participants.
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 NORMAL RETIREMENT.
A Participant who reaches his Normal Retirement Date and who shall retire
at that time shall thereupon be entitled to retirement benefits based on the
value of his Account, payable pursuant to the provisions of Section 9.1. A
Participant who remains in Service after his Normal Retirement Date shall not be
entitled to any retirement benefits until his actual termination of Service
thereafter (except as provided in Section 9.4), and he shall meanwhile continue
to participate in this Plan.
6.2 EARLY RETIREMENT.
A Participant who reaches his Early Retirement Date may retire at such time
(or, at his election, as of the first day of any month thereafter prior to his
Normal Retirement Date) and shall thereupon be entitled to retirement benefits
based on the vested value of his Account, payable pursuant to the provisions of
Section 9.1.
6.3 DISABILITY RETIREMENT.
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his Account, payable pursuant to the provisions
of Section 9.1.
6.4 DEATH BENEFITS.
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his Account shall be payable pursuant to
the provisions of Section 9.1. The Administrator shall direct the Trustee to
distribute his Account to any surviving Beneficiary designated by the
Participant or, if none, to such persons specified in Section 6.5(b).
(b) Upon the death of a Former Participant, the Administrator shall direct
the Trustee to distribute any undistributed balance of his Account to any
surviving Beneficiary designated by him or, if none, to such persons specified
in Section 6.5(b).
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the balance credited to the
Account of a deceased Participant or Former Participant as the Administrator may
deem desirable. The Administrator's determination of death and of the right of
any person to receive payment shall be conclusive.
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6.5 DESIGNATION OF BENEFICIARY AND MANNER OF PAYMENT.
(a) Each Participant shall have the right to designate a Beneficiary to
receive the sum or sums to which he may be entitled upon his death. The
Participant may also designate the manner in which any death benefits under this
Plan shall be payable to his Beneficiary, provided that such designation is in
accordance with Section 9.5. Such designation of Beneficiary and manner of
payment shall be in writing and delivered to the Administrator, and shall be
effective when received by the Administrator while the Participant is alive. The
Participant shall have the right to change such designation by notice in writing
to the Administrator while the Participant is alive. Such change of Beneficiary
or the manner of payment shall become effective upon its receipt by the
Administrator while the Participant is alive. Any such change shall be deemed to
revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary, or if
no designated Beneficiary survives the Participant, the balance credited to his
Account shall be paid to the person or persons in the first of the following
classes of successive preference Beneficiaries surviving at the death of the
Participant: the Participant's (1) widow or widower, (2) natural-born or adopted
children, (3) natural-born or adoptive parents, and (4) estate. The
Administrator shall determine which Beneficiary, if any, shall have been validly
designated or entitled to receive the balance credited to the Participant's
Account in accordance with the foregoing order of preference, and its decision
shall be binding and conclusive on all persons.
(c) Notwithstanding the foregoing, if a Participant is married on the date
of his death, the sum or sums to which he may be entitled under this Plan upon
his death shall be paid to his spouse, unless the Participant's spouse shall
have consented to the election of another Beneficiary. Such a spousal consent
shall be in writing and shall be witnessed either by a representative of the
Administrator or by a notary public. Any designation by an unmarried Participant
shall be rendered ineffective by any subsequent marriage, and any consent of a
spouse shall be effective only as to that spouse. If it is established to the
satisfaction of the Administrator that spousal consent cannot be obtained
because there is no spouse, because the spouse cannot be located, or other
reasons prescribed by governmental regulations, the consent of the spouse may be
waived, and the Participant may designate a Beneficiary or Beneficiaries other
than his spouse.
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ARTICLE VII
VESTING AND FORFEITURES
7.1 VESTING ON DEATH, DISABILITY AND NORMAL RETIREMENT.
Unless his participation in this Plan shall have terminated prior thereto,
upon a Participant's death, Disability or Normal Retirement Date (whether or not
he actually retires at that time) while he is still employed by the Employer,
the Participant's entire Account shall be fully vested and nonforfeitable.
7.2 VESTING ON TERMINATION OF PARTICIPATION.
Upon termination of his participation in this Plan for any reason other
than death, Disability, or Normal Retirement, a Participant shall be vested in a
percentage of his Employee Stock Ownership Account, such vested percentage to be
determined under the following table, based on the Years of Vesting Service
(including Years of Vesting Service prior to the Effective Date) credited to him
at the time of his termination of participation:
YEARS OF VESTING SERVICE PERCENTAGE VESTED
Less than 5 0%
5 or more 100%
Any portion of the Participant's Employee Stock Ownership Account which is
not vested at the time he incurs a Break shall thereupon be forfeited and
disposed of pursuant to Section 7.3. In such event, Employer Securities shall be
forfeited only after other assets. Distribution of the vested portion of a
terminated Participant's interest in the Plan shall be payable in any manner
permitted under Section 9.1.
7.3 DISPOSITION OF FORFEITURES.
(a) In the event a Participant incurs a Break and subsequently resumes both
his Service and his participation in the Plan prior to incurring at least 5
Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be
reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently incurs a
Break and receives a distribution, or in the event a Participant does not
terminate Service, but incurs at least 5 Breaks, or in the event that a
Participant terminates Service and incurs at least 5 Breaks but has not received
a distribution, then the forfeitable portion of his Employee Stock Ownership
Account, including Investment Adjustments, shall be reallocated to other
Participants, pursuant to Section 5.4, as of the date the Participant incurs
such Break or Breaks, as the case may be.
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(c) In the event a former Participant who had received a distribution from
the Plan is rehired, he shall repay the amount of his distribution before the
earlier of 5 years after the date of his rehire by the Employer, or the close of
the first period of 5 consecutive Breaks commencing after the withdrawal, in
order for any forfeited amounts to be restored to him.
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 RIGHT TO DEMAND EMPLOYER SECURITIES.
A Participant entitled to a distribution from his Account shall be entitled
to demand that his interest in the Account be distributed to him in the form of
Employer Securities, all subject to Section 9.9. The Administrator shall notify
the Participant of his right to demand distribution of his vested Account
balance entirely in whole shares of Employer Securities (with the value of any
fractional share paid in cash). However, if the charter or by-laws of the
Employer restrict ownership of substantially all of the outstanding Employer
Securities to Employees and the Trust, then the distribution of a Participant's
vested Account shall be made entirely in the form of cash or other property, and
the Participant is not entitled to a distribution in the form of Employer
Securities.
8.2 VOTING RIGHTS.
Each Participant with an Employee Stock Ownership Account shall be entitled
to direct the Trustee as to the manner in which the Employer Securities in such
acjcount are to be voted. Employer Securities held in the Employee Stock
Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by
the Trustee on each issue with respect to which shareholders are entitled to
vote in the same proportion as the Participants who directed the Trustee as to
the manner of voting their shares in the Employee Stock Ownership Accounts with
respect to such issue. In the event that a Participant fails to give timely
voting instructions to the Trustee with respect to the voting of Employer
Securities that are allocated to his Employee Stock Ownership Account, the
Trustee shall vote such shares in its discretion.
8.3 NONDISCRIMINATION IN EMPLOYEE STOCK OWNERSHIP CONTRIBUTION.
In the event that the amount of the Employee Stock Ownership Contribution
that would be required in any Plan Year to make the scheduled payments on an
Exempt Loan would exceed the amount that would otherwise be deductible by the
Employer for such Plan Year under Code Section 404, then no more than one-third
of the Employee Stock Ownership Contribution for the Plan Year, which is also
the Employer's taxable year, shall be allocated to the group of Employees who:
(a) Was at any time during the Plan Year or the preceding Plan Year a 5
percent owner of the Employer; or
(b) Received compensation (within the meaning of Section 415(c)(3) of the
Code) from the Employer for the preceding Plan Year in excess of $80,000, as
adjusted under Code Section 414(q), and, if the Employer so elects, was in the
"top-paid group" of Employees (as defined below) for such year.
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An Employee shall be deemed a member of the "top-paid group" of Employees
for a given Plan Year if such Employee is in the group of the top 20% of the
Employees of the Employer when ranked on the basis of compensation (as defined
above).
A former Employee shall be included in the group of Employees described above if
either:
(c) Such former Employee was included in such group when such Employee
separated from Service, or
(d) Such former Employee was included in such group at any time after
attaining age 55.
The determination of who is included in the group of Employees described
above, including the determination of the number and identity of Employees in
the "top-paid group," will be made in accordance with Section 414(q) of the Code
and the regulations thereunder.
8.4 DIVIDENDS.
Dividends paid with respect to Employer Securities credited to a
Participant's Employee Stock Ownership Account as of the record date for the
dividend payment may be allocated to the Participant's Employee Stock Ownership
Account, paid in cash to the Participant, or used by the Trustee to make
payments on an Exempt Loan, pursuant to the direction of the Administrator. If
the Administrator shall direct that the aforesaid dividends shall be paid
directly to Participants, the dividends paid with respect to such Employer
Securities shall be paid to the Plan, from which dividend distributions in cash
shall be made to the Participants with respect to the Employer Securities in
their Employee Stock Ownership Accounts within 90 days of the close of the Plan
Year in which the dividends were paid. If dividends on Employer Securities
already allocated to Participants' Employee Stock Ownership Accounts are used to
make payments on an Exempt Loan, the Employer Securities which are released from
the Exempt Loan Suspense Account shall first be allocated to each Employee Stock
Ownership Account in an amount equal to the amount of dividends that would have
been allocated to such Account if the dividends had not been used to make
payments on an Exempt Loan, and the remaining Employer Securities (if any) which
are released shall be allocated in the proportion that the value of each
Employee Stock Ownership Account bears to the value of all such Accounts, all in
accordance with Section 404(k) of the Code. Dividends on Employer Securities
obtained pursuant to an Exempt Loan and still held in the Exempt Loan Suspense
Account may be used to make payments on an Exempt Loan, as described in Section
8.6.
8.5 EXEMPT LOANS.
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt
Loan may take the form of (i) a loan from a bank or other commercial lender to
purchase Employer Securities (ii) a loan from the Employer to the Plan; or (iii)
an installment sale of Employer Securities to the Plan. The proceeds of any such
Exempt Loan shall be used, within a reasonable time after the Exempt Loan is
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obtained, only to purchase Employer Securities, repay the Exempt Loan, or repay
any prior Exempt Loan. Any such Exempt Loan shall provide for no more than a
reasonable rate of interest and shall be without recourse against the Plan. The
number of years to maturity under the Exempt Loan must be definitely
ascertainable at all times. The only assets of the Plan that may be given as
collateral for an Exempt Loan are Financed Shares acquired with the proceeds of
the Exempt Loan and Financed Shares that were used as collateral for a prior
Exempt Loan repaid with the proceeds of the current Exempt Loan. Such Financed
Shares so pledged shall be placed in an Exempt Loan Suspense Account. No person
or institution entitled to payment under an Exempt Loan shall have recourse
against Trust assets other than the Financed Shares, the Employer Stock
Ownership Contribution (other than contributions of Employer Securities) that is
available under the Plan to meet obligations under the Exempt Loan, and earnings
attributable to such Financed Shares and the investment of such contribution.
Any Employee Stock Ownership Contribution paid during the Plan Year in which an
Exempt Loan is made (whether before or after the date the proceeds of the Exempt
Loan are received), any Employee Stock Ownership Contribution paid thereafter
until the Exempt Loan has been repaid in full, and all earnings from investment
of such Employee Stock Ownership Contribution, without regard to whether any
such Employee Stock Ownership Contribution and earnings have been allocated to
Participants' Employee Stock Ownership Accounts, shall be available to meet
obligations under the Exempt Loan as such obligations accrue, or prior to the
time such obligations accrue, unless otherwise provided by the Employer at the
time any such contribution is made. Any pledge of Employer Securities shall
provide for the release of Financed Shares upon the payment of any portion of
the Exempt Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number
of Financed Shares released from such pledge shall equal the number of Financed
Shares held immediately before release for the current Plan Year multiplied by a
fraction. The numerator of the fraction is the sum of principal and interest
paid in such Plan Year. The denominator of the fraction is the sum of the
numerator plus the principal and interest to be paid for all future years. Such
years will be determined without taking into account any possible extension or
renewal periods. If interest on any Exempt Loan is variable, the interest to be
paid in future years under the Exempt Loan shall be computed by using the
interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may, in accordance with the
direction of the Administrator, obtain an Exempt Loan pursuant to the terms of
which the number of Financed Shares to be released from encumbrance shall be
determined with reference to principal payments only. In the event that such an
Exempt Loan is obtained, annual payments of principal and interest shall be at a
cumulative rate that is not less rapid at any time than level payments of such
amounts for not more than 10 years. The amount of interest in any such annual
loan repayment shall be disregarded only to the extent that it would be
determined to be interest under standard loan amortization tables. The
requirement set forth in the preceding sentence shall not be applicable from the
time that, by reason of a renewal, extension, or refinancing, the sum of the
expired duration of the Exempt Loan, the renewal period, the extension period,
and the duration of a new Exempt Loan exceeds 10 years.
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8.6 EXEMPT LOAN PAYMENTS.
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) the Employee Stock Ownership Contribution to the Trust made to meet the
Plan's obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Financed Shares and
investments of such contributions (both received during or prior to the Plan
Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt
Loan; and (3) the proceeds of the sale of any Financed Shares. Such contribution
and earnings shall be accounted for separately by the Plan until the Exempt Loan
is repaid.
(b) Employer Securities released from the Exempt Loan Suspense Account by
reason of the payment of principal or interest on an Exempt Loan from amounts
allocated to Participants' Employee Stock Ownership Accounts shall immediately
upon release be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to enable
the Trust to pay principal and interest on any such Exempt Loans as they are
due, provided, however, that no such contribution shall exceed the limitations
in Section 5.6. In the event that such contributions by reason of the
limitations in Section 5.6 are insufficient to enable the Trust to pay principal
and interest on such Exempt Loan as it is due, then upon the Administrator's
direction the Employer shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet
such principal and interest payments. Such new Exempt Loan shall be
subordinated to the prior Exempt Loan. Employer Securities released from
the pledge of the prior Exempt Loan shall be pledged as collateral to
secure the new Exempt Loan. Such Employer Securities will be released from
this new pledge and allocated to the Employee Stock Ownership Accounts of
the Participants in accordance with the applicable provisions of the Plan;
(2) Purchase any Financed Shares in an amount necessary to provide the
Trustee with sufficient funds to meet the principal and interest
repayments. Any such sale by the Plan shall meet the requirements of
Section 408(e) of the Act; or
(3) Any combination of the foregoing.
However, the Employer shall not, pursuant to the provisions of this
subsection, do, fail to do or cause to be done any act or thing which would
result in a disqualification of the Plan as an employee stock ownership plan
under Section 4975(e)(7) of the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any
amendment to or termination of the Plan which causes it to cease to qualify as
an employee stock ownership plan within the meaning of Section 4975(e)(7) of the
Code, or any repayment of an Exempt Loan, no shares of Employer Securities
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acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase
Employer Securities may be subject to a put, call or other option, or buy-sell
or similar arrangement, while such shares are held by the Plan or when such
shares are distributed from the Plan.
8.7 PUT OPTION.
In the event that the Employer Securities distributed to a Participant are
not readily tradable on an established market, the Participant shall be entitled
to require that the Employer repurchase the Employer Securities under a fair
valuation formula, as provided by governmental regulations. The Participant or
Beneficiary shall be entitled to exercise the put option described in the
preceding sentence for a period of not more than 60 days following the date of
distribution of Employer Securities to him. If the put option is not exercised
within such 60-day period, the Participant or Beneficiary may exercise the put
option during an additional period of not more than 60 days after the beginning
of the first day of the first Plan Year following the Plan Year in which the
first put option period occurred, all as provided in regulations promulgated by
the Secretary of the Treasury.
If a Participant exercises the foregoing put option with respect to
Employer Securities that were distributed as part of a total distribution
pursuant to which a Participant's Employee Stock Ownership Account is
distributed to him in a single taxable year, the Employer or the Plan may elect
to pay the purchase price of the Employer Securities over a period not to exceed
5 years. Such payments shall be made in substantially equal installments not
less frequently than annually over a period beginning not later than 30 days
after the exercise of the put option. Reasonable interest shall be paid to the
Participant with respect to the unpaid balance of the purchase price, and
adequate security shall be provided with respect thereto. In the event that a
Participant exercises a put option with respect to Employer Securities that are
distributed as part of an installment distribution, if permissible under Section
9.5, the amount to be paid for such securities shall be paid not later than 30
days after the exercise of the put option.
8.8 DIVERSIFICATION REQUIREMENTS.
Each Participant who has completed at least 10 years of participation in
the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25 percent of his Employee Stock Ownership Account
(to the extent such percentage exceeds the amount to which a prior election
under this Section 8.8 had been made). For purposes of this Section 8.8, the
term "qualified election period" shall mean the 5-Plan-Year period beginning
with the Plan Year after the Plan Year in which the Participant attains age 55
(or, if later, beginning with the Plan Year after the first Plan Year in which
the Employee first completes at least 10 years of participation in the Plan). In
the case of an Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service requirements
for diversification can make his last election hereunder, he shall be entitled
to direct the Plan as to the investment of at least 50 percent of his Employee
Stock Ownership Account (to the extent such percentage exceeds the amount to
which a prior election under this Section 8.8 had been made). The Plan shall
make
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available at least 3 investment options (chosen by the Administrator in
accordance with regulations prescribed by the Department of Treasury) to each
Participant making an election hereunder. The Plan shall be deemed to have met
the requirements of this Section if the portion of the Participant's Employee
Stock Ownership Account covered by the election hereunder is distributed to the
Participant or his designated Beneficiary within 90 days after the period during
which the election may be made. In the absence of such a distribution, the
Trustee shall implement the Participant's election within 90 days following the
expiration of the qualified election period. Notwithstanding the foregoing, if
the fair market value of the Employer Securities allocated to the Employee Stock
Ownership Account of a Participant otherwise entitled to diversify hereunder is
$500 or less as of the Valuation Date immediately preceding the first day of any
election period, then such Participant shall not be entitled to an election
under this Section 8.8 for that qualified election period.
8.9 INDEPENDENT APPRAISER.
An independent appraiser meeting the requirements of the regulations
promulgated under Code Section 170(a)(1) shall value the Employer Securities in
those Plan Years when such securities are not readily tradable on an established
securities market.
8.10 NONTERMINABLE RIGHTS.
The provisions of this Article VIII shall continue to be applicable to
Employer Securities held by the Trustee, whether or not allocated to
Participants' and Former Participants' Accounts, even if the Plan ceases to be
an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 PAYMENTS ON TERMINATION OF SERVICE - IN GENERAL.
All benefits provided under this Plan shall be funded by the value of a
Participant's vested Account in the Plan. As soon as practicable after a
Participant's Retirement, Disability, death or other termination of Service, the
Administrator shall ascertain the value of his vested Account, as provided in
Article V, and the Administrator shall hold or dispose of the same in accordance
with the following provisions of this Article IX.
9.2 COMMENCEMENT OF PAYMENTS.
(a) DISTRIBUTIONS UPON RETIREMENT, DISABILITY OR DEATH. Upon a
Participant's Retirement, Disability or death, payment of benefits under this
Plan shall, unless the Participant otherwise elects (in accordance with Section
9.3), commence as soon as practicable after the Valuation Date next following
the date of the Participant's Retirement, Disability or death.
(b) DISTRIBUTION FOLLOWING TERMINATION OF SERVICE. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement,
Disability or death, he shall be accorded an opportunity to commence receipt of
benefits as soon as practicable after the Valuation Date next following the date
of his termination of Service. A Participant who terminates Service with a
vested Account balance shall be entitled to receive from the Administrator a
statement of his benefits. In the event that a Participant elects not to
commence receipt of distribution in accordance with this Section 9.2(b) after
the Participant incurs a Break, the Administrator shall transfer his vested
Account balance to a distribution account. If a Participant's vested Account
balance does not exceed (or at the time of any prior distribution did not
exceed) $5,000, the Plan Administrator shall distribute the vested portion of
his Account balance as soon as administratively feasible without the consent of
the Participant or his spouse.
(c) DISTRIBUTION OF ACCOUNTS GREATER THAN $5,000. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $5,000, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such Account
balance. The Administrator shall notify the Participant of the right to defer
any distribution until the Participant's Account balance is no longer
immediately distributable. The consent of the Participant shall not be required
to the extent that a distribution is required to satisfy Code Section 401(a)(9)
or Code Section 415.
9.3 MANDATORY COMMENCEMENT OF BENEFITS.
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest to occur of the
close of the Plan Year in which (i) the Participant attains age 65, (ii) the
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tenth anniversary of the Plan Year in which the Participant commenced
participation, or (iii) the Participant terminates Service with the Employer and
all Related Employers.
(b) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated Beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated Beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, if the Participant's interest is
to be distributed in other than a lump sum, the following minimum distribution
rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period
not extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the Participant's
designated Beneficiary or (2) a period not extending beyond the life
expectancy of the designated Beneficiary, the amount required to be
distributed for each calendar year, beginning with distributions for the
first distribution calendar year, must at least equal the quotient obtained
by dividing the Participant's benefit by the applicable life expectancy.
(ii) For calendar years beginning after December 31, 1988, the amount
to be distributed each year, beginning with distributions for the first
distribution calendar year, shall not be less than the quotient obtained by
dividing the Participant's Account balance by the lesser of (1) the
applicable life expectancy, or (2) if the Participant's spouse is not the
designated Beneficiary, the applicable divisor determined from the table
set forth in Q&A-4 of section 1.401(a)(9)-2 of the Proposed Regulations.
Distributions after the death of the Participant shall be distributed using
the applicable life expectancy in subsection (iii) of Section 9.3(b) above
as the relevant divisor without regard to Proposed Regulations section
1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the Participant's
required beginning date. The minimum distribution for other calendar years,
including the minimum distribution for the distribution calendar year in
which the Participant's required beginning date occurs, must be made on or
before December 31 of the distribution calendar year.
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(d) If a Participant dies after a distribution has commenced in accordance
with Section 9.3(b) but before his entire interest has been distributed to him,
the remaining portion of such interest shall be distributed to his Beneficiary
at least as rapidly as under the method of distribution in effect as of the date
of his death.
(e) If a Participant shall die before the distribution of his Account
balance has begun, the entire Account balance shall be distributed by December
31 of the calendar year containing the fifth anniversary of the death of the
Participant, except in the following events:
(i) If any portion of the Participant's Account balance is payable to
(or for the benefit of) a designated Beneficiary over a period not
extending beyond the life expectancy of such Beneficiary and such
distributions begin not later than December 31 of the calendar year
immediately following the calendar year in which the Participant died; or
(ii) If any portion of the Participant's Account balance is payable to
(or for the benefit of) the Participant's spouse over a period not
extending beyond the life expectancy of such spouse and such distributions
begin no later than December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
If the Participant has not made a distribution election by the time of his
death, the Participant's designated Beneficiary shall elect the method of
distribution no later than the earlier of (1) December 31 of the calendar year
in which distributions would be required to begin under this Article or (2)
December 31 of the calendar year which contains the fifth anniversary of the
date of death of the Participant. If the Participant has no designated
Beneficiary, or if the designated Beneficiary does not elect a method of
distribution, distribution of the Participant's entire interest shall be
completed by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant and
his spouse may be redetermined but not more frequently than annually. The life
expectancy (or joint and last survivor expectancy) shall be calculated using the
attained age of the Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be the first distribution calendar year, and if
life expectancy is being recalculated, such succeeding calendar year. Unless
otherwise elected by the Participant (or his spouse, if applicable) by the time
distributions are required to begin, life expectancies shall be recalculated
annually. Any election not to recalculate shall be irrevocable and shall apply
to all subsequent years. The life expectancy of a nonspouse Beneficiary may not
be recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child
shall be treated as if it had been paid to a surviving spouse if such amount
will become payable to the surviving spouse upon such child reaching majority
(or other designated event permitted under regulations).
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(h) For distributions beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to begin
pursuant to this Article.
9.4 REQUIRED BEGINNING DATES.
(a) GENERAL RULE. The required beginning date of a Participant who is a
5-percent owner of the Employer is the first day of April of the calendar year
following the calendar year in which the Participant attains age 70-1/2. The
required beginning date of a Participant who is not a 5-percent owner shall be
April 1 of the calendar year following the later of either: (i) the calendar
year in which the Participant attains age 70-1/2, or (ii) the calendar year in
which the Participant retires.
(b) 5-PERCENT OWNER. A Participant is treated as a 5-percent owner for
purposes of this section if such Participant is a 5-percent owner as defined in
section 416(i) of the Code (determined in accordance with section 416 but
without regard to whether the plan is top-heavy) at any time during the Plan
Year ending with or within the calendar year in which such owner attains age
66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5-percent
owner under this section, they must continue to be distributed, even if the
Participant ceases to be a 5-percent owner in a subsequent year.
9.5 FORM OF PAYMENT.
Each Participant's vested Account balance shall be distributed in a lump
sum payment. Notwithstanding the preceding sentence, but subject to Section 9.3,
the Administrator may not distribute a lump sum without the Participant's
consent when the present value of a Participant's total Account balance is in
excess of $5,000. This form of payment shall be the normal form of distribution.
Furthermore, however, in the event that the Administrator must commence
distributions, as required by Section 9.4 herein, with respect to an Employee
who has attained age 70-1/2 and is still employed by the Employer, if the
Employee does not elect a lump sum distribution, payments shall be made in
installments in such amounts as shall satisfy the minimum distribution rules of
Section 9.3.
9.6 PAYMENTS UPON TERMINATION OF PLAN.
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the following terms, conditions and provisions: The
Account balance of each affected Participant and Former Participant shall
immediately become fully vested and nonforfeitable; the Account balance of all
Participants and Former Participants shall be determined within 60 days after
such termination, and the Administrator shall have the same powers to direct the
Trustee in making payments as contained in Sections 9.1 and 13.5.
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9.7 DISTRIBUTIONS PURSUANT TO QUALIFIED DOMESTIC RELATIONS ORDERS.
Upon receipt of a domestic relations order, the Administrator shall
promptly notify the Participant and any alternate payee of receipt of the order
and the Plan's procedure for determining whether the order is a Qualified
Domestic Relations Order. While the issue of whether a domestic relations order
is a Qualified Domestic Relations Order is being determined, if the benefits
would otherwise be paid, the Administrator shall segregate in a separate account
in the Plan the amounts that would be payable to the alternate payee during such
period if the order were a Qualified Domestic Relations Order. If within 18
months the order is determined to be a Qualified Domestic Relations Order, the
amounts so segregated, along with the interest or investment earnings
attributable thereto, shall be paid to the alternate payee. Alternatively, if
within 18 months, it is determined that the order is not a Qualified Domestic
Relations Order or if the issue is still unresolved, the amounts segregated
under this Section 9.7, with the earnings attributable thereto, shall be paid to
the Participant or Beneficiary who would have been entitled to such amounts if
there had been no order. The determination as to whether the order is qualified
shall be applied prospectively. Thus, if the Administrator determines that the
order is a Qualified Domestic Relations Order after the 18-month period, the
Plan shall not be liable for payments to the alternative payee for the period
before the order is determined to be a Qualified Domestic Relations Order.
9.8 CASH-OUT DISTRIBUTIONS.
If a Participant receives a distribution of his entire vested Account
balance because of the termination of his participation in the Plan, the Plan
shall disregard a Participant's Service with respect to which such cash-out
distribution shall have been made, in computing his Account balance in the event
that a Former Participant shall again become an Employee and become eligible to
participate in the Plan. Such a distribution shall be deemed to be made on
termination of participation in the Plan if it is made not later than the close
of the second Plan Year following the Plan Year in which such termination
occurs. The forfeitable portion of a Participant's Account balance shall be
restored upon repayment to the Plan by such Former Participant of the full
amount of the cash-out distribution, provided that the Former Participant again
becomes an Employee. Such repayment must be made by the Employee not later than
the end of the 5-year period beginning with the date of the distribution.
Forfeitures required to be restored by virtue of such repayment shall be
restored from the following sources in the following order of preference: (i)
current forfeitures; (ii) an additional Employee Stock Ownership Contribution,
as appropriate, and as subject to Section 5.6; and (iii) investment earnings of
the Fund. In the event that a Participant's Account balance is totally
forfeitable, a Participant shall be deemed to have received a distribution of
zero upon his termination of Service. In the event of a return to Service within
5 years of the date of his deemed distribution, the Participant shall be deemed
to have repaid his distribution in accordance with the rules of this Section
9.8.
9.9 ESOP DISTRIBUTION RULES.
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
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Participant elects otherwise in writing) shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or next
following his death, Disability or termination of Service, but not later than 1
year after the close of the Plan Year in which the Participant separates from
Service by reason of the attainment of his Normal Retirement Date, Disability,
death or separation from Service. In addition, all distributions hereunder
shall, to the extent that the Participant's Account is invested in Employer
Securities, be made in the form of Employer Securities or cash, or a combination
of Employer Securities and cash, in the discretion of the Administrator, subject
to the Participant's right to demand Employer Securities in accordance with
Section 8.1. Fractional shares, however, may be distributed in the form of cash.
9.10 DIRECT ROLLOVER.
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article IX, a distributee
may elect, at the time and in the manner prescribed by the Administrator, to
have any portion of an "eligible rollover distribution" paid directly to an
"eligible retirement plan" specified by the distributee in a "direct rollover."
(b) For purposes of this Section 9.10, an "eligible rollover distribution"
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an "eligible rollover distribution" does not include:
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated Beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the portion of
any distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to Employer
Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an "eligible rollover
distribution" to the surviving spouse, an "eligible retirement plan" is an
individual retirement account or individual retirement annuity.
(d) For purposes of this Section 9.10, a distributee includes a Participant
or Former Participant. In addition, the Participant's or Former Participant's
surviving spouse and the Participant's or Former Participant's spouse or former
spouse who is the alternate payee under a Qualified Domestic Relations Order are
"distributees" with regard to the interest of the spouse or former spouse.
(e) For purposes of this Section 9.10, a "direct rollover" is a payment by
the Plan to the "eligible retirement plan" specified by the distributee.
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9.11 WAIVER OF 30-DAY NOTICE.
If a distribution is one to which Sections 401(a)(11) and 417 of the Code
do not apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that: (1) the Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (2) the Participant, after
receiving the notice, affirmatively elects a distribution.
9.12 RE-EMPLOYED VETERANS.
Notwithstanding any provision of the Plan to the contrary, contributions,
benefits, Plan loan repayment suspensions and Service credit with respect to
qualified military service will be provided in accordance with Code Section
414(u).
9.13 SHARE LEGEND.
Employer Securities held or distributed by the Trustee may include such
legend restrictions on transferability as the Employer may reasonably require in
order to assure compliance with applicable Federal and State securities and
other laws.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 TOP-HEAVY RULES TO CONTROL.
Anything contained in this Plan to the contrary notwithstanding, if for any
Plan Year the Plan is a top-heavy plan, as determined pursuant to Section 416 of
the Code, then the Plan must meet the requirements of this Article X for such
Plan Year.
10.2 TOP-HEAVY PLAN DEFINITIONS.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Article X shall have the following meanings:
(a) "ACCRUED BENEFIT" shall mean the account balances or accrued benefits
of an Employee, calculated pursuant to Section 10.3.
(b) "DETERMINATION DATE" shall mean, with respect to any particular Plan
Year of this Plan, the last day of the preceding Plan Year (or, in the case of
the first Plan Year of the Plan, the last day of the first Plan Year). In
addition, the term "Determination Date" shall mean, with respect to any
particular plan year of any plan (other than this Plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the last day of the plan
year of such plan which falls within the same calendar year as the Determination
Date for this Plan.
(c) "EMPLOYER" shall mean the Employer (as defined in Section 1.1(q)) and
any entity which is (1) a member of a controlled group including such Employer,
while it is a member of such controlled group (within the meaning of Section
414(b) of the Code), (2) in a group of trades or businesses under common control
with such Employer, while it is under common control (within the meaning of
Section 414(c) of the Code), and (3) a member of an affiliated service group
including such Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code).
(d) "KEY EMPLOYEE" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who, at any
time during the Plan Year or during the 4 immediately preceding Plan Years, is
one of the following:
(1) An officer of the Employer who has compensation greater than 50%
of the amount in effect under Code 415(b)(1)(A) for the Plan Year;
provided, however, that no more than 50 Employees (or, if lesser, the
greater of 3 or 10% of the Employees) shall be deemed officers;
(2) One of the 10 Employees having annual compensation (as defined in
Section 415 of the Code) in excess of the limitation in effect under
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Section 415(c)(1)(A) of the Code, and owning (or considered as owning,
within the meaning of Section 318 of the Code) the largest interests
in the Employer;
(3) Any Employee owning (or considered as owning, within the
meaning of Section 318 of the Code) more than 5% of the outstanding
stock of the Employer or stock possessing more than 5% of the total
combined voting power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in
Section 415 of the Code) of more than $150,000 and who would be
described in Section 10.2(d)(3) if "1%" were substituted for "5%"
wherever the latter percentage appears.
For purposes of applying Section 318 of the Code to the provisions of this
Section 10.2(d), Section 318(a)(2)(C) of the Code shall be applied by
substituting "5%" for "50%" wherever the latter percentage appears. In addition,
for purposes of this Section 10.2(d), the provisions of Section 414(b), (c) and
(m) shall not apply in determining ownership interests in the Employer. However,
for purposes of determining whether an individual has compensation in excess of
$150,000, or whether an individual is a Key Employee under Section 10.2(d)(1)
and (2), compensation from each entity required to be aggregated under Sections
414(b), (c) and (m) of the Code shall be taken into account. Notwithstanding
anything contained herein to the contrary, all determinations as to whether a
person is or is not a Key Employee shall be resolved by reference to Section 416
of the Code and any rules and regulations promulgated thereunder.
(e) "NON-KEY EMPLOYEE" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who is not
considered to be a Key Employee with respect to this Plan.
(f) "PERMISSIVE AGGREGATION GROUP" shall mean all plans in the Required
Aggregation Group and any other plans maintained by the Employer which satisfy
Sections 401(a)(4) and 410 of the Code when considered together with the
Required Aggregation Group.
(g) "REQUIRED AGGREGATION GROUP" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case of a
terminated plan, had been) a Participant in the Plan Year containing the
Determination Date or any of the 4 preceding Plan Years, and each other plan of
the Employer which enables any plan of the Employer in which a Key Employee is a
Participant to meet the requirements of Sections 401(a)(4) and 410 of the Code.
10.3 CALCULATION OF ACCRUED BENEFITS.
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required Aggregation
Group or a Permissive Aggregation Group, the Employee's account balances
under the respective plan, determined as of the most recent plan valuation
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date within a 12-month period ending on the Determination Date, including
contributions actually made after the valuation date but before the
Determination Date (and, in the first plan year of a plan, also including
any contributions made after the Determination Date which are allocated as
of a date in the first plan year).
(2) With respect to any defined contribution pension plan in a
Required Aggregation Group or a Permissive Aggregation Group, the
Employee's account balances under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, including contributions which have not actually been
made, but which are due to be made as of the Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, pursuant to the actuarial assumptions used by such
plan, and calculated as if the Employee terminated Service under such plan
as of the valuation date (except that, in the first plan year of a plan, a
current Participant's estimated Accrued Benefit as of the Determination
Date shall be taken into account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the 5-year period ending on the
Determination Date, any Accrued Benefit for such individual shall not be
taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but shall exclude
amounts attributable to voluntary deductible Employee contributions, if
any.
(2) The Accrued Benefit shall be increased by the aggregate
distributions made with respect to an Employee under the plan or plans, as
the case may be, during the 5-year period ending on the Determination Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into
account as follows:
(A) If the transfer is initiated by the Employee and made from a
plan maintained by one employer to a plan maintained by another
unrelated employer, the transferring plan shall continue to count the
amount transferred; the receiving plan shall not count the amount
transferred.
(B) If the transfer is not initiated by the Employee or is made
between plans maintained by related employers, the transferring plan
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shall no longer count the amount transferred; the receiving plan shall
count the amount transferred.
(c) If any individual has not performed services for the Employer at any
time during the 5-year period ending on the Determination Date, any Accrued
Benefit for such individual (and the account of such individual) shall not be
taken into account.
10.4 DETERMINATION OF TOP-HEAVY STATUS.
This Plan shall be considered to be a top-heavy plan for any Plan Year if,
as of the Determination Date, the value of the Accrued Benefits of Key Employees
exceeds 60% of the value of the Accrued Benefits of all eligible Employees under
the Plan. Notwithstanding the foregoing, if the Employer maintains any other
qualified plan, the determination of whether this Plan is top-heavy shall be
made after aggregating all other plans of the Employer in the Required
Aggregation Group and, if desired by the Employer as a means of avoiding
top-heavy status, after aggregating any other plan of the Employer in the
Permissive Aggregation Group. If the required Aggregation Group is top-heavy,
then each plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would not otherwise be
deemed to be top-heavy. Conversely, if the Permissive Aggregation Group is not
top-heavy, then no plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would otherwise be deemed
to be top-heavy. In no event shall a plan included in a top-heavy Permissive
Aggregation Group be deemed a top-heavy plan unless such plan is also included
in a top-heavy Required Aggregation Group.
10.5 DETERMINATION OF SUPER TOP-HEAVY STATUS.
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4 above
for classification as a top-heavy plan, except that "90%" shall be substituted
for "60%" whenever the latter percentage appears.
10.6 MINIMUM CONTRIBUTION.
(a) For any Plan Year in which the Plan is top-heavy, each Non-Key Employee
who has met the age and service requirements, if any, contained in the Plan,
shall be entitled to a minimum contribution (which may include forfeitures
otherwise allocable) equal to a percentage of such Non-Key Employee's
compensation (as defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 3% of such Non-Key Employee's compensation.
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(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan shall
in no event exceed the percentage contribution made for the Key Employee
for whom such percentage is the highest for the Plan Year after taking into
account contributions under other defined contribution plans in this Plan's
Required Aggregation Group; provided, however, that this Section 10.7(b)(1)
shall not apply if this Plan is included in a Required Aggregation Group
and this Plan enables a defined benefit plan in such Required Aggregation
Group to meet the requirements of Section 401(a)(4) or 410 of the Code.
(2) No minimum contribution shall be required (or the minimum
contribution shall be reduced, as the case may be) for a Non-Key Employee
under this Plan for any Plan Year if the Employer maintains another
qualified plan under which a minimum benefit or contribution is being
accrued or made on account of such Plan Year, in whole or in part, on
behalf of the Non-Key Employee, in accordance with Section 416(c) of the
Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1) any
Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer contributions to or any benefits under Chapter
21 of the Code (relating to the Federal Insurance Contributions Act), Title II
of the Social Security Act, or any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the Plan
Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such Non-Key
Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 VESTING.
(a) For any Plan Year in which the Plan is a top-heavy plan, a
Participant's Accrued Benefit derived from Employer contributions (not including
contributions made pursuant to Code Section 401(k), if any) shall continue to
vest according to the following schedule:
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YEARS OF SERVICE COMPLETED PERCENTAGE VESTED
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 or more 100%
(b) For purposes of Section 10.7(a), the term "year of service" shall have
the same meaning as Year of Vesting Service, as set forth in Section 1.1(ss),
and as modified by Section 3.2.
(c) If for any Plan Year the Plan becomes top-heavy and the vesting
schedule set forth in Section 10.7(a) becomes effective, then, even if the Plan
ceases to be top-heavy in any subsequent Plan Year, the vesting schedule set
forth in Section 10.7(a) shall remain applicable with respect to any Participant
who has completed 3 or more Years of Service.
10.8 MAXIMUM BENEFIT LIMITATION.
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i) shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the Plan Year in which this
Section 10.8 becomes applicable.
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ARTICLE XI
ADMINISTRATION
11.1 APPOINTMENT OF ADMINISTRATOR.
This Plan shall be administered by a committee consisting of up to 5
persons, whether or not Employees or Participants, who shall be appointed from
time to time by the Board of Directors to serve at its pleasure. The Sponsor may
require that each person appointed as an Administrator shall signify his
acceptance by filing an acceptance with the Sponsor. The term "Administrator" as
used in this Plan shall refer to the members of the committee, either
individually or collectively, as appropriate. The authority to control and
manage the operation and administration of the Plan is vested in the
Administrator appointed by the Board of Directors. The Administrator shall have
the rights, duties and obligations of an "administrator," as that term is
defined in section 3(16)(A) of the Act, and of a "plan administrator," as that
term is defined in Section 414(g) of the Code. In the event that the Sponsor
shall elect not to appoint any individuals to constitute a committee to
administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 RESIGNATION OR REMOVAL OF ADMINISTRATOR.
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Sponsor and to the Trustee. Any
Administrator who was an employee of the Employer at the time of his appointment
shall be deemed to have resigned as an Administrator upon his termination of
Service. The Board of Directors may, in its discretion, remove any Administrator
with or without cause, by giving notice in writing, mailed or delivered to the
Administrator and to the Trustee.
11.3 APPOINTMENT OF SUCCESSORS: TERMS OF OFFICE, ETC.
Upon the death, resignation or removal of an Administrator, the Sponsor may
appoint, by Board of Directors' resolution, a successor or successors. Notice of
termination of an Administrator and notice of appointment of a successor shall
be made by the Sponsor in writing, with copies mailed or delivered to the
Trustee, and the successor shall have all the rights and privileges and all of
the duties and obligations of the predecessor.
11.4 POWERS AND DUTIES OF ADMINISTRATOR.
The Administrator shall have the following duties and responsibilities in
connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures as
shall be proper for the efficient administration of the Plan, such rules,
regulations and procedures to apply uniformly to all Employees, Participants and
Beneficiaries;
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(b) To exercise discretion in determining all questions arising in the
administration, interpretation and application of the Plan, including questions
of eligibility and of the status and rights of Participants, Beneficiaries and
any other persons hereunder;
(c) To decide any dispute arising hereunder strictly in accordance with the
terms of the Plan; provided, however, that no Administrator shall participate in
any matter involving any questions relating solely to his own participation or
benefits under this Plan;
(d) To advise the Employer and direct the Trustee regarding the known
future needs for funds to be available for distribution in order that the
Trustee may establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies to
the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to the
Plan for each fiscal year;
(g) To direct the Trustee concerning all matters requiring the
Administrator's direction pursuant to the provisions of this Plan and the Trust
Agreement;
(h) To advise the Trustee on all terminations of Service by Participants,
unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against the
Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee;
(l) To have all such other powers as may be necessary to discharge its
duties hereunder; and
(m) To direct the Trustee to pay all expenses of administering this Plan,
except to the extent that the Employer pays such expenses.
Full discretion is granted to the Administrator to interpret the Plan and
to determine the benefits, rights and privileges of Participants, Beneficiaries
or other persons affected by this Plan. The Administrator shall exercise its
discretion under the terms of this Plan and shall administer the Plan in
accordance with its terms, such administration to be exercised uniformly so that
all persons similarly situated shall be similarly treated.
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11.5 ACTION BY ADMINISTRATOR.
The Administrator may elect a Chairman and Secretary from among its members
and may adopt rules for the conduct of its business. A majority of the members
then serving shall constitute a quorum for the transaction of business. All
resolutions or other action taken by the Administrator shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions may
be adopted or other action taken without a meeting upon written consent signed
by at least a majority of the members. All documents, instruments, orders,
requests, directions, instructions and other papers shall be executed on behalf
of the Administrator by either the Chairman or the Secretary of the
Administrator, if any, or by any member or agent of the Administrator duly
authorized to act on the Administrator's behalf.
11.6 PARTICIPATION BY ADMINISTRATOR.
No member of the committee constituting the Administrator shall be
precluded from becoming a Participant in the Plan if he would be otherwise
eligible, but he shall not be entitled to vote or act upon matters or to sign
any documents relating specifically to his own participation under the Plan,
except when such matters or documents relate to benefits generally. If this
disqualification results in the lack of a quorum, then the Board of Directors
shall appoint a sufficient number of temporary members of the committee
constituting the Administrator who shall serve for the sole purpose of
determining such a question.
11.7 AGENTS.
The Administrator may employ agents and provide for such clerical, legal,
actuarial, accounting, medical, advisory or other services as it deems necessary
to perform its duties under this Plan. The cost of such services and all other
expenses incurred by the Administrator in connection with the administration of
the Plan shall be paid from the Fund, unless paid by the Employer.
11.8 ALLOCATION OF DUTIES.
The duties, powers and responsibilities reserved to the Administrator may
be allocated among its members so long as such allocation is pursuant to written
procedures adopted by the Administrator, in which case, except as may be
required by the Act, no Administrator shall have any liability, with respect to
any duties, powers or responsibilities not allocated to him, for the acts of
omissions of any other Administrator.
11.9 DELEGATION OF DUTIES.
The Administrator may delegate any of its duties to any Employees of the
Employer, to the Trustee with its written consent, or to any other person or
firm, provided that the Administrator shall prudently choose such agents and
rely in good faith on their actions.
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11.10 ADMINISTRATOR'S ACTION CONCLUSIVE.
Any action on matters within the authority of the Administrator shall be
final and conclusive except as provided in Article XII.
11.11 COMPENSATION AND EXPENSES OF ADMINISTRATOR.
No Administrator who is receiving compensation from the Employer as a
full-time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his services hereunder. Any other Administrator shall be
entitled to receive such reasonable compensation for his services as an
Administrator hereunder as may be mutually agreed upon between the Employer and
such Administrator. Any such compensation shall be paid from the Fund, unless
paid by the Employer. Each Administrator shall be entitled to reimbursement by
the Employer for any reasonable and necessary expenditures incurred in the
discharge of his duties.
11.12 RECORDS AND REPORTS.
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the Code
and governmental regulations issued thereunder.
11.13 REPORTS OF FUND OPEN TO PARTICIPANTS.
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund and
the statement of his Account balance, as well as a complete copy of the Plan and
the Trust Agreement and copies of annual reports to the Internal Revenue
Service, shall be made available by the Administrator to the Employer for
examination by each Participant during reasonable hours at the office of the
Employer, provided, however, that the statement of a Participant's Account
balance shall not be made available for examination by any other Participant.
11.14 NAMED FIDUCIARY.
The Administrator is the named fiduciary for purposes of Section 402 of the
Act and shall be the designated agent for receipt of service of process on
behalf of the Plan. It shall use the care and diligence in the performance of
its duties under this Plan that are required of fiduciaries under the Act.
Nothing in this Plan shall preclude the Employer from purchasing liability
insurance to protect the Administrator with respect to its duties under this
Plan.
49
<PAGE>
11.15 INFORMATION FROM EMPLOYER.
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should have
known that such information is erroneous.
11.16 RESPONSIBILITIES OF DIRECTORS.
Subject to the rights reserved to the Board of Directors acting on behalf
of the Employer as set forth in this Plan, no member of the Board of Directors
shall have any duties or responsibilities under this Plan, except to the extent
he shall be acting in the capacity of an Administrator or Trustee.
11.17 LIABILITY AND INDEMNIFICATION.
(a) To the extent not prohibited by the Act, the Administrator shall not be
responsible in any way for any action or omission of the Employer, the Trustee
or any other person in the performance of their duties and obligations set forth
in this Plan and in the Trust Agreement. To the extent not prohibited by the
Act, the Administrator shall also not be responsible for any act or omission of
any of its agents, or with respect to reliance upon advice of its counsel
(whether or not such counsel is also counsel to the Employer or the Trustee),
provided that such agents or counsel were prudently chosen by the Administrator
and that the Administrator relied in good faith upon the action of such agent or
the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under this
Plan or under the Act. Except for its own gross negligence, willful misconduct
or willful breach of the terms of this Plan, the Administrator shall be
indemnified and held harmless by the Employer against liability or losses
occurring by reason of any act or omission of the Administrator to the extent
that such indemnification does not violate the Act or any other federal or state
laws.
50
<PAGE>
ARTICLE XII
CLAIMS PROCEDURE
12.1 NOTICE OF DENIAL.
If a Participant or his Beneficiary is denied any benefits under this Plan,
either in whole or in part, the Administrator shall advise the claimant in
writing of the amount of his benefit, if any, and the specific reasons for the
denial. The Administrator shall also furnish the claimant at that time with a
written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary for
the claimant to perfect his claim, if possible, and an explanation of why such
material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 RIGHT TO RECONSIDERATION.
Within 60 days of receipt of the information described in 12.1 above, the
claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 REVIEW OF DOCUMENTS.
So long as the claimant's request for review is pending (including the
60-day period described in Section 12.2 above), the claimant or his duly
authorized representative may review pertinent Plan documents and the Trust
Agreement (and any pertinent related documents) and may submit issues and
comments in writing to the Administrator.
12.4 DECISION BY ADMINISTRATOR.
A final and binding decision shall be made by the Administrator within 60
days of the filing by the claimant of his request for reconsideration; provided,
however, that if the Administrator feels that a hearing with the claimant or his
representative present is necessary or desirable, this period shall be extended
an additional 60 days.
12.5 NOTICE BY ADMINISTRATOR.
The Administrator's decision shall be conveyed to the claimant in writing
and shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, with specific references to the
pertinent Plan provisions on which the decision is based.
51
<PAGE>
The Administrator's decision shall be binding and conclusive with respect to all
persons interested therein unless the Administrator has no reasonable basis for
its decision.
52
<PAGE>
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 AMENDMENTS.
The Sponsor reserves the right at any time and from time to time, for any
reason and retroactively if deemed necessary or appropriate by it, to the extent
permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be used
for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to the
extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested portion of
any Participant's Account balance as of the effective date of the amendment or
change the vesting schedule with respect to the future accrual of Employer
contributions for any Participants unless each Participant with 3 or more Years
of Vesting Service is permitted to elect to have the vesting schedule in effect
before the amendment used to determine his vested benefit;
(c) No amendment may eliminate an optional form of benefit; and.
(d) No amendment may increase the duties of the Trustee without its
consent.
Amendments may be made in the form of Board of Directors' resolutions or
separate written document. Copies of all amendments shall be delivered to the
Trustee.
13.2 EFFECT OF CHANGE IN CONTROL
(a) In the event of a "change in control" of the Sponsor, as defined in
paragraph (d) below, this Plan shall terminate at the effective time of such
change in control unless the Board of Directors shall affirmatively determine
prior to such effective time that the Plan shall not terminate. Nothing in this
Plan shall prevent the Sponsor from becoming a party to such a change in
control. In the event that the Board of Directors determines that the Plan shall
not terminate upon a change in control, any successor corporation or other
entity formed and resulting from such change in control shall have the right to
become the sponsor of this Plan by adopting the same by resolution. If, within
180 days from the effective time of such change in control, such entity does not
affirmatively adopt this Plan, then this Plan shall automatically be terminated,
all affected Participants' and Former Participants' Account balances shall
become fully vested and nonforfeitable, and the Trustee shall make payments to
the persons entitled thereto in accordance with Article IX.
(b) In the event that the Plan terminates upon a change in control in
accordance with paragraph (a) above, the Account balances of all affected
53
<PAGE>
Participants and Former Participants shall become fully vested and
nonforfeitable, and the Trustee shall either (i) make payments to each
Participant and Beneficiary in accordance with Section 9.5 or, (ii) in the
discretion of the Sponsor, continue the Trust Agreement and make distributions
upon the contingencies and in all the circumstances under which distributions
would have been made, on a fully vested basis, had there been no termination of
the Plan.
(c) Notwithstanding any provision of the Plan to the contrary, at and after
the effective time of a change in control, whether or not the Plan terminates at
such time, each of the following provisions shall become applicable; provided,
however, that any such provision shall not apply if the Board of Directors
determines that such provision either (i) would adversely affect the
tax-qualified status of the Plan pursuant to Code Section 401(a), (ii) would
adversely affect the accounting treatment of the change in control as a pooling
of interests, if the Board of Directors desires that such treatment apply, or
(iii) should not apply for any other reason:
(1) The Plan shall be interpreted, maintained and operated exclusively
for the benefit of those individuals who are participating in the Plan as
of the effective time of the change in control and their Beneficiaries.
Notwithstanding the provisions of Section 2.1(a), no Employee shall become
a Participant for the first time at or after the effective time of a change
in control.
(2) After a Participant's Retirement, Disability or other termination
of Service, such Participant's Account, regardless of its value, shall not
be distributed and shall share in the allocation of the Employee Stock
Ownership Contribution and Investment Adjustments until such time as either
(A) the Fund is liquidated in connection with the termination of the Plan,
or (B) the Participant (or his Beneficiary) receives a full distribution of
his Account either upon his election in accordance with Section 9.2(c) or
as required in accordance with Section 8.8, 9.3 or 9.4.
(3) Upon the termination of the Plan, Employer Securities that are
allocated to the Exempt Loan Suspense Account and that are not used to
repay an Exempt Loan shall be allocated as Investment Adjustments in
accordance with Section 5.3.
(4) Employer Securities that are released from the Exempt Loan
Suspense Account in accordance with Section 8.5 shall be allocated to the
Employee Stock Ownership Account of each Participant regardless of whether
he completed a Year of Vesting Service during the Plan Year or was an
Employee on the last day of such Plan Year.
(5) The Administrator shall consist of a committee selected by the
Board of Directors, and such committee shall have the exclusive authority
(i) to remove the Trustee and to appoint a successor trustee, (ii) to adopt
amendments to the Plan or the Trust Agreement to effectuate the provisions
and intent of this Section 13.2, and (iii) to perform any or all of the
functions and to exercise all of the discretion that are delegated to the
Administrator pursuant to Article XI.
54
<PAGE>
(6) Any application for a favorable determination letter with respect
to the tax-qualified status of the Plan under Code Section 401(a) with
respect to its termination shall be subject to the prior review, comment
and approval (which approval shall not be unreasonably withheld) of the
Administrator, as defined in paragraph (5) above.
(d) For purposes of this Section 13.2, the term "change in control" means
the occurrence of any one or more of the events specified in the following
clauses (i) through (iii): (i) any third person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the
beneficial owner of shares of the Sponsor with respect to which 25% or more of
the total number of votes for the election of the Board of Directors may be
cast, (ii) as a result of, or in connection with, any cash tender offer, merger
or other business combination, sale of assets or contested election, or
combination of the foregoing, the persons who were directors of the Sponsor
shall cease to constitute a majority of the Board of Directors, or (iii) the
effective time of a transaction that is approved by the stockholders of the
Sponsor and that provides either for the Sponsor to cease to be an independent
publicly-owned corporation or for a sale or other disposition of all or
substantially all of the assets of the Sponsor.
13.3 CONSOLIDATION OR MERGER OF TRUST.
In the event of any merger or consolidation of the Fund with, or transfer
in whole or in part of the assets and liabilities of the Fund to, another trust
fund held under any other plan of deferred compensation maintained or to be
established for the benefit of all or some of the Participants of this Plan, the
assets of the Fund applicable to such Participants shall be transferred to the
other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust
fund immediately after the merger, consolidation or transfer which is equal to
or greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (determined as if this Plan and
such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors, or of any new or successor
employer of the affected Participants, shall authorize such transfer of assets,
and, in the case of the new or successor employer of the affected Participants,
its resolutions shall include an assumption of liabilities imposed under this
Plan with respect to such Participants' inclusion in the new employer's plan;
and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
13.4 BANKRUPTCY OR INSOLVENCY OF EMPLOYER.
In the event of (a) the Employer's legal dissolution or liquidation by any
procedure other than a consolidation or merger, (b) the Employer's receivership,
insolvency, or cessation of its business as a going concern, or (c) the
commencement of any proceeding by or against the Employer under the federal
bankruptcy laws, or similar federal or state statute, or any federal or
55
<PAGE>
state statute or rule providing for the relief of debtors, compensation of
creditors, arrangement, receivership, liquidation or any similar event which is
not dismissed within 30 days, this Plan shall terminate automatically with
respect to such entity on such date (provided, however, that if a proceeding is
brought against the Employer for reorganization under Chapter 11 of the United
States Bankruptcy Code or any similar federal or state statute, then this Plan
shall terminate automatically if and when said proceeding results in a
liquidation of the Employer, or the approval of any Plan providing therefor, or
the proceeding is converted to a case under Chapter 7 of the Bankruptcy Code or
any similar conversion to a liquidation proceeding under federal or state law
including, but not limited to, a receivership proceeding). In the event of any
such termination as provided in the foregoing sentence, the Trustee shall make
payments to the persons entitled thereto in accordance with Section 9.6 hereof.
13.5 VOLUNTARY TERMINATION.
The Board of Directors reserves the right to terminate this Plan at any
time by giving to the Trustee and the Administrator notice in writing of such
desire to terminate. The Plan shall terminate upon the date of receipt of such
notice, the Account balances of all affected Participants and Former
Participants shall become fully vested and nonforfeitable, and the Trustee shall
make payments to each Participant or Beneficiary in accordance with Section 9.6.
Alternatively, the Sponsor, in its discretion, may determine to continue the
Trust Agreement and to continue the maintenance of the Fund, in which event
distributions shall be made upon the contingencies and in all the circumstances
under which such distributions would have been made, on a fully vested basis,
had there been no termination of the Plan. In addition, an entity other than the
Sponsor that is participating in this Plan may terminate its participation in
the Plan on a prospective basis by action of its board of directors. Upon such
termination of participation, Participants who are employees of such entity
shall be entitled to distributions from this Plan in accordance with Article IX
and this Article XIII.
13.6 PARTIAL TERMINATION OF PLAN OR PERMANENT DISCONTINUANCE OF CONTRIBUTIONS.
In the event that a partial termination of the Plan shall be deemed to have
occurred, or if the Employer shall discontinue permanently its contributions
hereunder, the right of each affected Participant and Former Participant in his
Account balance shall be fully vested and nonforfeitable. The Sponsor, in its
discretion, shall decide whether to direct the Trustee to make immediate
distribution of such portion of the Fund assets to the persons entitled thereto
or to make distribution in the circumstances and contingencies which would have
controlled such distributions if there had been no partial termination or
permanent discontinuance of contributions.
56
<PAGE>
ARTICLE XIV
MISCELLANEOUS
14.1 NO DIVERSION OF FUNDS.
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to the extent that a return of the Employer's contribution
is permitted under Section 4.4.
14.2 LIABILITY LIMITED.
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person, shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 FACILITY OF PAYMENT.
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is, at
the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall have
been duly appointed, the Administrator may direct the Trustee to make payment of
such benefit otherwise payable to such Participant or Beneficiary, to such other
person or institution, including a custodian under a Uniform Gifts to Minors
Act, or corresponding legislation (who shall be an adult, a guardian of the
minor or a trust company), and the release of such other person or institution
shall be a valid and complete discharge for the payment of such benefit.
14.4 SPENDTHRIFT CLAUSE.
Except as permitted by the Act or the Code, including in the case of
certain judgments and settlements described in subparagraph (C) of Section
401(a)(13) of the Code, no benefits or other amounts payable under the Plan
shall be subject in any manner to anticipation, sale, transfer, assignment,
pledge, encumbrance, charge or alienation. If the Administrator determines that
any person entitled to any payments under the Plan has become insolvent or
bankrupt or has attempted to anticipate, sell, transfer, assign, pledge,
encumber, charge or otherwise in any manner alienate any benefit or other amount
payable to him under the Plan or that there is any danger of any levy or
attachment or other court process or encumbrance on the part of any creditor of
such person entitled to payments under the Plan against any benefit or other
accounts payable to such person, the Administrator may, at any time, in its
discretion, and in accordance with applicable law, direct the Trustee to
57
<PAGE>
withhold any or all payments to such person under the Plan and apply the same
for the benefit of such person, in such manner and in such proportion as the
Administrator may deem proper.
14.5 BENEFITS LIMITED TO FUND.
All contributions by the Employer to the Fund shall be voluntary, and the
Employer shall be under no legal liability to make any such contributions,
except as otherwise provided herein. The benefits of this Plan shall be provided
solely by the assets of the Fund, and no liability for the payment of benefits
under the Plan or for any loss of assets due to any action or inaction of the
Trustee shall be imposed upon the Employer.
14.6 COOPERATION OF PARTIES.
All parties to this Plan and any party claiming interest hereunder agree to
perform any and all acts and execute any and all documents and papers which are
necessary and desirable for carrying out this Plan or any of its provisions.
14.7 PAYMENTS DUE MISSING PERSONS.
The Administrator shall direct the Trustee to make a reasonable effort to
locate all persons entitled to benefits under the Plan; however, notwithstanding
any provision in the Plan to the contrary, if, after a period of 5 years from
the date such benefit shall be due, any such persons entitled to benefits have
not been located, their rights under the Plan shall stand suspended. Before this
provision becomes operative, the Trustee shall send a certified letter to all
such persons at their last known address advising them that their interest in
benefits under the Plan shall be suspended. Any such suspended amounts shall be
held by the Trustee for a period of 3 additional years (or a total of 8 years
from the time the benefits first became payable), and thereafter such amounts
shall be reallocated among current Participants in the same manner that a
current contribution would be allocated. However, if a person subsequently makes
a valid claim with respect to such reallocated amounts and any earnings thereon,
the Plan earnings or the Employer's contribution to be allocated for the year in
which the claim shall be paid shall be reduced by the amount of such payment.
Any such suspended amounts shall be handled in a manner not inconsistent with
regulations issued by the Internal Revenue Service and Department of Labor.
14.8 GOVERNING LAW.
This Plan has been executed in the State of Kansas, and all questions
pertaining to its validity, construction and administration shall be determined
in accordance with the laws of that State, except to the extent superseded by
the Act.
14.9 NONGUARANTEE OF EMPLOYMENT.
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any Employee
58
<PAGE>
to be continued in the employment of the Employer, or as a limitation of the
right of the Employer to discharge any of its Employees, with or without cause.
14.10 COUNSEL.
The Trustee and the Administrator may consult with legal counsel, who may
be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder, or with
respect to any action or proceeding or any question of law, and they shall be
fully protected to the extent allowable by law with respect to any action taken
or omitted by them in good faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by
its duly authorized officers and its corporate seal to be affixed on this _____
day of _______, 1999.
Capitol Federal Financial
ATTEST:
____________________________ By _________________________________
Mary R. Falter, John C. Dicus
Secretary Chairman and Chief Executive
Officer
[Corporate Seal]
59
EXHIBIT 11
<TABLE>
<CAPTION>
Year Ended
September 30, 1999
----------------------------
(Dollars in Thousands
except per share data)
<S> <C>
Earnings per common share
Net Income available to common shareholders (for the six months ended
September 30, 1999) $34,771
=======
Weighted average common shares outstanding 88,488
Earnings per common share $ .39
=======
Earnings per common share assuming dilution
Net Income available to common shareholders (for the six months ended
September 30, 1999) $34,771
=======
Weighted average common shares outstanding 88,488
Add: Dilutive effects of assumed exercises of stock options and warrants ---
Weighted average common and dilutive potential common shares outstanding ---
Earnings per common share assuming dilution $ .39
=======
</TABLE>
[COVER]
CAPITOL FEDERAL FINANCIAL
ANNUAL REPORT 1999
<PAGE>
"...to give the investor and the borrower a means for achieving the habit of
thrift and the joy of home ownership." - from the official charter, filed
December 16, 1893
[PHOTO: Capitol Federal headquarters, 1927.]
CONTENTS
1 Financial Highlights
2 Letter from the CEO and the President
4 Performance - Where We Are Today
6 Potential - Where We Are Headed
8 Progress - Opportunities Abound
10 Future - Commitment with a Purpose
13 Financial Information
14 Selected Financial Data
16 Management's Discussion and Analysis
29 Independent Auditors' Report on Consolidated Financial Statements
30 Consolidated Balance Sheets
32 Consolidated Statements of Income
33 Consolidated Statements of Stockholders' Equity
34 Consolidated Statements of Cash Flows
36 Notes to Consolidated Statements
Decades of Momentum for the History of Capital Federal
1893 Capitol Federal opens its doors as the Savings and Loan Association of
Topeka. 1918 World War I ended, a new record marks Capitol Federal's
25th anniversary; assets reach $3 million.
1938 Surviving the Great Depression and on the grow again, the bank adopts a
federal charter and becomes Capitol Federal Savings and Loan
Association.
1941 Henry A. Bubb is named CEO, stressing service, stability, courtesy and
leadership.
1951 The Bank initiates branching strategy in eastern Kansas.
1969 John C. Dicus becomes President, while Henry Bubb remains Chairman;
assets close in on a half-billion dollars.
1989 John C. Dicus succeeds henry Bubb as Chairman.
1993 Capitol Federal's 100th anniversary; assets are more than $3.9 billion.
1996 John B. Dicus is elected President; John C. Dicus continues as
Chairman.
1999 Reorganization is completed March 31; Capitol Federal is now a publicly
traded financial institution.
2000 Capitol Federal Savings Bank begins the 21st century with over 30
branches and over $6.52 billion in assets.
[PHOTO: Capitol Federal headquarters since 1961.]
<PAGE>
Financial Highlights
[BAR GRAPH: [BAR GRAPH: [BAR GRAPH:
Assets (in billions) Deposits (in billions) Net Income (in millions)(1,2)
1995 4.3 1995 3.6 1995 30
1996 4.4 1996 3.7 1996 41
1997 4.9 1997 3.8 1997 53
1998 5.3 1998 3.9 1998 54
1999 6.5] 1999 3.9] 1999 63]
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total Assets $4,350,293 $4,453,672 $4,923,657 $5,315,801 $6,539,315
Loans receivable 2,751,634 2,944,906 3,322,102 3,711,152 4,291,288
Mortgage-related securities
Available-for-sale (AFS) 0 607,738 754,179 747,99 1,136,776
Held-to-maturity (HTM) 771,163 17,006 120,007 320,379 939,492
Deposits 3,673,630 3,740,718 3,787,123 3,894,180 3,899,565
Borrowings 75,000 75,000 450,000 675,000 1,520,000
Equity 515,882 547,422 604,789 662,332 1,046,514
Net income 1,2 30,374 41,193 52,704 53,991 63,306
Efficiency ratio 1,2 47.43% 40.57% 34.63% 36.45% 35.30%
Equity to assets 11.86% 12.29% 12.28% 12.46% 16.00%
<FN>
1 Net income and the efficiency ratio for 1999 excludes one-time charges
related to the reorganization, explained in the management Discussion
and Analysis, beginning on page 16.
2 Net income and the efficiency ration for 1996 excludes the SAIF special
assessment of $24.2 million.
</FN>
</TABLE>
<PAGE>
True Blue(R)
A Clear Vision for a Prosperous Future
Capitol Federal's rich history marked another important milestone in
fiscal year 1000. On March 31, 1999, we successfully completed the Plan of
Reorganization and Stock Issuance, transforming Capitol Federal from a mutual
savings association to a stock savings bank. This restructuring allows Capitol
Federal to expand its lending and investment activities within the communities
we serve.
As further commitment to our valued shareholders, depositors and our
communities, Capitol Federal continues to build upon the foundation on which it
has prospered for more than a century. Capitol Federal enjoys the loyalty of
generations of families, which is achieved by exceeding customer and community
expectations. We maintain one of the strongest capital positions in our
industry. This is accomplished by strict adherence to cost control and decisive
investment strategies. Safe business practices in conventional residential
mortgage lending lead the way in our notable growth. Development of expanded
retail services furthers our directive. Capitol Federal's corporate business
plan reinforces consistent, reliable performance and now focuses on building
unparalleled shareholder value.
At the close of this historic year, September 30, 1999, Capitol Federal
continued to build its assets and capital. Assets grew by $1.22 billion over
1998 to a total of $6.54 billion. Indicative of Capitol Federal's continued
dedication to safety and soundness and as a part of our ongoing efforts to
increase shareholder value, tangible equity to assets was 16.00% at year end.
Stockholders' equity totaled $1.05 billion and net income was $42.9 million.
Book value per share was $11.80 compared to $11.65 on June 30, 1999. Our
quarterly dividend payout, at $0.10 per share, has been paid three times since
our reorganization earlier in the year.
Capitol Federal's conversion to a stock company created on-time charges
affecting net income for fiscal year 1999. Net income for 1999 totaled $42.9
million compared to $54.0 million for 1998. Excluding the one-time charges, net
income would have been $63.3 million. The adjusted earnings represent a 17.2%
increase over the previous year. The efficiency
2
<PAGE>
ratio was 56.77% compared to 36.45% one year ago. The efficiency ratio,
excluding one-time charges, was 35.30% for the year ended September 30, 1999.
Exemplifying Capitol Federal's resolve to provide growth and security,
nonperforming assets decreased to $6.0 million for 1999, compared to $8.2
million one year ago. The percentage of nonperforming assets to total assets was
0.09%, lowered from 0.15% in 1998.
Capitol Federal is proud to be the leading residential lender in
Kansas, ending fiscal year 1999 with record originations. The bank ended the
year with a net increase in loans receivable of $580.1 million and
mortgage-related securities of $1.01 billion. As of September 30, 1999, loan
originations totaled $1.34 billion compared to $1.19 billion one year ago.
In 1893, Capitol Federal's founders began with ah mission of safety and
service. It is a tradition that will continue with even greater determination in
2000, delivering shareholder returns based on the steadfast principles of Safety
in Savings, Sound Lending Policies, Quality Customer Service and Commitment to
Community.
Management and your Board of Directors than you, our shareholders and
customers, for your continued trust. We look forward to the 21st century with
clear vision, filled with energy and confidence. With assurances of strength,
security and stability, Capitol Federal renews its dedication to seeking new
opportunities for sound growth and expanded customer service. With this pledge,
we remain True Blue(R) for all your financial and investment needs.
/s/ John C. Dicus
John C. Dicus, Chairman,
Chief Executive Officer
/s/ John B. Dicus
John B. Dicus, President,
Chief Operating Officer
[PHOTO: John C. Dicus and John B. Dicus]
<PAGE>
True Blue(R)
Performance - Where We Are Today
[BAR GRAPH: Capitol Federal began its long history of
Efficiency Ratio performance excellencebased on its stated mission of
1995 47.4% giving the depositor and the borrower ameans for
1996 40.5% achieving financial security and realizing the dream
1997 34.6% of homeownership. Capitol Federal has weathered many
1998 36.4% storms throughout its century of operation. It has
1999 35.3%] been the Bank's belief in people and homeownership
that has guided Capitol Federal and has led it to
consistent andsubstantial growth.
Capitol Federal welcomes depositor members
to join the Bank and share in the rewards of proven
success as we begin a new era. Fiscal year 1999
includes Capitol Federal's first six months as a
stock savings bank. Tried and true management
direction brought the Bank's performance to new
heights again this year. During the final quarter of
the year, Capitol Federal earnings achieved record
levels, allowing earnings per share to exceed the
previous quarter. This increase resulted from a
strong core earnings performance
[BAR GRAPH: Capitol Federal's tradition of strength and
Equity to Assets belief in home ownership continues with growth in
1995 11.8% assets and loan originations. Primarily due to growth
1996 12.2% in our loan and mortgage-related securities
1997 12.2% portfolio, total interest and dividend income for
1998 12.4% this year was $396.1 million compared to $363.6
1999 16.0%] million for fiscal year 1998. Loan origination volume
increased, resulting in posting record originations
in the market areas in which we operate.
Proud of our strong residential lending
heritage, Capitol Federal is unsurpassed by any other
local institution. We originated three times as many
residential loans as our nearest competitor. Capitol
Federal was formed with this purpose in mind and it
is further evidence of our strength today. The Bank's
loan portfolio is concentrated in permanent loans
secured by first mortgages on owner-occupied
residences, currently accounting for 94% of our
portfolio.
4
<PAGE>
[PIE CHART: Earning Asset Mix [PIE CHART: Costing Liability Mix
Mortgage-related securities: Borrowings 28.05%
Available for sale 17.85% Transaction accounts 17.09%
Held to maturity 14.75 Savings 54.86%]
Loans receivable 67.40%]
[BAR GRAPH: Growth in Assets [BAR GRAPH: Loan Originations
(billions of dollars) (billions of dollars)
1998 0.4 1998 1.32
1999 1.2] 1999 1.56]
With a professional staff of more than 800
located within a 31- branch network across Kansas,
Capitol Federal continues to expand its services and
retail product lines. Current growth in volume is
directly related to Capitol Federal's initiative in
developing new and innovative products to meet
customers' financial needs and to be at the forefront
of competitive conditions. Although Capitol Federal
remains true to our time-honored banking products and
services, we also actively engage in the pursuit of
future expansion opportunities.
Capitol Federal meets the challenges of this
new era with ever-increasing vigor and a
determination to respond to the needs of the
communities we serve. Ultimately, based on a culture
of performance excellence, we will continue to strive
to provide the highest return on investment for
customers and investors alike.
[PHOTO: new homes under construction; CAPTION: Capitol Federal... giving the
borrower a means for achieving financial security and realizing the dream of
home ownership.]
5
<PAGE>
True Blue(R)
Potential - Where We Are Headed
Capitol Federal's progressive positioning, based on capable and
trustworthy banking policies, establishes the foundation for a successful
future. Despite the ever-changing influence of market climates throughout our
history, Capitol Federal has endured exceedingly well. We continue to do so by
adhering to our basic philosophy of steady and consistent business practices.
Presently, we move forward by providing customers with a wide range of services
encompassing creative retail products as well as conventional real estate
mortgages and consumer loans. As management and staff work toward these
objectives, we do so with growth potential in mind.
Customers have access to the convenience of Capitol Federal's branch
locations, including seven in-store offices. The extended branch network
includes an automated teller machine (ATM) network that was traditionally housed
within most Capitol Federal offices. At this time, we have expanded ATM
installations to include off-premises and stand-alone locations. In our pursuit
of greater customer convenience and service flexibility, Capitol Federal's
branch network will continue to grow in potential customer areas. To meet the
challenge of evolving technology, banking via the Internet will be implemented
in the year 2000 with the introduction of True Blue(R) Online.
[PHOTO: Visa(R) True Blue(R) Direct Check Card and Visa(R) True Blue(R) Direct
Gold Check Card; CAPTION: Bank check cards enhance customer service.]
Capitol Federal offers a variety of deposit services, including savings
accounts, certificates of deposit, Individual Retirement Accounts, certificates
of deposit, Individual Retirement Accounts, money market accounts and a full
array of interest bearing and free checking accounts. The Visa(R) True Blue(R)
Direct check card offeres customers worldwide access to account transactions
anytime.
6
<PAGE>
[PHOTO: (above) A couple reviews house plans in front of partially constructed
home; (below) lending officer with a couple, reviewing loan agreement; CAPTION:
As the market expands so does the need for housing in our communities.
Conventional real estate mortgages remain the strength of our lending base.]
Based on customer desire for ease and speed of service, Capitol Agency
was established a number of years ago. As the insurance affiliate of Capitol
Federal Savings Bank, and an extension of our banking services, the agency
offers a variety of homeowner, auto and life insurance products.
Conventional residential mortgages remain the strength of our lending
base. In addition, our specialized Home-At-Last affordable housing program
remains strong, helping low-to-moderate income and minority families purchase
homes. Capitol Federal continues to strengthen its community commitment with
enthusiastic partnerships with nonprofit affordable housing agencies and the
Kansas Association of Realtors. Consumer Loans and home equity loans are also
included in our product mix for a wide range of lending services.
In an effort to further accommodate customers seeking diversified
investment portfolios, Capitol Federal recently welcomed CMIC Financial
Services. CMIC is a provider of investments and securities as Capitol Federal
branch offices. Within a cooperative referral system, CMIC fulfills the customer
demand for fixed and variable annuities, mutual funds, estate planning, college
funding and other non-FDIC insured investment products.
Capitol Federal has listened and responded proactively since its
establishment and will continue to follow this mutually beneficial course.
Backed by conservative operating standards, yet fueled by a progressive spirit,
the Bank can be characterized as having significant potential for our
shareholders.
7
<PAGE>
True Blue(R)
Progress - Opportunities Abound
During the first half of the 20th century, Capitol Federal experienced
consistent growth. It was during the last half of the century, however, that
Capitol Federal entered a period of unprecedented growth. The housing and baby
boom created opportunities in the form of increased savings, a tremendous rise
in loan volume and a new concept in convenient customer service: the branch
network.
Capitol Federal embraces the latest technology, the advent of
cyberspace and the information highway with vigor. Management continues to
aggressively seek out benefits presented by these new opportunities. Today's
customer can easily invest and bank on-line, open an account and pay bills by
telephone, or withdraw funds from an ATM halfway around the world. Capitol
Federal continues to address these needs and searches for enterprising concepts
that will parallel these services in the future.
[PHOTO: Computer screen displays the Capitol Federal logo; CAPTION: Capitol
Federal provides services in person, on the phone or via the internet.]
Capitol Federal was the first in Kansas to introduce a bill payment
service by telephone nearly three decades ago. Today, Capitol Federal continues
to take the initiative. We provide a professionally manned customer service
center that can be accessed by telephone every day of the week. With our
convenient in-store offices, personal service is offered during nontraditional
banking hours including weekends, evenings and some holidays.
8
<PAGE>
[PHOTO: Three people in graduation regalia; (inset) university building;
CAPTION: Capitol Federal is committed to supporting education at all levels in
the communities we serve.]
Confidentiality and security are crucial with the advancement of
technology. Prior to the release of any product, particularly via the World Wide
Web, Capitol Federal exceeds safety standards with all operations. In the
interest of protecting our customers, firewalls and encryption are part of our
everyday language. Our web site, www.capfed.com, is updated on a daily basis to
keep current and potential customers and investors abreast of the competitive
services we offer to provide cutting-edge interactive information, and to be a
valued source of real-time virtual news links, all reflective of our True Blue
image.
Capitol Federal has committed itself to community, a concept that
begins with family and home. The great state of Kansas boasts an extraordinary
quality of life. Dynamic corporate entities comprise a sizable presence here,
including several headquarters facilities throughout the state. Flourishing
economic health in Kansas is apparent.
With consistency in earnings, quality underwriting standards, and
financial strength and soundness of operations, Capitol Federal can afford
ambitious positioning. By holding one of the leading equity capital positions in
the nation, Capitol Federal can swiftly take advantage of any attractive
circumstance that may arise. In order to uphold and expand upon the ideals of
our proven corporate strategy, Capitol Federal can swiftly take advantage of any
attractive circumstance that may arise. In order to uphold and expand upon the
ideals of our proven corporate strategy, Capitol Federal will judiciously take
advantage of the abundant opportunities the future presents.
9
<PAGE>
True Blue(R)
The Future - Commitment with a Purpose
[PHOTO: Kansas...a great place to live. American Indian art at Spooner Hall,
Kansas University campus.]
Capitol Federal has always maintained a strong commitment to the future
of its communities, customers and now its shareholders. Capitol Federal actively
supports involvement with the development and progress of its area communities.
This dedication brings preservation and growth to the communities, to the
families living within the communities, and to Capitol Federal.
In recent times, a crucial priority has been the successful completing
of a Y2K five-step readiness plan. Beginning several years ago, with the full
support of the Board of Directors, sufficient resources were dedicated to the
completion of this task. Aware of the trust and faith customers and our
communities have in Capitol Federal, management has earnestly pursued the goal
of Y2K readiness. Although our programs are completed and deemed ready, no
company can absolutely guarantee there will be no disruption of service.
However, with contingency plans in place, Capitol Federal can guarantee that its
Year 2000 Task Force has been and will remain dedicated to minimizing and
eliminating the effects on customers in the unlikely even a disruption occurs.
The Bank strongly supports civic and charitable organizations, and as
an Equal Housing Lender, Capitol Federal has given special emphasis to
housing-related organizations. Capitol Federal Foundation, our newly
incorporated charitable entity, will be able to provide grants to worthwhile
causes, continuing to benefit communities within Capitol Federal's market areas.
The Foundation will provide funding for educational advancements, affordable
housing, civic organizations and
10
<PAGE>
[PHOTO: Volunteers in t-shirts with Capitol Federal logo; CAPTION: The bank
supports civic and charitable organizations with grants and gifts.]
various charities, such as the United Way. The Foundation gifts are investments
in the future and prosperity of our local communities.
The greatest commitment to be undertaken to date was our recent
conversion to a stock savings bank - an opportunity seized with a goal of
maximizing shareholder value. Capitol Federal management is committed to
enhancing long-term shareholder value. In that regard we commenced paying
quarterly dividends in May of this year and paid subsequent dividends in August
and November. It is our intent to continue paying cash dividends in future
quarters. In order to improve earnings pers share and return on equity, we
applied for and were granted permission to repurchase 15% of the publicly held
shares. These purchases will take place in an orderly manner, dependent on
market conditions. We have a capital utilization plan in place which involves
dividends, buybacks and leveraging our balance sheet at a profitable net
interest margin while maintaining a low level of credit risk and an acceptable
level of interest rate risk.
As we celebrate the beginning of a new era in Capitol Federal history,
we derive our strength from our past century of service. We diligently accept
the new challenge of increasing shareholder value. We confidently move forward
offering a greater diversity of financial services and products for customers.
We industriously seek out growth and we will progress into the future welcoming
endless opportunities that further our mission.
Most importantly, through all the growth, challenges, and opportunities
the next century will bring, we remain CAPITOL FEDERAL - TRUE BLUE(R) FOR OVER
ONE HUNDRED YEARS.
11
<PAGE>
[PHOTO: View down Interstate 70 at dusk, with city silhouetted against the sky;
CAPTION: Capitol Federal Savings Rely on us for the long-term]
<TABLE>
DIRECTORS
<S> <C>
B. B. Andersen Robert B. Maupin
Real Estate Developer Retired Senior Executive Vice President and Chief
Lending Officer of Capitol Federal Savings Bank
John B. Dicus
President and Chief Operating Officer of Capitol Carl W. Quarnstrom
Federal Financial and Capitol Federal Savings Bank Attorney and Partner, Shaw, Hergenreter, Quarnstrom
& kocher L.L.P.
John C. Dicus
Chairman of the Board and Chief Executive Officer of Frederick P. Reynolds
Capitol Federal Financial and Capitol Federal Savings Chairman of the Board of Sound Products
Bank
Marilyn S. Ward
Executive Director of ERC/Resource & Referral
MANAGEMENT GROUP
John C. Dicus Neil F. McKay
Chairman of the Board and Chief Executive Officer Executive Vice President, Chief Financial Officer and
Treasurer
John B. Dicus
President and Chief Operating Officer Stanley F. Mick
Executive Vice President and Chief Lending Officer for
R. Joe Aleshire Capitol Federal Savings Bank
Executive Vice President of Retail Operations for
Capitol Federal Savings Bank Kent G. Townsend
Senior Vice President and Controller
Larry K. Brubaker
Executive Vice President of Corporate Services for Mary Falter
Capitol Federal Savings Bank Corporate Secretary
</TABLE>
<TABLE>
<S> <C> <C>
INDEPENDENT AUDITORS CORPORATE COUNSEL SPECIAL COUNSEL
Deloitte & Touche L.L.P. Shaw, Hergenreter, Quarnstrom Silver, Freedman & Taff, L.L.P.
1010 Grand Avenue & Kocher, L.L.P. 1100 New York Avenue, N.W.
Suite 400 700 S. Kansas Avenue, Suite 504 Seventh Floor
Kansas City, MO 64106 Topeka, KS 66603 Washington, DC 20005
</TABLE>
12
<PAGE>
Financial Information
CONTENTS
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA . . . . . . . . . . . . . . 14-15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . .16-28
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATE FINANCIAL STATEMENTS. . . . . . . 29
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1999 and 1998 . . . . . .30-31
Consolidated Statements of Income for the years ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .34-35
Notes to Consolidated Financial Statements for the years ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .36-56
13
<PAGE>
SELECTED CONSOLIDATED 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 30. Fiscal 1996
results include the effect of a one-time Savings Association Insurance Fund
recapitalization assessment of approximately $24. 2 million. Fiscal 1999 results
include the effect of a one-time contribution to the Capitol Federal Foundation
of approximately $30.2 million.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Selected Financial Condition Data:
Total assets $6,539,315 $5,315,801 $4,923,657 $4,453,672 $4,350,293
Loans receivable, net 4,291,288 3,711,152 3,322,102 2,944,906 2,751,634
Securities purchased under agreement
to resell --- 235,000 --- --- ---
Investment securities, held-to-maturity 15,100 160,569 585,394 717,348 671,227
Mortgage-related securities:
Available-for-sale, at market value 1,136,776 747,991 754,179 607,738 ---
Held-to-maturity 939,492 320,379 120,007 17,006 771,163
Capital stock of Federal Home Loan Bank 68,336 43,584 40,398 37,752 35,415
Deposits 3,899,565 3,894,180 3,787,123 3,740,718 3,673,630
Borrowings 1,520,000 675,000 450,000 75,000 75,000
Equity 1,046,514 662,332 604,786 547,422 515,882
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(In Thousands, except per share data)
Selected Operations Data:
Total interest and dividend income $396,099 $363,642 $330,150 $306,389 $275,467
Total interest expense 253,030 234,897 207,457 200,401 193,197
Net interest and dividend income 143,069 128,745 122,693 105,988 82,270
Provision for loan losses 395 2,462 56 865 ---
Net interest and dividend income after
provision for loan losses 142,674 126,283 122,637 105,123 82,270
Fees and service charges 8,956 8,398 7,450 6,966 4,898
Other income 4,718 4,395 3,988 4,431 6,329
Total other income 13,674 12,793 11,438 11,397 11,227
Total other expense 86,940 50,304 45,680 71,505 43,266
Income before income tax expense 69,408 88,772 88,395 45,015 50,231
Income tax expense 26,487 34,781 35,691 18,393 19,857
Net income 42,921 53,991 52,704 26,622 30,374
Basic earnings per share $ .39
Average shares outstanding 88,634
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets 0.71% 1.05% 1.12% 0.60% 0.73%
Return on average equity 4.34 8.52 9.15 5.01 6.07
Dividend payout ratio 20.88
Interest rate spread information:
Average during period 1.84 1.91 2.04 1.83 1.13
End of period 1.79 1.83 1.97 1.86 1.39
Net interest margin 2.49 2.56 2.75 2.48 1.98
Ratio of operating expense to average
total assets 1.43 0.98 0.97 1.62 1.04
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.18 1.14 1.15 1.14 1.14
Efficiency ratio 56.77 36.45 34.63 62.51 47.43
Asset Quality Ratios:
Non-performing assets to total assets at
end of period 0.09 0.15 0.18 0.17 0.41
Non-performing loans to total loans 0.14 0.17 0.18 0.14 0.15
Allowance for loan losses to
non-performing loans 88.57 65.52 26.83 39.67 32.35
Allowance for loan losses to loans
receivable, net 0.10 0.11 0.05 0.05 0.05
Capital Ratios:
Equity to total assets at end of period 16.00 12.46 12.28 12.29 11.86
Average equity to average assets 16.26 12.37 12.13 12.02 11.98
Other Data:
Number of full-service offices 25 24 24 23 23
Number of limited service offices 6 5 3 2 1
</TABLE>
15
<PAGE>
General
Capitol Federal Financial (the "Company") is the mid-tier holding company
and the sole shareholder of Capitol Federal Savings Bank. In March 1999, Capitol
Federal Savings reorganized from a federally chartered mutual savings and loan
association into the federal mutual holding company form of organization. As a
result of this reorganization, Capitol Federal Savings converted to a federally
chartered stock savings bank and a wholly-owned subsidiary of Capitol Federal
Financial, which is majority owned by Capitol Federal Savings Bank, MHC, a
federally chartered mutual holding company. Capitol Federal Financial's common
stock is traded on the Nasdaq-Amex National Market under the symbol "CFFN." All
references to Capitol Federal Financial prior to March 31, 1999, except where
otherwise indicated, are to Capitol Federal Savings and its subsidiary on a
consolidated basis.
Our principal business has historically consisted of attracting deposits
from the general public and investing those funds primarily in permanent loans
secured by first mortgages on owner-occupied, 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 loan s. We also purchase whole loans
and invest in certain investment and mortgage-related securities.
The Company's results of operations are primarily dependent on net interest
rate spread, which is the difference between the average yield on loans,
mortgage-related securities and investments and the average rate paid on
deposits and other borrowings. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. In addition, the Company, like other non-diversified
savings institution holding companies, is subject to in terest rate risk to the
degree that its interest-earning assets mature or reprice at different times, or
on a different basis, than its interest-bearing liabilities.
Our results of operations are also affected by, among other things, fee
income received, loss or profit on securities available-for-sale, the
establishment of provisions for losses on loans, income derived from subsidiary
activities, the level of operating expenses and income taxes. Our operating
expenses principally consist of employee compensation and benefits, occupancy
expenses, federal deposit insurance premiums, data processing expenses and other
general and administrative expenses.
The Company is significantly affected by prevailing economic conditions
including federal monetary and fiscal policies and federal regulation of
financial institutions. Deposit balances are influenced by a number of factors
including interest rates paid on competing personal investments and the level of
personal income and savings within the institution's market area. Lending
activities are influenced by the demand for housing as well as competition from
other lending institutions. The primary sources of funds for lending activities
include deposits, loan repayments, borrowings and funds provided from
operations.
Forward-Looking Statements
We may from time to time make written or oral "forward-looking statements",
including statements contained in filings with the Securities and Exchange
Commission ("SEC"). These forward-looking statements may be included in this
annual report to shareholders and in other communications by the Company, which
are made in good faith by us pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the U.S. economy in general and the strength of the local
economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
16
<PAGE>
o the willingness of users to substitute competitors' products and services
for our products and services;
o our success in gaining regulatory approval of our products and services,
when required;
o the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not all inclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of Capitol Federal Financial or Capitol
Federal Savings.
Management Strategy
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.
The financial highlights of our strategy include:
o Single-Family Portfolio Lending. We are 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 1999, we originated
$1.21 billion of one- to four-family loans. At September 30, 1999, we had
$4.08 billion of these loans, representing 94.1% 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, 1999 were over
$150.0 million. As a result of these efforts, and excluding the effect of
our contribution to the Capitol Federal Foundation and other one-time costs
associated with the reorganization to a stock company, our ratio of
operating expenses to average total assets was 0.88% for the year ended
September 30, 1999 and our efficiency ratio, a commonly used industry ratio
measuring the cost of producing each dollar of revenue, was 35.30%.
Including these one-time costs the ratios were 0.71% and 56.77%,
respectively. Both of these ratios, excluding one time costs, are
significantly better than peer group and national averages.
o Strong Capital Position. Our policy has always been to protect the safety
and soundness of Capitol Federal Savings through conservative risk
management, balance sheet strength, consistent earnings and sound
operations. At September 30, 1999, our ratio of equity to total assets was
16.0% and our return on average assets for the fiscal year was 0.71%.
o Excellent Asset Quality. Through our commitment to single-family lending,
we have minimal delinquencies and, in management's view, very little credit
risk. At September 30, 1999, our ratio of non-performing assets to total
assets was 0.09%.
o Wholesale Borrowings and Investments. In order to reduce our interest rate
risk we have borrowed money and invested it in medium-term or adjustable
rate mortgage-related securities. At September 30, 1999, we had $1.52
billion in borrowings. We have extended this borrowing strategy by
leveraging the capital we raised in the reorganization.
Asset and Liability Management and Market Risk
Our Risk When Interest Rates Change. 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 our most
significant market risk.
How We Manage Our Risk of Interest Rate Change. In an attempt to manage our
exposure to changes in interest rates and comply with applicable regulations, we
regularly monitor our 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 despite
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 inter est rate spread will
be affected by changes in interest rates.
17
<PAGE>
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 inco me, while a positive gap within shorter repricing periods would
result in an increase in net interest income. During a period of falling
interest rates, the opposite would be true. As of September 30, 1999, the ratio
of Capitol Federal Savings one-year gap to total assets was a negative 10.44%
and its ratio of interest-earning assets to interest-bearing liabilities
maturing or repricing within one year was 75.72%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we have
adopted asset and liability management policies to better match the maturities
and repricing terms of our interest-earning assets and interest-bearing
liabilities. The board of directors sets and recommends our asset and liability
policies which are implemented by the asset and liability management committee.
The asset and liability management committee is chai red by the Chief Financial
Officer and is comprised of members of senior management. The purpose of the
asset and liability management committee is to communicate, coordinate and
control asset/liability management consistent with our business plan and board
approved policies. The asset and liability management committee 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 asset and liability management committee generally meets on at least
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 ba sed upon gap analysis
and income simulations. At each meeting, the asset and liability management
committee recommends appropriate strategy changes based on this 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 our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
o originating adjustable rate loans,
o maintaining a significant level of mortgage-related securities with average
lives of approximately five years or with interest rates that reprice in
less than three years,
o managing deposits to establish stable deposit relationships, and
o acquiring longer-term borrowings at fixed interest rates to offset the
negative impact of longer-term fixed rate loans in our 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 asset and liability management committee may determine
to increase our interest rate risk position somewhat in order to maintain our
net interest margin.
The asset and liability management committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, 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 market value of portfolio equity
that are authorized by the board of directors.
The following tables set forth at September 30, 1999 and 1998,
respectively, the estimated percentage change in our net interest income over a
four-quarter period and market value of portfolio equity based on the indicated
changes in interest rates.
At September 30, 1999
Estimated Change in
---------------------------------
Change Net Interest Market Value
(in Basis Points) Income of Portfolio
in Interest Rates(1) (next four quarters) Equity
- -------------------- -------------------- -------------
-300 bp -1.59% 10.21%
-200 bp 4.02% 10.36%
-100 bp 3.07% 8.47%
0 bp 0 0
100 bp -4.77% -12.81%
200 bp -9.41% -27.66%
300 bp -14.21% -43.29%
At September 30, 1998
Estimated Change in
---------------------------------
Change Net Interest Market Value
(in Basis Points) Income of Portfolio
in Interest Rates(1) (next four quarters) Equity
- -------------------- -------------------- -------------
-300 bp -18.50% - 3.55%
-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%
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
18
<PAGE>
The changes in net interest income estimations for 1999 over 1998 are
primarily the result of an increase in the portfolio of fixed rate loans.
Generally, in decreasing rate scenarios increased fixed rate lending allows
interest income to remain higher because liabilities reprice down faster than
assets, depicted by the negative gap report in the gap table below. In the
increasing rate scenarios, projected net interest income decreases because
liabilities will reprice up while the rate earned on fixed rate loans remains
unchanged. Helping to offset this effect, however, is the increase in purchased
adjustable rate loans. The effect of the capital utilization plan on net
interest income projections is generally favorable in increasing rate scenarios
and unfavorable in decreasing rate scenarios. The results presented in the above
tables are based upon the assumption that the total composition of interest
earning assets and interest bearing liabilities does not change. The table
presents the effects of the cha nge in interest rates only on the portfolio as
these assets and liabilities mature or repay.
The improvement in the change in the estimated market value of portfolio
equity in the down rate scenarios is generally the result of increased lending
in fixed rate products and the purchase of fixed rate mortgage-related
securities. The loans have been originated at current market rates, increasing
the likelihood that prepayments will not increase immediately in a falling rate
environment. These same originations cause the decrease in the estimated market
value of portfolio equity in the increasing rate environments. The callable
features of the borrowings, used to purchase mortgage-related securities, are
assumed to be exercised in increasing rate scenarios. This has the effect of
shortening the average maturities of liabilities while the fixed rate loans and
mortgage-related securities will tend to experience lower prepayments, and in
effect, lengthen in maturity.
The assumptions used by management to evaluate the vulnerability of our
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 our assets and
liabilities and the estimated effects of changes in interest rates on our net
interest income and market value of portfolio equity indicated in the above
table could vary substantially if different assumptions were us ed or actual
experience differs from such assumptions.
The following table (p. 20) summarizes the anticipated maturities or
repricing of our interest-earning assets and interest-bearing liabilities as of
September 30, 1999, based on the information and assumptions set forth in the
notes below.
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 adjust able-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. Total assets increased by $1.22 billion or 22.9% to $6.54 billion
at September 30, 1999 compared to $5.32 billion at September 30, 1998. The
increase was primarily due to our decision to leverage our capital through an
increase in mortgage-related securities of approximately $1.00 billion, acquired
through the utilization of proceeds from additional borrowings and issuance of
common stock. The increase was also due to a $580.1 million or 15.6% increase in
loans, which totaled $4.29 billion at Sep tember 30, 1999 compared to $3.71
billion at September 30, 1998. These increases were partially offset by a
decrease of $380.5 million or 96.2% in investment securities and securities
purchased under agreement to resell.
Loans. Our loan portfolio increased to $4.29 billion at September 30, 1999
from $3.71 billion at September 30, 1998. The increase in the loan portfolio
over this time period was due to increased loan demand caused both by low
interest rates and significant increases in home-building activities in Kansas.
The loan portfolio increased in most categories, with the largest increase
occurring in the one- to four-family category, increasing to $4.08 billion at
September 30, 1999 from $3.50 billion at September 30, 1998. Loan origination
and purchase volume for 1999 exceeded 1998 by $245.1 million. The lower interest
rates on mortgage loans increased refinancing activity to $253.1 million for
fiscal year 1999 from $235.0 million for fiscal year 1998.
Securities. Investment securities and securities purchased under agreement
to resell amounted to $15.1 million at September 30, 1999, and $395.6 million at
September 30, 1998. The decrease of $380.5 million or 96.2% was primarily due to
the use of funds from maturities and prepayments to fund our loan and
mortgage-related securities growth. As part of the execution of our capital
utilization plan, the average lives of mortgage-related securities purchased
during fiscal year 1999 approximated 5.6 years. At September 30, 1999, these
securities totaled $2.08 billion. Our mortgage-related securities are comprised
of mortgage-backed securities issued by Fannie Mae, Freddie Mac, or Ginnie Mae,
which minimizes credit risk. These are delivered in our name to our account at
the Federal Reserve in exchange for the funds we wish to invest.
Liabilities. Total liabilities increased $839.3 million or 18.0% to $5.49
billion at September 30, 1999 comp-
19
<PAGE>
<TABLE>
<CAPTION>
Three to More than More than
Within Three Twelve One Year to Three Years to Over
Months Months Three Years Five Years Five Years Total
------------ --------- ----------- -------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Fixed $ 104,041 $ 223,947 $ 476,727 $362,506 $1,503,981 $2,671,202
Adjustable 227,404 630,374 427,629 206,475 4,158 1,496,040
Other loans 132,080 11,710 9,598 2,612 672 156,672
Securities:
Non-mortgage(3) 0 100 0 0 15,000 15,100
Mortgage-related fixed(4) 53,838 134,317 246,595 154,326 370,055 959,131
Mortgage-related adjustable(4) 307,932 303,721 411,769 86,933 0 1,110,355
Other interest-earning assets 0 0 0 0 0 0
----------- ---------- ----------- -------- ---------- ----------
Total interest-earning assets 825,295 1,304,169 1,572,318 812,852 1,893,866 6,408,500
----------- ---------- ----------- -------- ---------- ----------
Interest-bearing liabilities:
Deposits:
NOW accounts(5) 53,222 149,670 53,874 19,166 2,790 278,722
Savings accounts(5) 30,870 74,087 12,965 5,557 0 123,479
Money market deposit accounts(5) 90,651 213,569 118,077 50,819 50,819 523,935
Certificates of deposit 772,987 1,307,255 717,671 172,567 2,949 2,973,429
Other borrowings(6) 120,000 0 0 250,000 1,150,000 1,520,000
----------- ---------- ----------- -------- ---------- ----------
Total interest-bearing
liabilites 1,067,730 1,744,581 902,587 498,109 1,206,558 5,419,565
----------- ---------- ----------- -------- ---------- ----------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $ (242,435) $ (440,412) $669,731 $314,743 $ 687,308 $ 988,935
=========== ========== =========== ======== ========== ==========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (242,435) $ (682,847) $(13,116) $301,627 $ 988,935 $ 988,935
=========== ========== =========== ======== ========== ==========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities as
a percent of total assets (3.71)% (10.44)% (0.20)% 4.61% 15.12%
Cumulative one-year gap at
September 30, 1998 3.84%
Cumulative one-year gap at
September 30, 1997 9.31%
</TABLE>
(1) Adjustable-rate loans are included in the period in which the rate is next
scheduled to adjust rather than in the period in which the loans 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 savings associations in our region.
(2) Balances have been reduced for non-performing loans, which amounted to $4.4
million at September 30, 1999.
(3) Based on contractual maturities.
(4) Reflects estimated prepayments in the current interest rate environment.
(5) Although our 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 Office of Thrift Supervision
assumptions and should not be regarded as indicative of the actual
withdrawals that may be experienced by us. If all of our 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 $996.9 million, for a cumulative one-year gap of (15.24%) of total
assets.
(6) Assumes call features will not be exercised in the current interest rate
environment.
20
<PAGE>
ared to $4.65 billion at September 30, 1998. This increase was due primarily to
an increase in borrowed funds of $845.0 million to fund mortgage-related
securities growth and, to a lesser extent, an increase in deposits of $5.4
million.
Equity. Total equity amounted to $1.05 billion at September 30, 1999 and
$662.3 million at September 30, 1998, or 16.00% and 12.46% of total assets at
such dates. The increase in equity over the period was due primarily to proceeds
received in the reorganization to a stock company and to continued profitable
operations. Unrealized gains on securities available for sale, net of taxes, was
$4.2 million at September 30, 1999 compared to $13.1 million at September 30,
1998 due to increases in market rates of i nterest during fiscal 1999.
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.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 7.14% 7.38% 7.63%
Mortgage-related securites 6.57 6.66 6.75
Investment securities 6.09 5.93 6.52
Other interest-earning assets 6.71 5.26 5.67
Combined weighted average
yield on interest-earning
assets 6.95 7.07 7.32
Weighted average rate paid on:
Savings deposits 2.22 3.64 3.02
Demand and NOW deposits 2.86 1.50 1.88
Certificate accounts 5.67 5.75 5.92
Borrowings 5.68 5.73 5.75
Combined weighted average
rate paid on interest-
bearing liablities 5.18 5.24 5.35
Spread 1.77 1.83 1.97
</TABLE>
Average Balances, Net Interest Income, Yields
Earned and Rates Paid
The following table on page 22 presents for the periods indicated the total
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.
Rate/Volume Analysis
The table on page 23 presents the 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
(1) changes in volume, which are changes in volume multiplied by the old rate,
(2) changes in rate, which are changes in rate multiplied by the old volume and
(3) changes in rate and volume, which are changes in rate multiplied by changes
in volume.
Comparison of Results of Operations for the Years
Ended September 30, 1999 and 1998
General. Capitol Federal completed its first fiscal year as a public
company with assets totaling $6.54 billion and equity of $1.05 billion. Net
income for the year was $42.9 million compared to $54.0 million for fiscal year
1998. However, excluding one-time charges related to the Reorganization
(explained below) net income for fiscal year 1999 would have been $63.3 million,
a 17.2% increase over the previous year.
Capitol Federal Financial ("Company"), headquartered in Topeka, Kansas is a
federally chartered savings and loan holding company incorporated in March 1999.
The Company was organized at the direction of Capitol Federal Savings ("Bank")
for the purpose of acquiring all of the common stock of the Bank issued in
connection with the conversion of the Bank from mutual to stock form
("Conversion"). On March 31, 1999, the Bank com-
21
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30, September 30,
1999 1998 1997
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- ------- ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1) $3,760,908 $273,134 7.26% $3,470,898 $264,752 7.63% $3,065,946 $236,158 7.70%
Other loans 145,925 12,373 8.48 46,082 3,694 8.02 48,689 3,904 8.02
Mortgage-related
securities 1,641,176 99,767 6.08 911,659 57,967 6.36 592,719 41,473 7.00
Investment securities 155,569 7,378 4.74 556,646 34,045 6.12 717,114 45,968 6.41
Capital stock of Federal
Home Loan Bank 49,283 3,447 6.99 41,598 3,186 7.66 38,698 2,647 6.84
--------- ------- --------- ------- --------- -------
Total Interest-Earning
Assets(1) $5,752,861 396,099 6.89 $5,026,883 363,644 7.23 $4,463,166 330,150 7.40
========= ------- ========= ------- ========= -------
Interest-Bearing
Liabilities:
Savings deposits $ 129,914 $ 2,886 2.22 $ 131,343 2,918 2.22 $ 131,912 2,931 2.22
Demand and NOW deposits 781,936 22,888 2.93 661,871 19,861 3.00 570,865 15,141 2.65
Certificate accounts 3,008,720 172,306 5.73 3,071,829 180,647 5.88 3,082,984 184,357 5.98
Borrowings 964,510 54,950 5.78 548,275 31,471 5.74 87,140 5,028 5.77
--------- ------- --------- ------- --------- -------
Total Interest-Bearing
Liabilities $4,885,080 253,030 5.18 $4,413,318 234,897 5.32 $3,872,901 207,457 5.36
========= ------- ========= ------- ========= -------
Net interest income $143,069 $128,747 $122,693
======= ======= =======
Net interest rate spread 1.71% 1.91% 2.04%
====== ====== ======
Net earning assets $ 867,781 $ 613,565 $ 590,265
========== ========== ==========
Net interest margin 2.49% 2.56% 2.75%
====== ====== ======
Average Interest-Earning
Assets to Average
Interest-Bearing
Liabilities 117.76% 113.90% 115.24%
====== ====== ======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, and loans in process.
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------------
1998 vs. 1999 1997 vs. 1998
-------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Rate/ Increase Due to Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $29,753 $(11,428) $(1,263) $17,062 $ 31,265 $ (2,383) $ (445) $28,437
Mortgage-related securities 46,396 (2,553) (2,043) 41,800 21,995 (5,524) 23 16,494
Investment securities (24,194) (4,824) 2,350 (26,668) (7,884) (2,886) (1,153) (11,923)
Other 591 (279) (51) 261 198 317 24 539
------- ------- ------ ------ ------ ------- ------ -------
Total interest-earning
assets $52,546 $(19,084) $(1,007) 32,455 $ 45,574 $(10,476) $(1,551) 33,547
======= ======= ====== ====== ====== ======= ====== =======
Interest-bearing liabilities:
Savings deposits $ (32) $ --- $ --- $ (32) $ (13) $ --- $ --- $ (13)
Demand and NOW deposits 3,602 (463) (84) 3,055 2,412 1,998 319 4,729
Borrowings 23,864 (219) (166) 23,479 26,498 (9) (46) 26,443
Certificate accounts (3,254) (5,222) 107 (8,369) (647) (3,083) 11 (3,719)
------- ------- ------ ------ ------ ------- ------ -------
Total interest-bearing
liabilities $24,180 $ (5,904) $ (143) $18,133 $ 28,250 $(1,094) $ 284 27,440
======= ======= ====== ------ ====== ======= ====== -------
Net interest income $14,322 $ 6,107
====== =======
</TABLE>
23
<PAGE>
pleted its Conversion, and the Company sold 37,807,183 shares of its common
stock a t a price of $10.00 per share in a subscription offering ("Offering") to
certain depositors of the Bank. At that time, the Company also issued 52,192,817
of its common stock to the Capitol Federal Savings Bank MHC ("MHC"). The
Conversion, the Offering and the issuance of Company common stock to the MHC are
referred to collectively as the "Reorganization." In connection with the
Reorganization, the Company established the Capitol Federal Foundation
("Foundation") and made a charitable contribution of $15. 1 million in cash and
1,512,287 shares of the Company's common stock to the Foundation, which resulted
in a one-time charge relating to the funding of the Foundation of $30.2 million
($18.7 million net of tax). The net proceeds from the Offering, excluding shares
issued to the Employee Stock Ownership Plan (ESOP) amounted to $355.5 million.
The Company contributed $275.0 million of the proceeds from the Offering to the
Bank in exchange for all of the issued and outstanding shares of common stock of
the Ba nk. The Company had no assets or operations prior to March 31, 1999.
Earnings per share from April 1, 1999 to September 30, 1999 was $0.39 and book
value per share at September 30, 1999 was $11.80. Presently, the only
significant assets of the Company are the capital stock of the Bank, the
Company's loan to the ESOP and the investments of the net proceeds from the
Offering retained by the Company. It is noted that during the second quarter of
fiscal year 1999, the Company recorded, in addition to the contribution to the
Foundation of $30.2 million, a $2.4 million expense in conjunction with the
termination of the existing pension plan and the implementation of the ESOP.
Net Interest Income. Net interest income increased $14.3 million or 11.1%
to $143.1 million for 1999 compared to 1998, reflecting a $32.5 million or 8.9%
increase in interest income which was partially offset by a $18.1 million or
7.7% increase in interest expense. Our interest rate spread and net interest
margin decreased to 1.71% and 2.49%, respectively, for 1999 compared to 1.91%
and 2.56%, respectively, for 1998. The ratio of average interest-earning assets
to average interest-bearing liabilities incre ased to 117.8% for 1999 compared
to 113.9% for 1998.
Interest Income. The increase in interest income during the year ended
September 30, 1999 was primarily due to an increase in the average balance of
our interest-earning assets. The average balance of the loan portfolio increased
$389.8 million or 11.1% to $3.91 billion for 1999 compared to 1998 due to
increased loan demand. The average balance of our mortgage-related securities
and investment securities portfolios increased $328.4 million or 22.4% to $1.80
billion for 1999 compared to 1998 primarily as a result of the use of additional
borrowings to purchase mortgage-related securities. This increase was consistent
with our decision to leverage our capital. The average yield earned on our loan
portfolio decreased to 7.31% in 1999 from 7.63% in 1998, and the average yield
earned on our mortgage-related and investment securities portfolios decreased to
5.97% for 1999 from 6.27% for 1998. The decrease in average yield earned on our
mortgage-related and investment securities portfolios was primarily due to t he
purchase of lower-yielding mortgage-related securities that had adjustable rates
of interest.
Interest Expense. The increase in interest expense during the year ended
September 30, 1999 was primarily due to the increase of $416.2 million or 75.9%
on the average balance of borrowings and an increase in the average balance of
deposits. The average balance of deposits increased $55.5 million or 1.4% to
$3.92 billion for 1999, $118.6 million of which consisted of an increase in
demand deposits, including noninterest-bearing checking, NOW and money market
accounts partially offset by a $63.1 million dec rease in the average balance of
certificates of deposit. The average rate paid on deposits decreased to 5.05% in
1999 from 5.26% in 1998. The average rate paid on borrowings increased slightly
to 5.78% in 1999 from 5.74% in 1998. Borrowings increased by $845.0 million for
the year ended September 30, 1999 compared to September 30, 1998. All of the
borrowings were from the Federal Home Loan Bank of Topeka and are consistent
with our decision to leverage our capital. The borrowings are all callable
advances.
Provision for Loan Losses. For the year ended September 30, 1999, the
expense for the provision for loan losses amounted to $395,000 compared to an
expense for the provision for loan losses in 1998 of $2.5 million. At September
30, 1999, our allowance for loan losses was $4.4 million or 0.10% of the total
loan portfolio and approximately 88% of total nonaccruing loans. This compares
with an allowance for loan losses of $4.1 million or 0.11% of the total loan
portfolio and approximately 66% of the total non accruing loans as of September
30, 1998. At fiscal year end 1999, the unallocated portion of the allowance for
loan losses was $2,000. The allocated portion of the allowance of $4.4 million
is composed of inherent credit losses related to the loan portfolio.
During 1999, our single-family residential loan portfolio increased by
$578.3 million at September 30, 1999 over September 30, 1998. The provision
represents 0.07% of the fiscal year 1999 increase in the portfolio.
Non-performing single-family loans decreased by $1.1 million, or 18.6%, to $4.9
million at September 30, 1999 from $6.0 million at September 30, 1998. Our
consumer loan portfolio increased approximately 9.5% to $157.0 million.
The provision for loan losses in fiscal year 1999 was recorded in the
allocated allowance to reflect the increase in the single family residential
mortgage loan portfolio. The reduction in the balance of the allowance for loan
losses in all other loan categories, except consumer loans, resulted from
decreased balances in those loan categories. The redistribution of the allowance
comes from the application of our formula allowance which evaluates the overall
risk of the portfolio. We
24
<PAGE>
maintained our provision for credit losses on consumer loans at approximately
0.1% of the consumer loan portfolio. The increase in the formula allowance was
primarily driven by faster market growth in the portfolio. We also reviewed the
ratio of our non-performing loans to total loans and compared this to our ratio
of allowance for loan losses to net loans receivable. The increase in the
allowance for credit losses properly allocates the inherent credit losses based
upon the known risks of the loan portfolio during fiscal year 1999.
Other Income. Other income amounted to $13.7 million and $12.8 million for
the years ended September 30, 1999 and 1998, respectively. The increase
consisted primarily of a $1.0 million, or 17.2% increase in automated teller and
debit card transaction fees and checking account transaction fees.
Other Expenses. Other expenses increased $36.6 million or 72.8% to $86.9
million for the year ended September 30, 1999 compared to the year ended
September 30, 1998. This increase was primarily due to a $30.2 million
contribution from the Company to the Capitol Federal Foundation as part of the
Reorganization. In addition, pension costs for the year ended September 30, 1999
increased $3.0 million over the year ended September 30, 1998 due to the
termination of the existing pension plan and the implementation of the ESOP.
Other personnel expense was up $2.5 million for the year ended September 30,
1999 compared to the year ended September 30, 1998. The increase was due to
increased staffing at new branch locations and for the loan origination
function, as well as back office support functions. Office occupancy expense was
approximately $900,000 greater for the year ended September 30, 1999 compared to
the year ended September 30, 1998. This increase was the result of increased
lease expense on new branch locations and costs associated with upgrading our
computer systems.
Provision for Income Taxes. The provision for income taxes amounted to
$26.5 million and $34.8 million for 1999 and 1998, respectively, resulting in
effective tax rates of 38.2% and 39.2%, respectively.
Comparison of Results of Operations for the Years
Ended September 30, 1998 and 1997
General. Net income for the year ended September 30, 1998 was $54.0 million
compared to net income of $52.7 million for the year ended September 30, 1997,
an increase of $1.3 million or 2.4%. 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 4.9% to
$128.7 million for 1998 compared to 1997, reflecting a $33.5 million or 10.1%
increase in interest income which was partially offset by a $27.4 million or
13.2% increase in interest expense. Our 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
our 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 our 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 securities. The average yield earned on
our loan portfolio decreased from 7.70% in 1997 to 7.63% in 1998, and the
average yield earned on our mortgage-related and investment securities
portfolios decreased from 6.68% for 1997 to 6.27% for 1998. The decrease in
average yield earned on our 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 our 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, $90.1 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 $2.5 million compared to a
provision for loan losses in 1997 of $56,000. At September 30, 1998, our
allowance for loan losses was $4.1 million or 0.11% of the total loan portfolio
and approximately 66% of total nonaccrual loans. This compares with an allowance
for loan losses of $1.6 million or 0.05% of the total loan portfolio and
approximately 27% of the total nonaccrual loans as of Septembr 30, 1997. At
fiscal year end 1998, the unallocated portion of the allowance for loan losses
was $60,000. The allocated portion of the allowance of $4.0 million is composed
of inherent credit losses related to the loan portfolio.
During 1998, changes in assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
affected the assessment of the allocated allowance.
During 1998, our single-family residential loan portfolio increased by
$359.6 million over 1997. In addition,
25
<PAGE>
the non-performing single-family loans increased by $1.0 million, or 21%, from
$5.0 million at September 30, 1997 to $6.0 million at September 30, 1998,
primarily due to an increased number of borrowers being overextended in their
consumer debt. The provision for loan losses in fiscal 1998 of $2.5 million,
representing 2.2% of pretax earnings, was recorded in allocated allowance to
reflect the incr ease in the nonperforming single family residential mortgage
loans as a result of the increase in the overall risk evaluation of the
portfolio, which contributed to an increase in the formula allowance. The
provision represents 0.56% of the 1998 increase in the portfolio. The increase
in the formula allowance was primarily driven by faster market growth in the
portfolio as a result of increased refinancings and the exposure presented by
the level of nonperforming loans. We also reviewed the ratio of our non
- -performing loans to total loans and compared this to our ratio of allowance
for loan losses to net loans receivable.
During 1998, our multi-family loan portfolio increased by approximately 51%
to $40.4 million. This growth is the result of increased lending opportunities
in various market areas. We increased our provision for credit losses to 0.5% of
the multi-family loan portfolio. We increased our portfolio of commercial real
estate loans by approximately 53% to $9.1 million and increased our provision
for credit losses to 0.9% of the commercial real estate loan portfolio. The
portfolio of construction and development loans remained generally unchanged
from 1997 to 1998. However, we increased our provision for credit losses to 1.1%
of the construction and development loan portfolio. Our consumer loan portfolio
increased 12% to $143.3 million during 1998 as a result of increased marketing
efforts. We increased our provision for credit losses on consumer loans to
approximately 0.1% of the consumer loan portfolio. These increases in provision
for credit losses properly allocate the inherent credit loss provision based
upon the known risks of the various loan portfolios in 1998.
Other Income. Other income amounted to $12.8 million and $11.4 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 $4.6 million or 10.1% to $50.3
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 10.2%
increase in personnel expenses and a $1.3 million or 19.7% increase in occupancy
costs resulting from the addition of two limited service branch offices in 1998.
We had also set up a reserve for losses on unfunded commitments of $900,000,
reflecting the growth in mortgage and consumer loan commitments and letters of
credit.
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.
Liquidity and Commitments
Capitol Federal Savings' liquidity, represented by cash and cash
equivalents, investments and mortgage-related securities available for sale, is
a product of its operating, investing and financing activities. Capitol Federal
Savings' primary sources of funds are deposits, amortization, prepayments and
maturities of outstanding loans and mortgage-related 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, we invest excess funds in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
Historically, we have been able to generate sufficient cash through deposits and
have only utilized borrowings to a limited degree. We utilize repurchase
agreements and Federal Home Loan Bank advances to leverage our capital base and
provide funds for our lending and investment activities, and to enhance our
interest rate risk management. Since the Reorganization, we have increased our
use of borrowed funds to leverage our capital.
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. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-related securities and investment securities. At September
30, 1999, the total approved loan origination and purchase commitments
outstanding amounted to $286.3 million. At the same date, the unadvanced portion
of construction loans was $29.0 million. Unused home equity lines of credit were
$150.8 million as of September 30, 1999 and outstanding letters of credit
totaled $1.2 million. Certificates of deposit scheduled to mature in one year or
less at September 30, 1999, totaled $1.94 billion. Based on historical
experience, management believes that a significant portion of maturing deposits
will remain with us. We anticipate that we will continue to have sufficient
funds, through deposits and borrowings, to meet our current commitments.
Capital
Consistent with our goals to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance
26
<PAGE>
with regulatory standards. Total equity was $1.05 billion at September 30, 1999,
or 16.0% of total assets on that date. As of September 30, 1999, Capitol Federal
Savings exceeded all capital requirements of the Office of Thrift Supervision.
Capitol Federal Savings' regulatory capital ratios at September 30, 1999 were as
follows: Tier I (leverage) ca pital, 14.6%; Tier I risk-based capital, 33.7%;
and total risk-based capital, 33.9%. The regulatory capital requirements to be
considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
Year 2000 Issues
General. The Year 2000 issue confronting us and our 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 have remained focused upon Y2K compliance
issues and have issued guidance concerning the responsibilities of senior
management and directors. The Federal Financial Institution Examination Council
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 conjunct ion 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, our operations may be
significantly affected by the Y2K issue due to our dependence on technology and
date-sensitive data. Computer software, hardware and other equipment, both
within and outside our direct control and third parties with whom we
electronically or operationally interface 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, we 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 our suppliers and
creditors and the creditworthine ss of our borrowers. Thus, if not adequately
addressed, the Y2K issue could result in a significant adverse impact on our
operations and, in turn, our financial condition and results of operations.
State of Readiness. During April 1997, we formulated our plan to address
the Y2K issue. Since that time, we have 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;
o Developed compliance plans and schedules for all lines of business;
o Completed renovation of internal applications; updated system software;
o Completed computer code testing;
o Completed vendor compliance verification;
o Completed awareness and education activities for employees through existing
internal communication channels;
o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue, executed a multi-faceted customer
communication program;
o Completed and tested contingency plans; and
o Completed further tests to assure maintenance of Y2K readiness.
The following paragraphs summarize the phases of our Y2K plan:
Awareness Phase. Our 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 complete.
Assessment Phase. Our 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 our 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, including hardware,
soft-
27
<PAGE>
ware, utilities and vendors, as well as environmental systems, including
security systems and facilities. Systems were prioritized based on business
impact and available alternatives. As part of this process, 118 vendors and
2,458 programs were identified as mission critical. Mission critical systems
supplied by vendors were reviewed to determine Y2K readiness. If Y2K-ready
versions were not available, we began identifying functional replacements which
were upgradable or are currently Y2K-ready, and a formal plan was developed to
repair, upgrade or replace all missi on critical systems. This phase is
complete. As of September 30, 1999, 100% of the mission critical vendors and
100% of the mission critical programs were identified as or determined to be
Y2K-ready.
By June 1998, our larger borrowers were evaluated for Y2K exposure using a
questionnaire developed by our Y2K Business Systems Team. As part of the current
credit approval process, all new and renewed loans are evaluated for Y2K risk.
Our loan policy clearly states that all loans, especially commercial real estate
loans, require an analysis of the impact of Y2K issues on the creditworthiness
of the borrower prior to approval. Commercial real estate loans represent only
0.12% of total loans and all are sec ured by real estate. No commercial real
estate borrower was identified as mission critical during the assessment process
due to the size, nature, and collateral of commercial real estate loans with us.
While we will continue to monitor the progress being made by our larger
borrowers in addressing their own Y2K issues, to date we are generally satisfied
with these customers' responses to our inquiries.
Renovation Phase. Our 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 validated. We have renovated and
validated all mission critical proprietary software.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date sensitive data. We have
completed the process of validation testing each mission critical system. We
created a test environment comprised of an IBM Multiprise 2000 dedicated to Y2K
testing which is virtually insulated from production and development
environments. Our validation phase is complete for all mission critical systems.
During the validation testing process, no significant Y2K problems were
identified relating to any modified or upgraded mission critical systems.
Implementation Phase. Y2K-ready modified or upgraded versions have been
installed and placed into production with respect to all proprietary mission
critical systems.
Bank Resources Invested. Our Y2K project team has been assigned the task of
ensuring that all of our mission critical systems are identified, analyzed for
Y2K compliance, corrected if necessary, tested, and have changes put into
service. The Y2K project team members represent all our functional areas,
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. Our board of directors oversees the Y2K plan and
provides guidance and resources to and receives monthly updates from the Y2K
project team leader.
We are 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 us is estimated to be
$2.3 million. Expenses of approximately $1.4 million were incurred and expensed
through September 30, 1999. Y2K expenses are not expected to exceed the budget,
and we do not expect significant increases in future data processing costs
relating to Y2K compliance.
Contingency Plans. During the assessment phase, we began to develop back-up
or contingency plans for each of our mission critical systems. A few of our
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, we 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.
We have identified a worst case scenario that envisions the possibility of
the lack of power or communication services for a period of time in excess of
one day. Contingency planning is an integral part of our Y2K readiness plan. Key
operating personnel are actively analyzing services that will be supported
during extended outages and preparing written plans and procedures to train our
personnel. The contingency plans are tested when practical to validate the
effectiveness of contingent procedures.
Virtually all of our mission critical systems are written and maintained by
our Information Systems Department. As of September 30, 1999, 100% of all
mission critical proprietary software had been renovated. Although there can be
no assurances, we do not anticipate any material adverse effect on our
operations as a result of the impact of the Y2K issue.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Capitol Federal Financial and Subsidiary
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of Capitol Federal
Financial and Subsidiary (the Company) as of September 30, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. These
financial statements are the responsibility of the Company'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 Company as of September 30,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
October 28, 1999
Kansas City, Missouri
29
<PAGE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998 (in thousands)
- --------------------------------------------------------------------------------
ASSETS 1999 1998
--------- ---------
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository
institutions $ 22,275 $ 12,454
Interest bearing deposits in other banks 12,000
--------- ---------
Total cash and cash equivalents 22,275 24,454
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 235,000
INVESTMENT SECURITIES, Held-to-maturity
(Market value of $14,754 and $160,712) 15,100 160,569
CAPITAL STOCK OF FEDERAL HOME LOAN BANK, at cost 68,336 43,584
MORTGAGE-RELATED SECURITIES:
Available-for-sale, at market value
(Amortized cost of $1,129,995 and $726,104) 1,136,776 747,991
Held-to-maturity, at cost (Market value of
$914,820 and $319,128) 939,492 320,379
LOANS HELD FOR SALE, Net 3,651 14,578
LOANS RECEIVABLE, Net (Less allowance for loan
losses of $4,407 and $4,081) 4,291,288 3,711,152
PREMISES AND EQUIPMENT, Net 24,046 22,785
REAL ESTATE OWNED, Net (Less allowance for losses
of $16 and $139) 1,073 1,964
ACCRUED INTEREST RECEIVABLE:
Loans receivable 19,874 18,399
Mortgage-related securities 12,540 6,823
Investment securities 431 2,776
OTHER ASSETS 4,433 5,347
--------- ---------
TOTAL ASSETS $6,539,315 $5,315,801
========= =========
(Continued)
<PAGE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998 (in thousands, except share amounts)
- -------------------------------------------------------------------------------
LIABILITIES AND EQUITY 1999 1998
--------- ---------
LIABILITIES:
Deposits $3,899,565 $3,894,180
Advances from Federal Home Loan Bank 1,345,000 500,000
Securities sold under agreements to
repurchase 175,000 175,000
Advance payments by borrowers for taxes
and insurance 37,422 37,426
Income taxes payable 1,287 227
Deferred income taxes 13,779 28,995
Accounts payable and accrued expenses 20,748 17,641
--------- ---------
Total liabilities 5,492,801 4,653,469
COMMITMENTS AND CONTINGENCIES (NOTE 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 50,000,000
shares authorized, no shares issued or
outstanding
Common stock, $.01 par value, 450,000,000
shares authorized, 91,512,287 shares issued
and outstanding as of September 30, 1999 915
Additional paid-in capital 384,864
Unearned compensation - Employee Stock Ownership Plan (28,230)
Retained earnings 684,761 649,199
Accumulated other comprehensive income 4,204 13,133
--------- ---------
Total stockholders' equity 1,046,514 662,332
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,539,315 $5,315,801
========= =========
See notes to consolidated financial statements. (Concluded)
31
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans receivable $285,508 $268,444 $240,062
Mortgage-related securities 99,767 57,967 41,473
Investment securities 1,194 23,025 43,461
Securities purchased under
agreements to resell 3,894 6,955
Cash and cash equivalents 2,289 4,065 2,507
Capital stock of Federal Home Loan
Bank 3,447 3,186 2,647
-------- -------- --------
Total interest and dividend income 396,099 363,642 330,150
INTEREST EXPENSE:
Deposits 198,080 203,426 202,429
Borrowings 54,950 31,471 5,028
-------- -------- --------
Total interest expense 253,030 234,897 207,457
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME 143,069 128,745 122,693
PROVISION FOR LOAN LOSSES 395 2,462 56
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN LOSSES 142,674 126,283 122,637
OTHER INCOME:
Automated teller and debit card
transaction fees 4,236 3,267 2,528
Checking account transaction fees 2,866 2,791 2,359
Loan fees 1,854 2,340 2,563
Insurance commissions 1,530 1,424 1,479
Other, net 3,188 2,971 2,509
-------- -------- --------
Total other income 13,674 12,793 11,438
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 31,770 26,300 23,875
Occupancy of premises 8,647 7,756 6,477
Office supplies and related expenses 3,399 3,325 3,275
Deposit and loan transaction costs 4,110 3,514 3,022
Advertising 2,719 2,564 2,709
Federal insurance premium 2,341 2,409 3,391
Foundation contribution 30,231
Other, net 3,723 4,436 2,931
-------- -------- --------
Total other expenses 86,940 50,304 45,680
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 69,408 88,772 88,395
INCOME TAX EXPENSE 26,487 34,781 35,691
-------- -------- --------
NET INCOME $ 42,921 $ 53,991 $ 52,704
======== ======== ========
Earnings per share (from April 1, 1999):
Basic $ 0.39
========
Diluted $ 0.39
========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (in thousands, except share amounts)
Unearned
Compensation- Accumulated
Common Stock Additional Employee Stock Other Total
---------------------- Paid-in Ownership Retained Comprehensive Stockholders'
Shares Amount Capital Plan Earnings Income Equity
------ ------ ---------- -------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1996 $542,504 $ 4,918 $ 547,422
Comprehensive Income:
Net income 52,704 52,704
Other comprehensive income -
Change in unrealized gains on
mortgage-related securities
available-for-sale, net of deferred
income taxes of $3,107 4,660 4,660
--------- -------- ----------
Total comprehensive income 57,364
----------
BALANCE, September 30, 1997 595,208 9,578 604,786
Comprehensive Income:
Net income 53,991 53,991
Other comprehensive income -
Change in unrealized gains on
mortgage-related securities
available-for-sale, net of deferred
income taxes of $2,370 3,555 3,555
--------- -------- ----------
Total comprehensive income 57,546
----------
BALANCE, September 30, 1998 649,199 13,133 662,332
Comprehensive Income:
Net income 42,921 42,921
Other comprehensive income -
Change in unrealized gains on mortgage-
related securities available-for-sale,
net of deferred income taxes of $(6,177) (8,929) (8,929)
----------
Total comprehensive income 33,992
----------
Issuance of common stock, net of offering
expenses of $7,403 88,487,713 $885 $354,660 355,545
Common stock issued to Employee Stock
Ownership Plan 3,024,574 30 30,216 $(30,246)
Common stock committed to be released
for allocation - Employee Stock
Ownership Plan 2,016 2,016
Decrease in fair market value of
Employee Stock Ownership Plan shares
committed to be released for allocation (12) (12)
Capitalization of Mutual Holding Company (100) (100)
Dividends on common stock to stockholders
($0.20 per share) (7,259) (7,259)
---------- ---- -------- -------- -------- ------ ----------
BALANCE, September 30, 1999 91,512,287 $915 $384,864 $(28,230) $684,761 $4,204 $1,046,514
========== ==== ======== ======== ======== ====== ==========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (in thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,921 $ 53,991 $ 52,704
Adjustments to reconcile net
income to net cash provided by
operating activities:
Termination of pension plan 1,350
Contribution of common stock to
Capitol Federal Foundation 15,108
Federal Home Loan Bank stock dividends (3,447) (3,186) (2,646)
Net loan origination fees capitalized 10,058 4,664 466
Amortization of net deferred loan
origination fees (8,684) (3,930) (248)
Provision for loan losses 395 2,462 56
Provision for losses on real estate
owned 216 424
Gain on sales of real estate owned, net (314) (382) (438)
Gain on sales of loans held for sale (294) (172) (253)
Originations of loans held for sale (2,141) (23,760) (3,560)
Proceeds from sales of loans held for
sale 13,256 18,782 4,251
Amortization and accretion of premiums
and discounts on mortgage-related
securities and investment securities 3,668 1,039 (1,770)
Depreciation and amortization of premises
and equipment 3,154 2,960 2,816
(Benefit) provision for deferred income
taxes (9,039) (33) 10,637
Decrease in fair market value of Employee
Stock Ownership Plan shares committed to
be released for allocation (12)
Common stock committed to be released for
allocation - Employee Stock Ownership Plan 2,016
Changes in:
Accrued interest receivable (4,847) 3,916 334
Other assets (436) 990 (297)
Income taxes payable 1,060 (3,151) 1,972
Accounts payable and accrued expenses 3,107 3,813 (24,682)
-------- -------- --------
Net cash provided by operating
activities 66,879 58,219 39,766
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities 172,486 850,060 196,992
Purchases of investment securities (36,305) (425,000) (64,992)
Purchases of securities under
agreements to resell (1,383,410) (235,000)
Repayments of securities purchased
under agreements to resell 1,618,410
Principal collected on mortgage-
related securities available-for-
sale 555,350 255,352 112,900
Purchases of mortgage-related
securities available-for-sale (962,181) (244,027) (249,850)
Principal collected on mortgage-
related securities held-to-maturity 304,732 138,934 10,115
Purchases of mortgage-related
securities held-to-maturity (936,591) (339,792) (113,117)
Loan originations net of principal
collected on loans receivable (369,662) (273,624) (266,024)
Purchases of loan receivable (215,959) (124,724) (117,425)
Purchases of premises and
equipment, net (4,415) (5,632) (4,504)
Proceeds from sales of
real estate owned 5,028 6,901 7,364
-------- -------- --------
Net cash used in investing
activities (1,252,517) (396,552) (488,541)
-------- -------- --------
(Continued)
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (in thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (7,259)
Deposits, net of payments 5,385 $107,057 $ 46,405
Proceeds from advances from Federal
Home Loan Bank 1,397,000 255,000 337,000
Repayments on advances from Federal
Home Loan Bank (552,000) (30,000) (62,000)
Proceeds from securities sold under
agreements to repurchase 175,000
Proceeds from common stock issuance,
net 340,337
Repayments of securities sold under
agreements to repurchase (75,000)
Change in advance payments by
borrowers for taxes and insurance (4) (458) 182
--------- -------- --------
Net cash provided by financing
activities 1,183,459 331,599 421,587
--------- -------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,179) (6,734) (27,188)
CASH AND CASH EQUIVALENTS:
Beginning of year 24,454 31,188 58,376
--------- -------- --------
End of year $ 22,275 $ 24,454 $ 31,188
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income tax payments, net of refunds $ 34,294 $ 37,910 $ 39,987
========= ======== ========
Interest payments, net of interest
credited to deposits of $173,473,
$176,588 and $175,242 $ 76,060 $ 58,280 $ 31,510
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to real estate owned $ 4,251 $ 5,664 $ 6,425
========= ======== ========
Loans made upon the sale of real estate
owned $ 428 $ 600 $ 193
========= ======== ========
Common stock issued to Employee Stock
Ownership Plan in exchange for a note
receivable $ 30,246
=========
See notes to consolidated financial statements. (Concluded)
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (in thousands, except share data)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Capitol Federal Financial (the "Company") provides a full range of banking
services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the
"Bank") which has 25 full service and six limited service banking offices
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. The Bank emphasizes mortgage lending, primarily originating
one-to four-family mortgage loans. The Company is subject to competition from
other financial institutions and other companies that provide financial
services. The Company is subject to the regulations of certain federal agencies
and undergoes periodic examinations by those regulatory authorities.
On March 31, 1999, the Company completed the reorganization of the Bank
into the federal mutual holding company form of ownership, whereby the Bank
converted into a federally chartered stock savings bank as a wholly owned
subsidiary of the Company, and the Company became a majority-owned subsidiary of
Capitol Federal Savings Bank MHC (the "MHC"), a federally chartered mutual
holding company (collectively, the "Reorganization"). In connection with the
Reorganization, the Company sold 37,807,183 shares of Company common stock, par
value $0.01 per share at $10.00 per share which, net of issuance costs,
generated proceeds of $355,545. The Company loaned $30,246 to the Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase 3,024,574 shares of the
Company's stock in the initial public offering. The Company also issued
52,192,817 shares of Company common stock to the MHC. As an integral part of the
Reorganization and in furtherance of the Company's commitment to the communities
that it serves, the Company established a charitable foundation known as the
Capitol Federal Foundation (the "Foundation") and contributed 1,512,287 shares
and $15,123 in cash to the Foundation. The Company received $15 in proceeds from
the contribution of shares to the Foundation. The Company recorded a
contribution expense of $30,231 and a corresponding deferred tax benefit of
$11,488 for this donation.
The Company's ability to pay dividends is dependent, in part, upon its
ability to obtain dividends from the Bank. The future dividend policy of the
Company is subject to the discretion of the Board of Directors and will depend
upon a number of factors, including future earnings, financial conditions, cash
needs, and general business conditions. Holders of common stock will be entitled
to receive dividends as and when declared by the Board of Directors of the
Company out of funds legally available for that purpose. Such payment, however,
will be subject to the regulatory restrictions set forth by the Office of Thrift
Supervision ("OTS"). In addition, the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") provides that, as a general rule, a financial
institution may not make a capital distribution if it would be undercapitalized
after making the capital distribution.
To date, the MHC has waived its receipt of cash dividends from the Company.
The dollar amount of dividends waived by the MHC are considered as a restriction
on the retained earnings of the Company. The amount of any dividend waived by
the MHC shall be available for declaration as a dividend solely to the MHC. At
September 30, 1999, the cumulative amount of such waived dividend was $10,439.
Subsequent to September 30, 1999, the Company obtained regulatory approval
to repurchase up to 5,897,921 shares of common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
and its wholly owned subsidiary, the Bank. The Bank has a wholly owned
subsidiary, Capitol Funds, Inc., that 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 Agreements to Resell and
Mortgage-Related Securities, Held-to-Maturity
Investment securities, securities purchased under agreements to resell and
certain mortgage-related securities are held-to-maturity and are stated at cost,
adjusted for amortization of premiums and discounts which are recognized as
adjustments to interest income over the
36
<PAGE>
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 accumulated other
comprehensive income, net of deferred income taxes. Premiums and discounts are
recognized as adjustments to interest income over the life of the securities
using the level yield method. Gains or losses on the disposition of
mortgage-related securities available-for-sale are recognized using the specific
identification method. Estimated fair values of mortgage-related securities
available 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.
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 that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff 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 is 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.
The Bank also records a loss valuation for loan losses inherent in unused
commitments to provide financing (Note 16). The Bank records the allowance for
these off-balance sheet commitments in accrued expenses.
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 portfolio.
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
37
<PAGE>
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 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 Company files a consolidated income tax return using the accrual basis
of accounting.
The Company 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.
The Bank is 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 expense 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 required to be 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, 1999 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") repeals 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. The Bank began recapturing excess reserves beginning with the year ended
September 30, 1999. The Company established a deferred income tax liability in
the amount of $10,701 and $13,203 on the excess reserves as of September 30,
1999 and 1998, respectively.
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.
Estimates
The preparation of these consolidated 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.
Significant Group Concentrations of Credit Risk
Most of the Bank's activities are with customers located within the
metropolitan areas of eastern Kansas and a portion of the metropolitan area of
greater Kansas City.
New Statements of Financial Accounting Standards
In February 1997, the Financial Accounting Standards Board (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 was adopted for the Company's
consolidated financial statements for the year ended September 30, 1999.
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 was adopted for
the Company's consolidated financial statements as of September 30,1999.
In June 1997, the 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. In accordance
with the Statement, the Company has (a) classified items of other comprehensive
income by their nature in a financial statement and (b) displayed 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 was adopted for the Company's consolidated
financial statements as of and for the year ended September 30, 1999.
38
<PAGE>
In June 1997, the 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. The Statement was adopted for the Company's
consolidated financial statements as of and for the year ended September 30,
1999. The Company determined that it has no segment other than the banking
segment.
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 was adopted for the Company's consolidated financial statements as of
and for the year ended September 30, 1999.
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
entities conducting mortgages banking activities account for certain securities
and other interests they retain after securitizing mortgage loans that were
held-for-sale. The Statement was effective for the Company's consolidated
financial statements as of January 1, 1999. The adoption of this Statement did
not have a material impact on the Company's consolidated financial statements as
of and for the year ended September 30, 1999.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of internal use computer software at
various stages of development. This SOP is effective for the Company's fiscal
year ending September 30, 2000. The Company does not expect the implementation
of this SOP to have a material inpact on the Company'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. Due to the
issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", the
Statement will not be effective for the Company's consolidated financial
statements until the fiscal year ending September 30, 2001. The adoption of this
Statement is not expected to have a material impact on the Company's
consolidated financial statements.
Earnings Per Share
The Company completed its initial stock offering on March 31, 1999, and,
accordingly, earnings per share for 1999 is computed on net income and common
stock outstanding from that date. Earnings per share is calculated by dividing
net income from April 1, 1999 to September 30, 1999 of $34,771, by the weighted
average number of common and common equivalent shares outstanding. The Company
accounts for the 3,024,574 shares acquired by its ESOP in accordance with
Statement of Position 93-6; shares controlled by the ESOP are not considered in
the weighted average shares outstanding until the shares are committed for
allocation to an employee's individual account. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share calculations.
<TABLE>
<CAPTION>
For the six months
ended
September 30, 1999
------------------
<S> <C>
Net Income $ 34,771
Weighted average common shares 88,487,713
Allocated ESOP shares 151,776
-----------
Total basic and diluted weighted
average common shares 88,639,489
===========
Net earnings per share:
Basic $ 0.39
Diluted $ 0.39
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1997 and 1998
consolidated financial statements in order to conform with the 1999
presentation.
39
<PAGE>
2. INVESTMENT SECURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Certificate of deposit $ 100 $ $ $ 100
Federal National Mortgage
Association notes 15,000 346 14,654
--------- ---------- ---------- ---------
$ 15,100 $ $ 346 $ 14,754
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
---------- --------- ---------- ----------
$ 160,569 $ 143 $ $ 160,712
========== ========= ========== ==========
</TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity are as follows:
September 30, 1999
------------------
Estimated
Amortized Market
Cost Value
--------- ---------
One year or less $ 100 $ 100
Ten years and thereafter 15,000 14,654
------- -------
$ 15,100 $ 14,754
======= =======
As of September 30, 1998, the Bank held callable notes with aggregate carrying
values of $160,469. All dispositions of investment securities during 1999, 1998
and 1997 were the result of maturities or calls.
40
<PAGE>
3. MORTGAGE-RELATED SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pass through certificates:
Federal National Mortgage Association $ 500,641 $ 4,633 $ 2,002 $ 503,272
Federal Home Loan Mortgage Corporation 629,354 7,350 3,200 633,504
---------- ---------- ---------- ----------
$1,129,995 $ 11,983 $ 5,202 $1,136,776
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Pass through certificates:
Federal National Mortgage Association $ 260,291 $ 7,753 $ 61 $ 267,983
Federal Home Lona Mortgage Corporation 465,813 14,288 93 480,008
---------- --------- ---------- ----------
$ 726,104 $ 22,041 $ 154 $ 747,991
========== ========= ========== ==========
</TABLE>
All dispositions of mortgage-related securities available-for-sale during
1999, 1998 and 1997 were the result of maturities or calls.
The amortized cost and estimated market value of mortgage-related
securities available-for-sale by contractual maturity are as follows:
September 30, 1999
------------------
Estimated
Amortized Market
Cost Value
--------- ---------
One year or less $ 12,056 $ 11,959
One year through five years 3,539 3,679
Five years through ten years 115,834 119,160
Ten years and thereafter 998,566 1,001,978
---------- ----------
$1,129,995 $1,136,776
========== ==========
Actual maturities of 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 financial
instruments.
As of September 30, 1999, the Bank has pledged mortgage-related securities
available for sale as collateral with amortized cost of $109,578 and estimated
market value of $110,211 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 agreements to repurchase (Note 12). The Bank also has
mortgage-related securities available for sale with amortized cost of $8,929 and
estimated market value of $8,982 pledged as collateral to the Federal Reserve
Bank for treasury, tax and loan requirements as of September 30, 1999.
41
<PAGE>
4. MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations:
Federal National Mortgage Association $ 832,264 $ 96 $ 23,764 $ 808,596
Federal Home Loan Mortgage Corporation 5,251 60 5,191
Government National Mortgage Association 101,977 944 101,033
---------- ---------- ---------- ----------
$ 939,492 $ 96 $ 24,768 $ 914,820
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Collaterized 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
========== ========= ========== ==========
</TABLE>
The amortized cost and estimated market value of mortgage-related
securities held-to-maturity by contractual maturity are as follows:
September 30, 1999
------------------
Estimated
Amortized Market
Cost Value
--------- ---------
One year through five years $ 52,951 $ 52,722
Ten years and thereafter 886,541 862,098
------- -------
$ 939,492 $ 914,820
======= =======
Actual maturities of 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.
As of September 30, 1999, the Bank has mortgage-related securities
held-to-maturity with amortized cost of $104,005 and estimated market value of
$101,687 pledged as collateral for securities sold under agreements to
repurchase (Note 12).
All dispositions of mortgage-related securities held-to-maturity during
1999, 1998 and 1997 were the result of maturities or calls.
5. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases investment securities and mortgage-related securities
under agreements to resell substantially identical securities. Securities
purchased under agreements to resell as of September 30, 1998 consist of
mortgage-related securities.
The amount advanced under such agreements represent short-term loans and
are 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 Bank had one outstanding agreement
which matured within 90 days and was outstanding with one dealer.
42
<PAGE>
6. LOANS RECEIVABLE, Net
1999 1998
--------- ---------
Mortgage loans:
Residential - one-to-four units $4,083,148 $3,504,799
Residential - five or more units 31,114 40,361
Construction and development 56,660 52,086
Commercial 11,415 9,069
---------- ----------
4,182,337 3,606,315
Other loans:
Property improvements, auto and other 125,303 106,793
Student loans 16,424 20,120
Deposits 15,281 16,446
---------- ----------
157,008 143,359
Less:
Undisbursed loan funds 29,043 21,690
Allowance for loan losses 4,407 4,081
Unearned loan fees and deferred costs 14,607 12,751
---------- ----------
Loans receivable, net $4,291,288 $3,711,152
========== ==========
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 both September 30, 1999 and 1998
was $3,449, respectively. There were no other commercial real estate or business
loans purchased or originated during 1999, 1998 or 1997. The Bank originates and
purchases both adjustable and fixed rate loans. The approximate composition of
these loans is as follows:
September 30, 1999
- --------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- ----------------------------------- ------------------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
- ----------- ------------ ---------------- ------------
1 mo. - 1 yr. $ 14,293 1 mo. - 1 yr. $ 14,980
1 yr. - 3 yrs. 18,071 1 yr. - 3 yrs. 8,104
3 yrs. - 5 yrs. 18,668 3 yrs. - 5 yrs. 7,502
5 yrs. - 10 yrs. 203,206 5 yrs. - 10 yrs. 59,324
10 yrs. - 20 yrs. 783,012 10 yrs. - 20 yrs. 236,403
Over 20 yrs. 1,678,790 Over 20 yrs. 1,296,992
---------- ----------
$2,716,040 $1,623,305
========== ==========
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to a one year constant maturity treasury note or the cost of
funds for the 11th District of Federal Home Loan Bank.
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, 1999, the Bank is in compliance with this limitation.
A summary of the activity in the allowance for loan losses is as follows:
1999 1998 1997
------ ------ ------
Balance, beginning of year $4,081 $1,639 $1,583
Provision charged to expense 395 2,462 56
Losses charged against the allowance (69) (20)
------ ------ ------
Balance, end of year $4,407 $4,081 $1,639
====== ====== ======
43
<PAGE>
The Bank did not engage in any troubled debt restructurings during the
years ended September 30, 1999, 1998 and 1997. No loans were considered impaired
during the years ended September 30, 1999, 1998 and 1997.
Aggregate loans to executive officers, directors and their associates,
including companies in which they have partial ownership interest did not exceed
5% of stockholders' equity as of September 30, 1999 and 1998. 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, 1999 and 1998, loans totaling approximately $4,976 and
$6,229, respectively, were on nonaccrual status. Gross interest income would
have increased by $151 and $227 for the years ended September 30, 1999 and 1998,
respectively, for nonaccrual status loans.
As of September 30, 1999 and 1998, the Bank was servicing loans for others
aggregating approximately $399,531 and $520,595, 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 $6,979 and $8,662 as of
September 30, 1999 and 1998, respectively.
7. LOANS HELD FOR SALE, Net
1999 1998
------ ------
Loans held for sale $3,745 $14,595
Deferred net discounts, premiums
and other related costs (94) (17)
------ -------
Loans held for sale, net $3,651 $14,578
====== =======
Gross realized gains on sales of loans held for sale were $294, $172, and
$253, respectively, for the years ended September 30, 1999, 1998 and 1997.
8. PREMISES AND EQUIPMENT, Net
1999 1998
------- -------
Land $ 6,465 $ 6,462
Building and improvements 26,659 24,532
Furniture, fixtures and equipment 21,098 19,210
------- -------
54,222 50,204
Less accumulated depreciation 30,176 27,419
------- -------
Premises and equipment, net $24,046 $22,785
======= =======
Depreciation and amortization expense for the years ended September 30,
1999, 1998 and 1997 was $3,154, $2,960, and $2,816, respectively.
Certain Bank facilities and equipment are leased under various operating
leases. Rental expense was $853, $329, and $219, respectively, for years ended
September 30, 1999, 1998 and 1997.
Future minimum rental commitments under noncancellable leases are:
2000 $502
2001 211
2002 10
----
$723
====
44
<PAGE>
9. REAL ESTATE OWNED
1999 1998
------ ------
Real estate owned (acquired by foreclosure or
by deed in lieu of foreclosure) $1,089 $2,103
Less allowance for losses 16 139
------ ------
$1,073 $1,964
====== ======
A summary of the activity in the allowance for losses on real estate owned is as
follows:
1999 1998 1997
---- ---- ----
Balance, beginning of year $ 139 $ 166 $ 210
Provision charged to expense 216 424
Losses charged against the allowance (123) (243) (468)
----- ----- -----
Balance, end of year $ 16 $ 139 $ 166
===== ===== =====
10. DEPOSITS
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
Average Average
Amount Rate Amount Rate
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Passbook and demand deposits:
NOW and PS* $ 278,722 1.12% $ 260,440 1.50%
Passbook and Passcard 123,479 2.22% 129,180 2.22%
Money Market Select 322,660 4.38% 213,181 5.09%
Cash Fund 201,275 2.84% 225,356 3.08%
--------- ---------
926,136 828,157
Certificates of deposit:
1.00% to 1.99% 2 1.00%
2.00% to 2.99% 44 2.22%
3.00% to 3.99% 5,732 3.83% 5,900 3.88%
4.00% to 4.99% 573,440 4.88% 429,108 4.51%
5.00% to 5.99% 1,644,605 5.53% 1,684,996 5.63%
6.00% to 6.99% 514,167 6.12% 715,234 6.16%
7.00% to 7.99% 234,901 7.68% 227,695 7.68%
8.00% to 8.99% 538 8.11% 2,405 8.47%
9.00% to 9.99% 685 9.00%
--------- ---------
2,973,429 3,066,023
--------- ---------
$3,899,565 $3,894,180
========= =========
Weighted average interest rate
on deposits during the year 4.99% 5.15%
==== ====
</TABLE>
45
<PAGE>
As of September 30, 1999 and 1998, certificates of deposit mature as follows:
1999
---------
Within one year $1,941,683
Beyond one year but within two years 521,411
Beyond two years but within three years 334,787
Beyond three years 175,548
---------
Total $2,973,429
=========
A summary of interest expense by deposit type is as follows:
1999 1998 1997
-------- -------- --------
Passbook savings deposits $ 2,886 $ 2,918 $ 2,931
NOW accounts and money market
demand deposits 22,120 19,861 15,141
Certificates of deposit 173,074 180,647 184,357
-------- -------- --------
$198,080 $203,426 $202,429
======== ======== ========
The amount of non-interest bearing deposits was $28,828 and $23,168 as of
September 30, 1999 and 1998, respectively. The aggregate amount of deposit
accounts with a balance of $100 or greater was approximately $498,261 and
$402,781 as of September 30, 1999 and 1998, respectively, of which jumbo
certificates of deposit with a minimum denomination of $100 was $311,090 and
$299,476 as of September 30, 1999 and 1998, respectively. Deposits in excess of
$100 are not insured by the Federal Deposit Insurance Corporation.
11. ADVANCES FROM FEDERAL HOME LOAN BANK
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------ ------------------------------------
Fiscal Fiscal
Year Interest Year Interest
Maturity Amount Rate Maturity Amount Rate
- -------- --------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
2000 $ 120,000 5.24% 2004 $275,000 5.76%
2004 275,000 5.76% 2008 225,000 5.68%
--------
2008 225,000 5.68%
2009 725,000 5.60% $500,000 5.72%
--------- ======== =====
$1,345,000 5.61%
========= =====
</TABLE>
Actual maturities of the advances may differ from scheduled maturities as
the Federal Home Loan Bank has the right to call the advances and the Bank has
the option to prepay the advances. The call dates range from years 1999 to 2004.
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, 1999, there was
$120,000 drawn on this line of credit which is due December 10, 1999, the
agreement's expiration date. Management expects that the agreement will be
renewed concurrently with its expiration.
46
<PAGE>
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank sells securities under agreements to repurchase ("repurchase
agreements"). Fixed-coupon repurchase agreements are treated as financings, and
obligations to repurchase the identical securities sold are reflected as
liabilities in the consolidated balance sheets. The dollar amounts of securities
underlying the agreements remain in the asset accounts. The Bank sold certain
mortgage-related securities under agreements to repurchase with book values of
$212,340 and $181,024 and market values of $210,625 and $189,265 as of September
30, 1999 and 1998, respectively.
The securities underlying these agreements are delivered to a designated
safekeeping agent at the inception of the agreement.
The following provides information regarding the repurchase agreements as
of and for the years ended September 30, 1999, 1998 and 1997.
1999 1998 1997
-------- -------- --------
Weighted average interest rate
during and at the endof the period 5.73% 5.73% 5.73%
------ ------ ------
Maximum amount outstanding
at any month-end during the period $175,000 $175,000 $175,000
======== ======== ========
Average amount outstanding
during the period $175,000 $175,000 $ 82,692
======== ======== ========
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
Income tax expense consists of the following:
1999 1998 1997
------ ------ ------
Current $35,526 $34,814 $25,054
Deferred (9,039) (33) 10,637
------ ------ ------
$26,487 $34,781 $35,691
====== ====== ======
Income tax expense has been provided at effective rates of 38.2%, 39.2%,
and 40.4% for the years ended September 30, 1999, 1998 and 1997, 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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
computed at statutory rate $24,293 35.0% $31,070 35.0% $30,938 35.0%
Increases (decreases) in
taxes resulting from:
State taxes, net
of Federal income tax
benefit 2,027 2.9 3,849 4.4 4,705 5.3
Other 167 0.3 (138) (0.2) 48 0.1
------- ---- ------- ---- ------- ----
$26,487 38.2% $34,781 39.2% $35,691 40.4%
======= ==== ======= ==== ======= ====
</TABLE>
47
<PAGE>
Deferred tax expense (benefit) results from timing differences in the
recognition of revenue and expenses for tax and financial statement purposes.
The sources of these differences and the tax effect of each were as follows:
1999 1998 1997
------ ------ ------
BIF/SAIF Premium $ 9,421
Deferred loan fees and costs $ 191 $ 342 270
Accrued interest on savings 380 352 352
Allowance for loan losses 279 (1,310) (27)
Salaries and employee benefits 3 (99) (84)
Federal Home Loan Bank stock dividends 1,063 1,242 1,032
Bad debts reserve (2,502)
Foundation contribution (7,835)
Other (618) (560) (327)
------ ------ ------
$(9,039) $ (33) $10,637
====== ====== ======
The components of net deferred tax liabilities as of September 30, 1999 and 1998
are as follows:
1999 1998
------ ------
Deferred tax assets:
Deferred loan fees and costs $ 304 $ 495
Accrued interest on savings 1,025 1,405
Allowance for loan losses 1,671 1,950
Salaries and employee benefits 1,302 1,305
Allowance for losses on real estate owned 5
Foundation contribution 7,835
Other 331 314
------- -------
$ 12,468 $ 5,474
Deferred tax liabilities:
Unrealized gain on mortgage-related
securities available-for-sale $ (2,578) $ (8,755)
Federal Home Loan Bank stock dividends (9,969) (8,906)
Bad debt reserves (10,701) (13,203)
Prepaid expenses (375) (291)
Fixed assets - depreciation (560) (263)
Pension fund (328)
Other (2,064) (2,723)
------- -------
(26,247) (34,469)
------- -------
Net deferred tax liabilities $(13,779) $(28,995)
======= =======
48
<PAGE>
14. EMPLOYEE BENEFIT PLANS
Pension Plan - The Bank sponsored 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
were calculated under the Plan using various formulas based upon years of
service and compensation. The Bank's funding policy was to contribute annually
an amount intended to at least meet the minimum funding requirements of
applicable regulations.
The Bank terminated the Plan effective May 31, 1999 ceasing the accrual of
any further benefits and the contribution of any further amounts under the Plan.
The Bank has substantially distributed all of the Plan's assets to participants
in accordance with their accrued benefits and the requirements of applicable law
as of September 30, 1999.
The Company adopted the provisions of SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". SFAS No. 132 standardizes
disclosures for pension and other postretirement benefits to the extent
practicable, and was effective for the Company's financial statements for the
year ended September 30, 1999. There were no contributions to the Plan for the
year ended September 30, 1999. The following table sets forth the Plan's funded
status and amounts recognized in the Company's financial statements as of
September 30, 1999:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $10,290 $11,023
Service cost 574 515
Interest cost 604 666
Amendments (2,109)
Actuarial gain 1,991 (352)
Benefits paid (11,350) (1,562)
------- -------
Benefit obligation at end of year 10,290
------- -------
Change in plan assets:
Fair value of plan assets as beginning of year 10,523 10,367
Actual return on plan assets 827 899
Employer contribution 819
Benefits paid (11,350) (1,562)
------- -------
Fair value of plan assets at end of year 10,523
------- -------
Reconciliation of funded status:
Projected benefit obligation excess of plan assets 233
Unrecognized transition asset obligation 460
Unrecognized net actuarial loss 1,685
Unrecognized prior service cost 92
------- -------
Prepaid benefit cost 2,470
======= =======
Weighted-average assumptions as of period end:
Discount rate 5.9%
Expected return on plan assets 7.8%
Rate of compensation increase 4.0%
</TABLE>
Components of net periodic benefit cost for the years ended September 30:
1999 1998 1997
-------- -------- --------
Service cost $ 574 $ 516 $ 454
Interest cost 604 666 644
Expected return on plan assets (743) (748) (1,192)
Amortization of transition asset obligation 460 115 115
Amortization of prior service cost 200 37 37
Amortization of actuarial loss 1,375 95 704
------ ----- -----
Net periodic benefit cost $2,470 $ 681 $ 762
====== ===== =====
49
<PAGE>
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 $613, $669, and $571 for the years ended September 30, 1999,
1998 and 1997, respectively.
Employee Stock Ownership Plan
The Bank has an ESOP for the benefit of the Bank employees who meet the
eligibility requirement which includes having completed 1,000 hours of service
within a 12 month period. The ESOP Trust acquired 3,024,574 shares of common
stock in the Company's initial public offering with proceeds from a loan from
the Company.
The Bank makes cash contributions to the ESOP on an annual basis sufficient
to enable the ESOP to make the required loan payments to the Company.
The loan referred to above bears interest at a fixed rate of 5.80% with
interest payable annually and future principal and interest payable in fifteen
fixed installments of $2,991. A payment of $2,991 consisting of principal of
$2,099 and interest of $892 was paid on September 30, 1999. The loan is secured
by the shares of the stock purchased.
As the debt is repaid, 201,638 shares are released from collateral annually
at September 30 and allocated to qualified employees based on the proportion of
their compensation to total qualifying compensation. The Company accounts for
its ESOP in accordance with AICPA Statement of Position 93-6. Accordingly, the
shares pledged as collateral are reported as a reduction of stockholders' equity
in the consolidated balance sheet. As shares are committed to be released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Compensation expense related to the ESOP was $2,004 for the year
ended September 30, 1999. Dividends on unallocated ESOP shares are recorded as a
reduction of debt. There were no dividends credited to allocated ESOP shares as
of September 30, 1999.
Following is a summary of shares held in the ESOP Trust as of September 30,
1999:
Allocated shares 201,638
Unreleased shares 2,822,936
---------
Total ESOP shares 3,024,574
=========
Fair value of unreleased shares
at September 30, 1999
$ 28,144
=========
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 $1,216 and $1,299 as of September 30, 1999 and 1998,
respectively, and are accrued over the period of active employment and will be
funded by life insurance contracts.
50
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
The Bank had approximate commitments outstanding to originate and purchase
first mortgage loans as of September 30, 1999 and 1998 as follows:
1999 1998
---------- ----------
Fixed rate (interest rates ranging
from 6.00% to 8.63% and 5.88% to
9.50%, respectively, at September
30, 1999 and 1998) $ 61,400 $ 76,800
Variable rate 189,100 63,900
-------- --------
$250,500 $140,700
======== ========
As of September 30, 1999, the Bank had commitments to originate
non-mortgage loans approximating $10,720 of which approximately $563 were
fixed-rate (interest rates ranging from 7.50% to 10.25%) and $10,157 were
floating rate commitments. 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 rates ranging from 8.75% to 10.50%) and $8,332 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.
The Bank has approved, but unused, home equity lines of credit of
approximately $151,000 at September 30, 1999. Approval of lines of credit is
based upon underwriting standards that 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
$1,200 at September 30, 1999.
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
Company'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) to
risk-weighted assets (as defined), and of core capital (as defined) to adjusted
tangible assets (as defined). Management believes, as of September 30, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1999 and 1998, 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.
51
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total capital (to risk weighted
assets) $960,916 33.9% $226,843 8.0% $283,554 10.0%
Core capital (to adjusted tangible
assets) 956,758 14.6% 262,864 3.0% 328,581 5.0%
Tangible capital (to tangible assets) 956,758 14.6% 98,574 1.5% N/A N/A
Tier I capital (to risk weighted assets) 956,758 33.7% N/A N/A 170,132 6.0%
As of September 30, 1998:
Total capital (to risk weighted assets) $652,949 27.3% $191,424 8.0% $239,280 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%
A reconciliation of the Bank's equity under generally accepted accounting
principles ("GAAP") to regulatory capital amounts as of September 30, 1999 is as
follows:
Total equity as reported under GAAP $960,962
Adjustments for regulatory capital
Unrealized gains on securities (4,204)
--------
Total tangible and core capital 956,758
General loan loss reserve 4,407
--------
Total risk based capital $961,165
========
</TABLE>
52
<PAGE>
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.
The estimated fair value of the Bank's financial instruments as of
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 22,275 $ 22,275 $ 24,454 $ 24,454
Securities purchased under
agreements to resell 235,000 235,000
Investment securities held
-to-maturity 15,100 14,754 160,569 160,712
Capital Stock of Federal Home
Loan Bank 68,336 68,336 43,584 43,584
Mortgage-related securities:
Available-for-sale 1,136,776 1,136,776 747,991 747,991
Held-to-maturity 939,492 914,820 320,379 319,128
Loans held for sale 3,651 3,652 14,578 14,901
Loans receivable 4,291,288 4,157,898 3,711,152 3,954,842
Liabilities:
Deposits 3,899,565 3,843,825 3,894,180 3,917,423
Advances from Federal Home
Loan Bank 1,345,000 1,320,559 500,000 529,217
Securities sold under
agreements to repurchase 175,000 174,583 175,000 186,954
</TABLE>
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
Contract Estimated Contract Estimated
or Unrealized or Unrealized
Notional Gain Notional Gain
Amount (Loss) Amount (Loss)
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Commitments to originate and purchase
first mortgage loans
$250,500 $2,844 $140,700 $(2,867)
Commitments to originate non-mortgage
loans 10,720 (266) 8,750 (402)
</TABLE>
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 and Securities Purchased
Under Agreements to Resell
Estimated fair values of investment securities, mortgage-related
securities, securities purchased under agreements 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.
Loans Held for Sale
Estimated fair values of loans held for sale are determined based on sales
commitments or dealer quotations.
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
53
<PAGE>
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 Agreements to Repurchase
The estimated fair value of securities sold under agreements 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, 1999 and 1998. 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. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The Company was organized to serve as the holding company for the Bank and
began operations on March 31, 1999 in conjunction with the Savings Bank's
mutual-to-stock conversion and the Company's initial public offering of common
stock (Note 1). The Company's (parent company only) balance sheet as of
September 30, 1999 and the related statements of income and cash flows for the
period then ended are as follows:
54
<PAGE>
BALANCE SHEET
SEPTEMBER 30, 1999
(in thousands, except share amounts)
- --------------------------------------------------------------------------------
ASSETS
CASH AND CASH EQUIVALENTS $ 49,017
INVESTMENT IN CAPITOL FEDERAL SAVINGS BANK 960,962
DEFERRED INCOME TAXES 9,038
---------
TOTAL ASSETS $1,019,017
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES -
Income taxes payable $ 650
STOCKHOLDERS' EQUITY:
Common stock $.01 par value, 450,000,000 shares
authorized, 91,512,287 issued and outstanding 915
Additional paid-in capital 384,864
Note receivable - Employee Stock Ownership Plan (28,147)
Unearned compensation - Employee Stock Ownership Plan (28,230)
Accumulated other comprehensive income 4,204
Retained earnings 684,761
---------
Total stockholders' equity 1,018,367
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,019,017
=========
STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1999
(in thousands)
- --------------------------------------------------------------------------------
INTEREST INCOME $ 1,967
-------
OTHER EXPENSES:
Salaries and employee benefits 169
Foundation contribution 30,231
Other, net 85
Total other expense 30,485
-------
LOSS BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY (28,518)
INCOME TAX BENEFIT 10,837
-------
LOSS BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARY (17,681)
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY 60,602
-------
NET INCOME $42,921
=======
55
<PAGE>
STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1999
(in thousands)
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,921
--------
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in undistributed earnings of
subsidiary (60,602)
Decrease in fair market value of Employee
Stock Ownership Plan shares committed to
be released for allocation (12)
Contribution of common stock to Capitol
Federal Foundation 15,108
Changes in:
Income taxes payable 650
Deferred income taxes (9,038)
--------
Net cash flows used in operating activities (10,973)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in Bank (275,287)
Principal collected on notes receivable from
Employee Stock Ownership Plan 2,099
--------
Net cash flows used in investing activities (273,188)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 340,437
Cash dividends on common stock to stockholders (7,259)
--------
Net cash flows provided by financing activities 333,178
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,017
CASH AND CASH EQUIVALENTS:
Beginning of year
--------
End of year $ 49,017
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Income tax payments $ 34,294
========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES -
Common stock issued to Employee Stock Ownership Plan
in exchange for a note receivable $ 30,246
========
These statements should be read in conjunction with the other notes related to
the Company's consolidated financial statements.
56
<PAGE>
<TABLE>
<S> <C>
SHAREHOLDER INFORMATION LOCATIONS
Annual Meeting HOME OFFICE
700 S. Kansas Avenue
The Annual Meeting of Stockholders will be held at 10:00 a.m. central time, on Topeka, KS 66603
January 20, 2000, at hte Manner Conference Center, 1801 SW Western, Topeka,
Kansas. RETAIL BRANCH OFFICES
Stock Listing Emporia
602 Commercial
Capitol Federal Financial common stock is traded on teh nasdaq-Amex national
market under hte symbol "CFFN." Kansas City
7734 State Avenue
Price Range of Common Stock
Lawrence
The high and low bid quotations for the common stock as reported on the Nasdaq 1046 Vermont Street
Stock Market, as well as dividends declared per share, is reflected in the table 1025 Iowa Street
below. The information set forth in the table below was provided by the Nasdaq
Stock Market. Such information reflects interdealer prices, without retail Lenexa
mark-up, mark-down or commission and may not represent actual transactions. The 15525 W. 87th Street Parkway
stock began trading on April 1, 1999.
Manhattan
FISCAL 1999 1401 Poyntz
--------------------------------------
HIGH LOW DIVIDENDS Mission
-------------------------------------- 5251 Johnson Drive
Third Quarter 10.375 8.625 $0.10
Fourth Quarter 10.438 9.625 $0.10 Olathe
1408 E. Santa Fe
Our cash dividend payout poicy is continually reviewed by management and the 15345 W. 119th Street
Board of Directors. The Company intends to continue its policy of paying 2100 E. 151st Street
quarterly dividends; however, the payment will depend upon a number of factors,
including capital requirements, regulatory limitations, the Company's financial Overland Park
condition, results of operations and the Bank's ability to pay dividends to the 9500 Nall Avenue
Company. The Company relies significantly upon such dividends originating from 9000 W. 87th Street
the Bank to accumulate earnings for payment of cash dividends to its 13500 Metcalf
stockholders. See Note 1 to the Notes to Consolidated Financial Statements for a 10101 College Boulevard
discussion of restrictions on the Bank's ability to pay dividends. 12200 Blue Valley Parkway
At December 1, 1999, there were 91,462,287 shares of Capitol Federal
Financial common stock issued and outstanding and approximately 16,796 Prairie Village
stockholders of record. 1900 W. 75th Street
Salina
Stockholders and General Inquiries 2550 S. 9th Street
James D. Wempe, Vice President Shawnee
Capitol Federal Financial 5700 Nieman Road
700 S. Kansas Avenue 15700 Shawnee Mission Parkway
Topeka, Kansas 66603
(785) 270-6055 Topeka
email: [email protected] 1201 S. Topeka Boulevard
2100 SW Fairlawn Road
Transfer Agent 2901 S. Kansas Avenue
2865 SW Wanamaker Road
American Stock Transfer & Trust Company
40 Wall Street Wichita
New York, NY 10005 301 N. Main
(202) 936-5100 8040 E. Douglas
4020 W. Maple
10404 W. Central
4000 E. Harry
4616 E. 13th Street
8301 E. 21st Street
</TABLE>
<PAGE>
[BACK COVER]
CAPITOL
[LOGO] FEDERAL
FINANCIAL
True Blue(R) for over 100 years
SUBSIDIARIES OF THE REGISTRANT
<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
The financial statements of Capitol Federal Financial are consolidated with
those of its subsidiaries.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1999 OF CAPITOL FEDERAL
FINANCIAL 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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 22,275
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 15,100
<INVESTMENTS-MARKET> 14,754
<LOANS> 4,299,346
<ALLOWANCE> 4,407
<TOTAL-ASSETS> 6,539,315
<DEPOSITS> 3,899,505
<SHORT-TERM> 0
<LIABILITIES-OTHER> 73,236
<LONG-TERM> 1,520,000
0
0
<COMMON> 357,549
<OTHER-SE> 688,965
<TOTAL-LIABILITIES-AND-EQUITY> 6,539,315
<INTEREST-LOAN> 285,508
<INTEREST-INVEST> 100,961
<INTEREST-OTHER> 9,630
<INTEREST-TOTAL> 396,099
<INTEREST-DEPOSIT> 198,080
<INTEREST-EXPENSE> 54,950
<INTEREST-INCOME-NET> 143,069
<LOAN-LOSSES> 395
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 69,408
<INCOME-PRE-EXTRAORDINARY> 69,408
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,921
<EPS-BASIC> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 4.03
<LOANS-NON> 4,976
<LOANS-PAST> 18
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,081
<CHARGE-OFFS> 69
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,405
<ALLOWANCE-DOMESTIC> 4,405
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2
</TABLE>
