As filed with the Securities and Exchange Commission on February 1, 1999
Registration No. 333-68363
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAPITOL FEDERAL FINANCIAL
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
United States 6035 To Be Requested
(State or other jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer Identification No.)
or organization) Classification Code Number)
</TABLE>
700 Kansas Avenue, Topeka, Kansas 66603 (785) 235-1341
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
John C. Dicus, Chairman and Chief Executive Officer
Capitol Federal Financial
700 Kansas Avenue
Topeka, Kansas 66603
(785) 235-1341
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please send copies of all communications to:
James S. Fleischer, P.C.
Martin L. Meyrowitz, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
Up to 50,000,000 Shares of Common Stock
CAPITOL FEDERAL FINANCIAL
(Proposed Holding Company for Capitol Federal Savings Bank)
700 Kansas Avenue
Topeka, Kansas 66603
Capitol Federal Savings and Loan Association is changing from the mutual to
the stock form of organization. As part of this change, Capitol Federal
Financial is being formed to own all of the common stock of Capitol Federal
Savings and Loan Association , which will change its name to Capitol Federal
Savings Bank. The shares being offered to the public in this prospectus will
represent less than half of the common stock of Capitol Federal Financial. More
than half of the outstanding common stock will be given to Capitol Federal
Savings Bank MHC, a mutual holding company controlled by the members of Capitol
Federal Savings Bank.
TERMS OF THE OFFERING
An independent appraiser estimated the market value of the converted
Capitol Federal Savings Bank. Using this estimate, Capitol Federal Financial is
offering to sell to the public between 32,136,106 shares and 43,478,261 shares .
Capitol Federal Financial may increase the number of shares offered up to
50,000,000 shares, subject to Office of Thrift Supervision approval. Based on
this estimate, we are making the following offering of shares of common stock:
<TABLE>
<S> <C>
o Price Per Share $10.00
o Number of Shares
Minimum/Maximum/Maximum, as adjusted 32,136,106 to 43,478,261to 50,000,000
o Commissions and other Expenses
Minimum/Maximum/Maximum, as adjusted $5,445,652 to $6,750,000 to $7,500,000
o Net Proceeds to Capitol Federal Financial
Minimum/Maximum/Maximum, as adjusted $315,915,408 to $428,032,610 to $492,500,000
o Net Proceeds Per Share
Minimum/Maximum/Maximum, as adjusted $9.83 to $9.84 to $9.85
</TABLE>
Please refer to "Risk Factors" beginning on page 11 of this document.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any other federal agency or state securities regulator has
approved or disapproved these securities or determined if this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
For information on how to subscribe for common stock, call the Stock
Information Center at (877) 815-1820.
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
____________, 1999
<PAGE>
[MAP of Registrant's market area to be produced here.]
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this entire document carefully, including the
financial statements and the notes to the financial statements.
Important Risks in Owning Capitol Federal Financial's Common Stock
Before you decide to purchase stock, you should read the "Risk Factors"
section on pages 11 to 13 of this document.
We Are Changing Our Structure
Capitol Federal Savings is converting to a stock company. Capitol Federal
Financial will own all of the stock of Capitol Federal Savings. Some of Capitol
Federal Financial's shares will be offered for sale to the public and more than
half of its shares will be given to Capitol Federal Savings Bank MHC, a mutual
holding company to be controlled by the members of Capitol Federal Savings . We
believe that this change in structure is currently in our best interests and in
the best interests of our depositors and the communities that we serve. The
change will allow us to:
o expand our size and operations,
o better compete with commercial banks and other financial institutions,
and
o increase our equity capital base and improve our ability to raise
additional money when needed.
The Companies:
Capitol Federal Financial
700 Kansas Avenue
Topeka, Kansas 66603
Capitol Federal Financial will be the holding company for Capitol Federal
Savings when our change in structure is complete. It is not currently an
operating company and has not engaged in any business to date.
Capitol Federal Savings and Loan Association
700 Kansas Avenue
Topeka, Kansas 66603
Capitol Federal Savings is a federal mutual savings association. At
September 30, 1998, we had total assets of $5.31 billion, deposits of $3.89
billion, and total equity of $662.3 million.
3
<PAGE>
We are a community-oriented savings association serving primarily the
entire metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and
Salina, Kansas and a portion of the metropolitan area of greater Kansas City
through 24 full service and five limited service banking offices. We emphasize
residential mortgage lending, primarily originating one-to four-family mortgage
loans.
Capitol Federal Savings Bank MHC
700 Kansas Avenue
Topeka, Kansas 66603
Upon completion of our change in structure and the stock offering, Capitol
Federal Savings Bank MHC will own more than half of the outstanding shares of
Capitol Federal Financial. As long as they remain depositors of Capitol Federal
Savings, persons who had membership rights in Capitol Federal Savings as of the
date of the change in structure will continue to have these rights in Capitol
Federal Savings Bank MHC after the change in structure.
Capitol Federal Savings Bank MHC is not expected to engage in any business
activity other than holding more than half of the shares of Capitol Federal
Financial and investing any funds retained by it.
After completing our change in structure, the stock offering and a planned
contribution of shares to the Capitol Federal Foundation, we will appear as
shown below:
Total Public Shares
- -------------------------- ---------------------- -------------------
CAPITOL FEDERAL SAVINGS MINORITY STOCKHOLDERS CAPITOL FEDERAL
BANK MHC FOUNDATION
- -------------------------- ---------------------- -------------------
| | |
| 57.03% of the | 41.31% of the | 1.65% of the
| Common Stock | Common Stock | Common Stock
| | |
- --------------------------------------------------------------------------------
CAPITOL FEDERAL FINANCIAL
- --------------------------------------------------------------------------------
|
| 100% of the Common Stock
|
- --------------------------------------------------------------------------------
CAPITOL FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
The Stock Offering
We are offering between 32,136,106 and 43,478,261 shares of Capitol Federal
Financial at $10.00 per share. Because of changes in financial market conditions
before we complete the
4
<PAGE>
stock offering, the offering may increase to 50,000,000 shares without any
notice to you. If so, you will not have the chance to change or cancel your
stock order.
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc. will
assist us in selling the stock. For further information about Charles Webb &
Company's role in the offering, see "The Reorganization and Stock Issuance -
Marketing Arrangements."
How We Determined the Offering Range and the $10.00 Price Per Share
The independent appraisal by RP Financial, LC., dated as of November 20,
1998, established the offering range. This appraisal was based on our financial
condition and operations and the effect of the additional capital raised in this
offering. The $10.00 price per share was determined by our board directors and
is the price most commonly used in stock offerings involving conversions of
mutual savings institutions. RP Financial will update the appraisal before the
completion of the offering.
After completion of the change in structure and stock offering, each share
of Capitol Federal Financial common stock, including the shares given to Capitol
Federal Savings Bank MHC and the Capitol Federal Foundation, will have a book
value of $9.82, at the maximum of the offering range. This means the price paid
for each share sold in this offering will be 101.83% of the book value.
Terms of the Offering
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors who held at least $50 with us on June 30, 1997.
(2) The Capitol Federal Financial Employee Stock Ownership Plan.
(3) Depositors who held at least $50 with us on December 31, 1998.
(4) Other members of Capitol Federal Savings on ___________, 1999.
(5) Capitol Federal Savings' directors, officers and employees.
Shares of common stock not subscribed for in the subscription offering will
be offered to the general public in a direct community offering and, if
necessary, a public offering. See pages 125 to 127.
Subscription Rights
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not transfer your subscription rights. We will not accept any
stock orders that we believe involve the transfer of subscription rights.
5
<PAGE>
Payment for Shares
You may pay for your subscriptions:
(1) by personal check, official bank check or money order; or
(2) by authorizing us to withdraw money from your deposit account(s)
maintained at Capitol Federal Savings.
(3) in cash, if delivered in person at any full-service banking office of
Capitol Federal Savings, though we request that you change cash for a
check with any of the tellers at Capitol Federal Savings;
Termination of the Offering
The subscription offering will end on ______________, 1999. If all of the
shares are not subscribed for in the subscription offering and we do not get
orders for the remaining shares by _____________, 1999, we will either:
(1) promptly return any payment you made to us, with interest, or cancel
any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the extension
and of your rights to cancel or change your order. If we extend the
offering and you do not respond to the notice, then we will cancel
your order and return your payment, with interest, or cancel any
withdrawal authorization you gave us.
Stock Information Center
If you have any questions regarding the offering or our change in
structure, please call the Stock Information Center at (877) 815-1820.
Capital Federal Savings has a website (http://www.capfed.com). Upon
completion of the subscription offering on March __, 1999, the website will
provide a current update on the status of the offering.
How We Will Use the Proceeds Raised from the Sale of Common Stock
We intend to use the net proceeds received from the stock offering as
follows.
o 8.0%, or $34.8 million at the maximum of the offering range, will be
loaned to the employee stock ownership plan to purchase common stock.
o $50.0 million will be retained by Capitol Federal Financial and placed
in short-term investments, which may later be used as a possible
source of funds for the payment of dividends to stockholders, for
stock repurchases and for other general corporate purposes.
6
<PAGE>
o 4%, or $17.4 million at the maximum of the offering range, will be
contributed in cash to the Capitol Federal Foundation.
o The remainder, or $325.8 million at the maximum of the offering range,
will be used to buy all of the capital stock of Capitol Federal
Savings.
We intend to use the proceeds at Capitol Federal Savings primarily to
increase our investment and mortgage-related securities.
Benefits to Management from the Offering
We intend to establish the Capitol Federal Financial Employee Stock
Ownership Plan which will purchase 8% of the shares sold in this offering. A
loan from Capitol Federal Financial to the plan, funded by a portion of the
proceeds from this offering, will be used to purchase these shares. If shares
are not available for purchase by the employee stock ownership plan in the
subscription offering, then the plan will purchase the shares in the open
market. The employee stock ownership plan will provide a retirement benefit to
all employees eligible to participate in the plan.
We also intend to adopt a stock option plan and a restricted stock plan for
the benefit of directors, officers and employees. If we adopt the restricted
stock plan, some of these individuals will be awarded stock at no cost to them.
As a result, both the employee stock ownership plan and the restricted stock
plan will increase the voting control of management without a cash outlay.
The following table presents the total value of the shares of common stock,
at the maximum of the offering range, which would be acquired by the employee
stock ownership plan and the total value of all shares available for award and
issuance when we grant awards under the restricted stock plan. The table assumes
that the value of the shares is the same as the sales price of the shares in the
offering. The table does not include a value for the options because that value
will be equal to the fair market value of the common stock on the day that the
options are granted. As a result, financial gains can be realized under an
option only if the market price of common stock increases.
Percentage of
Estimated Shares Sold
Value of Shares in the Offering
Employee Stock Ownership Plan..... $34,782,608 8.0%
-----------
Restricted Stock Awards........... 17,391,304 4.0
Stock Options..................... --- 10.0
Total........................ $52,173,912 22.0%
=========== ====
For a further discussion of benefits to management, see "Management."
7
<PAGE>
We Intend to Contribute a Total of $34.8 Million in Cash and Stock to a New
Charitable Foundation
To continue our long-standing commitment to our local communities, we
intend to establish a charitable foundation, the Capitol Federal Foundation, and
to fund the foundation with shares of our common stock and cash equal to a total
of 8% of the shares sold in this offering. Based on the maximum amount of shares
offered, we will issue an additional 1,739,130 shares to the foundation and make
a cash contribution of $17.4 million to the foundation. We plan for the
foundation to support charitable causes in Capitol Federal Savings' primary
market areas. Charitable contributions by Capitol Federal Savings totaled
$210,000 in 1996, $253,000 in 1997 and $301,000 in 1998. If we do establish the
foundation, then the value of the common stock will be lower than if the
offering was completed without the foundation. For a further discussion of the
financial impact of the foundation, see "Risk Factors - The establishment of
Capitol Federal Foundation will reduce our earnings," "Pro Forma Data" and
"Comparison of Valuation and Pro Forma Information With No Foundation."
We Plan to Pay a Quarterly Cash Dividend
We currently plan to pay a quarterly cash dividend with an annualized rate
of $.40 per share, starting one quarter after the completion of our change in
structure and stock offering. Future dividends are not guaranteed and will
depend on our ability to pay them. We will not pay or take any steps to pay a
return of capital distribution for one year following the stock offering. See
page 21.
The Common Stock Will be Traded on the Nasdaq National Market
We expect our common stock to be traded on the Nasdaq National Market under
the symbol "CFFN." However, persons purchasing shares may not be able to sell
their shares when they want to, or at a price equal to or above $10.00.
8
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial Condition
Data" and "Selected Operations Data" for, and as of the end of, each of the
years ended September 30 is derived from our audited financial statements. The
following information is only a summary and you should read it in conjunction
with our financial statements and notes beginning on page F-2. Fiscal 1996
results include the effect of a one-time Savings Association Insurance Fund
recapitalization assessment of approximately $24.2 million.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ------------ ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.................................... $5,314,901 $4,923,657 $4,453,672 $4,350,293 $4,009,047
Loans receivable, net........................... 3,710,252 3,322,102 2,944,906 2,751,634 2,288,472
Securities purchased under agreement to resell.. 235,000 --- --- --- ---
Investment securities, held-to-maturity......... 160,569 585,394 717,348 671,227 691,355
Mortgage-related securities:
Available-for-sale, at market value.......... 747,991 754,179 607,738 --- ---
Held-to-maturity............................. 320,379 120,007 17,006 771,163 884,868
Federal Home Loan Bank stock.................... 43,584 40,398 37,752 35,415 35,415
Deposits........................................ 3,894,180 3,787,123 3,740,718 3,673,630 3,447,628
Borrowings...................................... 675,000 450,000 75,000 75,000 ---
Equity.......................................... 662,332 604,786 547,422 515,882 485,508
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ---------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest and dividend income........... $363,644 $330,097 $306,389 $275,467 $241,793
Total interest expense....................... 234,897 207,457 200,401 193,197 151,358
--------- --------- --------- --------- ---------
Net interest income....................... 128,747 122,640 105,988 82,270 90,435
Provision (recovery) for loan losses......... 3,362 56 865 --- (1,986)
--------- --------- --------- --------- ---------
Net interest income after provision
(recovery) for loan losses.............. 125,385 122,584 105,123 82,270 92,421
Fees and service charges..................... 8,398 7,450 6,966 4,898 4,787
Gain on sales of loans, mortgage-related
securities and investment securities........ --- --- --- --- 3,972
Other non-interest income.................... 4,455 3,637 4,431 6,329 5,929
--------- --------- --------- --------- ---------
Total non-interest income................. 12,853 11,087 11,397 11,227 14,688
Total non-interest expense................ 49,466 45,276 71,505 43,266 42,914
--------- --------- --------- --------- --------
Income before income tax expense.......... 88,772 88,395 45,015 50,231 64,195
Income tax expense........................... 34,781 35,691 18,393 19,857 24,359
--------- --------- --------- --------- ---------
Net income................................ $ 53,991 $ 52,704 $ 26,622 $ 30,374 $ 39,836
========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets ..................... 1.05% 1.12% 0.60% 0.73% 1.01%
Return on average equity ..................... 8.52 9.15 5.01 6.07 8.56
Interest rate spread information:
Average during period........................ 1.87 1.95 1.71 1.13 1.54
End of period................................ 1.83 1.97 1.86 1.39 1.46
Net interest margin........................... 2.55 2.66 2.46 2.01 2.33
Ratio of operating expense to average
total assets................................. 0.97 0.97 1.62 1.04 1.08
Ratio of average interest-earning assets to
average interest-bearing liabilities......... 1.15 1.15 1.14 1.14 1.13
Efficiency ratio.............................. 35.80 34.63 62.51 47.43 41.74
Asset Quality Ratios:
Non-performing assets to total assets at
end of period................................. 0.15 0.18 0.17 0.41 0.21
Non-performing loans to total loans............ 0.17 0.18 0.14 0.15 0.26
Allowance for loan losses to non-performing
loans......................................... 79.96 26.83 39.67 32.35 65.40
Allowance for loan losses to loans
receivable, net............................... 0.13 0.05 0.05 0.05 0.17
Capital Ratios:
Equity to total assets at end of period........ 12.46 12.28 12.29 11.86 12.11
Average equity to average assets............... 12.38 12.13 12.02 11.98 11.75
Other Data:
Number of full-service offices................. 24 24 23 23 23
Number of limited service offices.............. 5 3 2 1 1
</TABLE>
10
<PAGE>
RISK FACTORS
You should consider these risk factors, in addition to the other
information in this Prospectus, before deciding whether to make an investment in
this stock.
Increasing interest rates may hurt our profits.
To be profitable, we have to earn more money in interest than we pay to our
depositors and lenders in interest. If interest rates rise, our net interest
income could be negatively affected if interest paid on interest-bearing
liabilities, such as deposits and borrowings, increases more quickly than
interest received on interest-earning assets, such as loans, mortgage-related
and investment securities. This would cause income to go down. In addition,
rising interest rates may hurt our income because they may reduce the demand for
loans and the value of our mortgage-related and investment securities. For a
further discussion of how changes in interest rates could impact us, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk."
Our use of proceeds from this offering to buy mortgage-related securities could
increase our risk that changes in market interest rates will result in lower
income.
We intend to use the net proceeds from the stock sale to purchase
adjustable rate mortgage-related securities with interest rates that fluctuate
with the general trends in the U.S. bond market. These rates could decrease,
causing us to earn less on these assets in the future.
In addition to investing the net stock proceeds, we intend to continue our
current growth strategy by purchasing up to an additional $3.00 billion of
adjustable rate mortgage-related securities, from time to time over the next
three years. We would fund these purchases with long-term fixed rate borrowings
at rates which would increase our net interest income. If market interest rates
change substantially, our net interest income could be reduced.
Capitol Federal Savings Bank MHC will own more than half of the stock of Capitol
Federal Financial. This means that Capitol Federal Savings Bank MHC will have
enough votes to control what happens on most matters put to a vote of
stockholders.
Capitol Federal Savings Bank MHC is required by the Office of Thrift
Supervision to own more than half of the common stock of Capitol Federal
Financial. The board of directors of Capitol Federal Savings Bank MHC will have
the power to vote this stock. Depositors of Capitol Federal Savings, who elect
the board of Capitol Federal Savings Bank MHC, have generally assigned this
right to the board. Therefore, the board of Capitol Federal Savings Bank MHC
will control the results of most matters put to a vote of stockholders of
Capitol Federal Financial. We cannot assure you that the votes cast by Capitol
Federal Savings Bank MHC will be in your personal best interests. For more
information regarding your lack of voting control over Capitol Federal
Financial, see "Capitol Federal Savings Bank MHC" and "Restrictions on
Acquisition of the Stock Holding Company and the Bank."
11
<PAGE>
After the change in structure and stock offering, our net income-to-equity ratio
will be low compared to other companies and our compensation expenses will
increase. This could negatively impact the price of our stock.
The proceeds we will receive from the sale of our common stock will
significantly increase our capital and it will take us time to fully use it in
our business operations. Our compensation expenses will also increase because of
the costs associated with the employee stock ownership and stock-based incentive
plans. Therefore, we expect our return on equity to be below our historical
level and less than our regional and national peers. This low return on equity
could hurt our stock price. We cannot guarantee when or if we will achieve
returns on equity that are comparable to industry peers. For further information
regarding pro forma income and expenses, see "Pro Forma Data."
The establishment of the Capitol Federal Foundation will reduce our earnings.
Capitol Federal Financial intends to contribute to the Capitol Federal
Foundation shares of its common stock equal to 4% of the shares sold in the
stock offering plus cash equal to the value of 4% of the stock sold in the stock
offering. This contribution will decrease our operating results for the year
ending September 30, 1999. For a further discussion regarding the effect of the
contribution to the foundation, see "Pro Forma Data."
The contribution to the Capitol Federal Foundation means that your total
ownership will be 1.65% less after we make the contribution.
If you purchase shares, then your voting interests in Capitol Federal
Financial will be reduced by 1.65% when we contribute our shares to the
foundation. For a further discussion regarding the effect of the contribution to
the foundation, see "Pro Forma Data," "Comparison of Valuation and Pro Forma
Information With No Foundation" and "The Reorganization and Stock Issuance -
Establishment of the Foundation."
We intend to grant stock options and restricted stock to the board and
management following the change in structure and stock offering which could
further reduce your voting interest.
If approved by a vote of the shareholders, excluding the shares owned by
Capitol Federal Savings Bank MHC, we intend to establish a stock option plan
with a number of shares equal to 10% of the shares issued to the public and a
restricted stock plan with a number of shares equal to 4% of the shares issued
to the public for the benefit of directors, officers and employees of Capitol
Federal Financial and Capitol Federal Savings. Stock options are paid for by the
recipient in an amount equal to the fair market value of the stock on the date
of the grant. This payment is not made until the option is actually exercised by
the recipient. Restricted stock is a bonus paid in the form of stock rather than
cash, and is not paid for by the recipient. Awards under these plans will reduce
the voting interests of all stockholders. For further discussion regarding these
plans, see "Pro Forma Data" and "Management - Benefits - Other Stock Benefit
Plans."
12
<PAGE>
If our computer systems do not properly work on January 1, 2000, our business
operations will be disrupted.
If our computer systems and the computer systems operated by our third
party vendors do not properly work on January 1, 2000, then we could experience
a disruption in our business operations. As a result, our financial condition
and results of operations could be weakened. In addition, if we do not do a good
job preparing for the January 1, 2000 date change, then regulators may take
action against us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Issues."
We intend to waive cash dividends which would otherwise be paid by Capitol
Federal Financial to Capitol Federal Savings Bank MHC. This could reduce the
number of shares you receive if we ever do a full conversion and eliminate the
mutual holding company.
For more information on how this would affect your ownership interest, see
"The MHC May Consider Converting to Stock Form in the Future."
13
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The selected financial and operating data presented below at December
31,1998 and for the three months ended December 31, 1998 and 1997 are unaudited.
In the opinion of management, all adjustment (consisting only of normal
recurring accruals) necessary for a fair presentation have been included. The
results of operations and other data for the three months ended December 31,
1998, are not necessarily indicative of the results of operations for the fiscal
year ending September 30, 1999.
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------------------
(In Thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total Assets.................................................. $5,365,365 $5,314,901
Loans Receivable, net......................................... 3,760,273 3,710,252
Securities Purchased under Agreement to Resell................ 144,851 235,000
Investment Securities, held to maturity....................... 10,100 160,569
Mortgage related securities:
Available-for-sale, at market value....................... 1,099,907 747,991
Held-to-maturity.......................................... 181,460 320,379
Federal Home Loan Bank stock.................................. 43,584 43,584
Deposits...................................................... 3,956,235 3,894,180
Borrowings.................................................... 675,000 675,000
Equity........................................................ 670,045 662,332
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------------
1998 1997
--------------- --------------
(In Thousands)
<S> <C> <C>
Selected Operations Data:
Total interest income................................... $ 91,418 $ 90,194
Total interest expense.................................. 60,211 57,664
Net interest income................................ 31,207 32,530
Fees and service charges................................ 2,153 2,235
Other non-interest income............................... 955 1,096
Total non-interest income.......................... 3,108 3,331
Total non-interest expense......................... 12,269 11,324
Income before income tax expense................... 22,046 24,537
Income tax expense...................................... 8,554 9,815
Net income......................................... $ 13,492 $ 14,722
============ ==========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
----------------------------
1998 1997
------------ -------------
<S> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets.................................... 1.04% 1.25%
Return on average equity.................................... 8.37% 9.99%
Interest rate spread information:
Average during period..................................... 1.90% 1.99%
End of period............................................. 1.94% 1.89%
Net interest margin......................................... 1.79% 1.93%
Ratio of operating expense to average total assets.......... 0.95% 0.96%
Ratio of average interest-earning assets to average
interest-bearing liabilities.............................. 1.14 1.13
Efficiency ratio............................................ 36.50% 32.33%
Asset Quality Ratios:
Non-performing assets to total assets at end of period...... 0.14% 0.14%
Non-performing loans to total loans......................... 0.15% 0.15%
Allowance for loan losses to non-performing loans........... 88.10% 31.98%
Allowance for loan losses to loans receivable, net.......... 0.13% 0.05%
Capital Ratios:
Equity to total assets at end of period..................... 12.49% 12.42%
Average equity to average assets............................ 12.45% 12.48%
Other Data:
Number of full service offices.............................. 25 24
Number of limited service offices........................... 5 3
</TABLE>
Capital Requirements
The following table sets forth the Bank's historical compliance with its
capital requirements at December 31, 1998. See "Regulation - Regulatory Capital
Requirements".
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------
Amount Percent
------------- --------------
<S> <C> <C>
Tangible Capital
Actual................................. $662,691 12.28%
Required............................... 80,978 1.50%
Excess................................. 581,713 10.78%
Core Capital
Actual................................. $662,691 12.28%
Required............................... 161,956 3.00%
Excess................................. 500,735 9.28%
Risk-based Capital
Actual................................. $667,674 27.71%
Required............................... 193,050 8.00%
Excess................................. 474,624 19.71%
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL
INFORMATION
Comparison of Financial Condition at December 31, 1998 and September 30, 1998
Total assets at December 31, 1998 were $5.36 billion compared to $5.31
billion at September 30, 1998, an increase of $50.5 million. The primary factor
in this increase was a $213.0 million increase in mortgage-related securities
and a $50.0 million increase in loans. These increases were partially offset by
a $240.6 million decrease in investment securities. Investment securities
decreased from $395.6 million at September 30, 1998 to $155.0 million at
December 31, 1998 as a result of maturities and call options that were exercised
on securities.
Total deposits of the Bank increased by $62.1 million from $3.89 billion at
September 30, 1998 to $3.95 billion at December 31, 1998. The increase was
primarily due to interest credited to accounts of $42.9 million.
Total equity at December 31, 1998 was $670.0 million compared to $662.3
million at September 30, 1998. This is an increase of $7.7 million or 1.2%. Net
earnings of $13.5 million for the three months ended December 31, 1998 were
offset by a $5.8 million decrease in unrealized gain value of securities
available for sale, net of deferred income taxes.
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
December 31, 1997
General. Net income for the three months ended December 31, 1998 was $13.5
million compared to $14.7 million for the three months ended December 31, 1997.
Net interest income decreased $1.3 million or 4.1% for the three months ended
December 31, 1998 compared to the same period in 1997. The decrease in net
interest income occurred because the rate earned on the loan portfolio decreased
32 basis points while the rate paid on deposits only decreased 18 basis points,
causing a net reduction in the net interest spread.
Average interest-earning assets for the three months ended December 31,
1998 increased 7.14% to $5.25 billion. The increase was due primarily to a
$361.4 million increase in the average balance of mortgage-related securities
and a $379.6 million increase in the average balance of loans. Average
interest-bearing liabilities increased 7.37% to $4.60 billion compared to the
three months ended December 31, 1997. The increase is the result of additional
borrowings from the FHLB of $225 million and increased average deposit balances.
The net interest spread decreased 9 basis point from 1.99% for the three months
ended December 31, 1997 to 1.90% for the three months ended December 31, 1998.
Interest Income. Interest income for the three months ended December 31,
1998 was $91.4 million compared to $90.2 million for the three months ended
December 31, 1997. This is an increase of $1.2 million or 1.4%. The increase in
interest income was primarily the result of growth in average interest-earning
assets from $4.90 billion for the three months ended December 31, 1997 to $5.25
billion for the three months ended December 31, 1998. The yield on
interest-earning assets for the three months ended December 31, 1998 decreased
to 7.12%
16
<PAGE>
compared to 7.41% for the same period in 1997. The decrease in average yield
partially offset the increase in interest income due to volume.
Interest Expense. Interest expense for the three months ended December 31,
1998 was $60.2 million as compared to $57.7 million for the three months ended
December 31, 1997. This is an increase of $2.5 million or 4.4%. The increase in
interest expense was primarily the result of growth in average interest-bearing
liabilities from $4.28 billion for the three months ended December 31, 1997 to
$4.60 billion for the three months ended December 31, 1998. The rate paid on
average interest-bearing liabilities for the three months ended December 31,
1998 decreased to 5.18% compared to 5.35% for the same period in 1997, which
partially offset the increase in interest expense due to volume.
Non-interest Income. Non-interest income for the three months ended
December 31, 1998 was $3.1 million compared to $3.3 million for the three months
ended December 31, 1997. This is a decrease of $223,000 or 6.7%. The decrease
was due to a $90,000 reduction in service fee income and a total of $169,000 in
reduction in miscellaneous other non-operating income.
Non-interest Expense. Non-interest expense was $12.3 million for the three
months ended December 31, 1998 compared to $11.3 million for the three months
ended December 31, 1997. This is an increase of $945,000 or 8.3%. Compensation
and benefits expense increased to $6.4 million for the three months ended
December 31, 1998 compared to $6.0 million for the three months ended December
31, 1997. This is a $350,000 or 5.8% increase. The increase was due to the
addition of forty-eight full-time equivalent employees over the year resulting
principally from the opening of 2 limited service offices and one full-service
office. Office occupancy expense increased $192,000 over the same period of the
previous year due to the opening of new facilities and normal maintenance on
existing facilities. Fees paid to outside service providers increased $173,000
in the quarter ended December 31, 1998 compared to the quarter ended December
31, 1997.
Income Taxes. Income taxes for the three months ended December 31, 1998
were $8.5 million compared to $9.8 million for the three months ended December
31, 1997. This is a decrease of $1.3 million or 12.8%. The reduction in tax
expense is due to lower earnings and a reduction of 2.0% in the tax rate for the
State of Kansas.
CAPITOL FEDERAL FINANCIAL
Capitol Federal Financial (the "Stock Holding Company") will be
incorporated under Federal law to hold all of the stock of Capitol Federal
Savings Bank (the "Bank"). The Stock Holding Company has applied for the
approval of the Office of Thrift Supervision ("OTS") to become a savings and
loan holding company and will be subject to regulation by that agency. After we
complete the stock sale, the Stock Holding Company will be a unitary savings and
loan holding company. See "Regulation - The Stock Holding Company." The Stock
Holding Company will have no significant assets other than all of the
outstanding shares of common stock of the Bank, the part of the net proceeds it
keeps and its loan to the Capitol Federal Financial Employee Stock Ownership
Plan ("ESOP"). The Stock Holding Company will have no
17
<PAGE>
significant liabilities. See "How We Intend to Use the Proceeds." Initially, the
management of the Stock Holding Company and the Bank will be substantially the
same and the Stock Holding Company will use the offices of the Bank. The Stock
Holding Company intends to utilize the support staff of the Bank from time to
time and will pay the Bank for this expense. If the Stock Holding Company
expands or changes its business in the future, we may hire our own employees.
We believe the proposed mutual holding company structure will give us more
flexibility to change our business activities by forming new companies which we
own, or by buying other companies, including other financial institutions and
financial services companies. We do not have any current plans to do these
things. The Stock Holding Company intends to pay for its business activities
with the proceeds it keeps from the stock sale and the money we earn from
investing the proceeds, as well as from dividends from the Bank. See "Our Policy
Regarding Dividends."
The principal executive offices of Capitol Federal Financial will be
located at 700 Kansas Avenue, Topeka, Kansas 66603, and its telephone number is
(785) 235-1341.
CAPITOL FEDERAL SAVINGS BANK
The Bank is a federally chartered and insured mutual savings bank with 24
full service offices and five limited service offices. At September 30, 1998,
the Bank had total assets of $5.31 billion, total deposits of $3.89 billion and
equity of $662.3 million. For more information regarding the business and
operations of the Bank, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business of the Bank."
The Bank is examined and regulated by the OTS, its primary federal
regulator. The Bank is also regulated by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is required to have certain reserves set by the
Federal Reserve Board and is a member of the Federal Home Loan Bank ("FHLB") of
Topeka, which is one of the 12 regional banks in the FHLB System.
The executive offices of Capital Federal Savings Bank are located at 700
Kansas Avenue, Topeka, Kansas 66603, and its telephone number is (785) 235-1341.
CAPITOL FEDERAL SAVINGS BANK MHC
As part of the restructuring of the Bank pursuant to the Plan of
Reorganization and Stock Issuance Plan (the "Reorganization"), the Bank will
organize the Capitol Federal Savings Bank MHC ("MHC") as a federal mutual
holding company . As long as they remain depositors of the Bank, persons with
membership or liquidation rights in the Bank as of the date of the
Reorganization will continue to have these rights in the MHC after the
Reorganization. Borrowers whose loans were outstanding on January 6, 1993 have
membership rights in the Bank and will have membership rights in the MHC after
the Reorganization as long as their loans
18
<PAGE>
remain outstanding. Members of the MHC, consisting solely of depositors and
certain borrowers of the Bank, will have the authority to elect the board of
directors of the MHC .
The MHC's principal assets will be the shares of common stock, par value
$.01 per share of Capitol Federal Financial ("Common Stock") received in the
Reorganization and $100,000 contributed by the Bank as its initial
capitalization. Initially, the MHC does not intend to conduct any business
except to own a majority of the Common Stock of the Stock Holding Company and
invest any money it has. The MHC will be a mutual corporation chartered under
federal law and regulated by the OTS. The MHC will be subject to the limitations
and restrictions imposed on savings and loan holding companies by the Home
Owners' Loan Act ("HOLA"). See "Regulation - The Mutual Holding Company."
The executive offices of Capitol Federal Savings Bank MHC will be located
at 700 Kansas Avenue, Topeka, Kansas 66603, and its telephone number will be
(785) 235-1341.
HOW WE INTEND TO USE THE PROCEEDS
Although the actual net proceeds from the sale of the shares of Common
Stock cannot be determined until the Reorganization and Stock Issuance is
completed, it is presently anticipated that the net proceeds from the sale of
the shares of Common Stock will be between $315.9 million and $428.0 million and
up to $492.5 million assuming an increase in the estimated value of the Common
Stock sold in the Offerings, ranging from $321,361,060 to $434,782,610 (the
"Estimated Offering Range") by 15%. See "Pro Forma Data" and "The Reorganization
and Stock Issuance - Stock Pricing and Number of Shares to be Issued" as to the
assumptions used to arrive at such amounts.
The Stock Holding Company will retain $50.0 million of the net
Reorganization proceeds and will purchase all of the capital stock of the Bank
to be issued in the Reorganization in exchange for the remaining Reorganization
proceeds, net of Reorganization-related expenses and the loan to be made to the
ESOP. The Stock Holding Company intends to use a portion of the net proceeds to
make a loan directly to the ESOP to enable the ESOP to purchase up to 8.0% of
the shares of Common Stock sold in the offering of between 32,136,106 and
50,000,000 shares of Capitol Federal Financial common stock at $10.00 per share
through the Subscription Offering, the Community Offering and the Public
Offering (the "Offerings"). Based upon the issuance of 32,136,106 shares of
Common Stock and 43,478,261 shares of Common Stock at the minimum and maximum of
the Estimated Offering Range, respectively, the loan to the ESOP would be $25.7
million and $34.8 million, respectively. See "Management - Benefits - Employee
Stock Ownership Plan." The remaining net proceeds retained by the Stock Holding
Company initially may be used to invest in U.S. Government and federal agency
securities of various maturities, mortgage-related or other securities, deposits
in either the Bank or other financial institutions, or a combination thereof.
The net proceeds retained by the Stock Holding Company may ultimately be used
to:
o support the Bank's lending activities;
19
<PAGE>
o repay borrowings in the ordinary course; or
o support the future expansion of operations through the establishment
of additional banking offices or other customer facilities or through
acquisitions of other financial institutions or branch offices,
although no such acquisition transactions are specifically being
considered at this time.
The net proceeds from the Offerings may also be used for other business and
investment purposes, including the payment of regular or special cash dividends,
possible repurchases of the Common Stock or returns of capital. The Stock
Holding Company and the Bank have committed however, not to take any action to
further the payment of any return of capital on the Common Stock during the
one-year period subsequent to consummation of the Reorganization. Management of
the Stock Holding Company may consider expanding or diversifying, as such
opportunities become available. The Stock Holding Company and the Bank have
determined to retain only $50.0 million of the net proceeds at the Stock Holding
Company level.
Following the six-month anniversary of the completion of the
Reorganization, to the extent permitted by the OTS and based upon then existing
facts and circumstances, the Stock Holding Company's Board of Directors may
determine to repurchase shares of Common Stock, subject to any applicable
statutory and regulatory requirements. Such facts and circumstances may include
but not be limited to:
o market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and an
improvement in the Stock Holding Company's return on equity;
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and
o any other circumstances in which repurchases would be in the best
interests of the Stock Holding Company and its stockholders.
Any stock repurchases will be subject to the determination of the Stock Holding
Company's Board of Directors that the Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases.
The portion of the net proceeds used by the Stock Holding Company to
purchase the capital stock of the Bank will be added to the Bank's general funds
to be used for general corporate purposes, including increased lending
activities and to support the expansion of the Bank's wholesale leverage
strategy, which entails the purchase of adjustable rate mortgage-related
securities funded by fixed rate borrowings. See "Risk Factors - Our use of
proceeds from this offering to buy mortgage-related securities could increase
our risk that changes in market interest rates will result in lower income."
While the amount of net proceeds received by the Bank will further strengthen
the Bank's capital position, which already
20
<PAGE>
substantially exceeds all regulatory requirements, it should be noted that the
Bank is not reorganizing primarily to raise capital. After the Reorganization
and Stock Issuance, based upon the maximum of the Estimated Offering Range, the
Bank's tangible capital ratio will be approximately 16.67%. As a result, the
Bank will continue to be a well-capitalized institution.
The net proceeds may vary because total expenses of the Reorganization and
Stock Issuance may be more or less than those estimated. The net proceeds will
also vary if the number of shares to be issued in the Reorganization and Stock
Issuance is adjusted to reflect a change in the estimated pro forma market value
of the Bank. Payments for shares made through withdrawals from existing deposit
accounts at the Bank will not result in the receipt of new funds for investment
by the Bank but will result in a reduction of the Bank's interest expense and
liabilities as funds are transferred from interest-bearing certificates or other
deposit accounts.
OUR POLICY REGARDING DIVIDENDS
Following consummation of the Reorganization, the Board of Directors of the
Stock Holding Company intends to pay quarterly cash dividends on the Common
Stock, beginning after the first quarter following completion of the
Reorganization and Stock Issuance. The initial annual dividend rate to be paid
on the Common Stock will be at an annualized rate of $.40 per share. The
continued payment of dividends will depend upon a number of factors, including
capital requirements, the Stock Holding Company's and the Bank's financial
condition and results of operations, tax considerations, statutory and
regulatory limitations, and general economic conditions. No assurances can be
given that any dividends will be paid or that, if paid, will not be reduced or
eliminated in future periods. If the MHC does not waive the receipt of any
dividends from the Stock Holding Company, the amount of dividends payable by the
Stock Holding Company to public stockholders may be reduced. Special cash
dividends, stock dividends or returns of capital may, to the extent permitted by
OTS policy and regulations, be paid in addition to, or in lieu of, regular cash
dividends. The Stock Holding Company intends to file consolidated tax returns
with the Bank. Accordingly, it is anticipated that any cash distributions made
by the Stock Holding Company to its stockholders would be treated as cash
dividends and not as a non-taxable return of capital for federal and state tax
purposes.
Dividends from the Stock Holding Company will depend, in large part, upon
receipt of dividends from the Bank, because the Stock Holding Company initially
will have no source of income other than dividends from the Bank, earnings from
the investment of proceeds from the sale of shares of Common Stock retained by
the Stock Holding Company, and interest payments with respect to the Stock
Holding Company's loan to the ESOP. A regulation of the OTS imposes limitations
on "capital distributions" by savings institutions. See "Regulation -
Limitations on Dividends and Other Capital Distributions."
Any payment of dividends by the Bank to the Stock Holding Company which
would be deemed to be drawn out of the Bank's bad debt reserves, would require a
payment of taxes at the then-current tax rate by the Bank on the amount of
earnings deemed to be removed from the reserves for such distribution. The Bank
does not intend to make any distribution to the Stock Holding Company that would
create such a federal tax liability. See "Taxation."
21
<PAGE>
THE MHC INTENDS TO WAIVE ANY DIVIDENDS
FROM CAPITOL FEDERAL FINANCIAL
The Board of Directors of the MHC will determine whether the MHC will
waive the receipt of dividends declared by the Stock Holding Company each time
the Stock Holding Company declares a dividend. The Board of Directors of the MHC
presently intends to waive the receipt of dividends declared by the Stock
Holding Company. OTS regulations require the MHC to notify the OTS of any
proposed waiver of the9 right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not to object to any such waiver if:
o the mutual holding company's board of directors determines that such
waiver is consistent with such directors' fiduciary duties to the
mutual holding company's members;
o for as long as the subsidiary holding company is controlled by the
mutual holding company, the dollar amount of dividends waived by the
mutual holding company is considered to be a restriction on the
stockholders' equity of the subsidiary holding company, which
restriction, if material, is disclosed in the public financial
statements of the subsidiary holding company as a note to the
financial statements;
o the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding
company, and, in accordance with Statement of Financial Accounting
Standards No. 5, where the subsidiary holding company determines that
the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability;
o the amount of any waived dividend is considered as having been paid by
the subsidiary holding company in evaluating any proposed dividend
under OTS capital distribution regulations; and
o in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion
transaction takes into account the amount of the dividends waived by
the mutual holding company.
In addition, the OTS has announced that the dividends waived by the mutual
holding companies will affect the ratio pursuant to which shares of common stock
of a subsidiary holding company held by all of the stockholders who purchase
shares of Common Stock other than the mutual holding company ("Minority
Stockholders") would be exchanged for shares of common stock of the converted
holding company in a conversion transaction. The OTS will not permit a pro rata
exchange if the mutual holding company has waived the receipt of cash dividends
by the subsidiary holding company. Accordingly, the precise treatment of any
conversion transaction cannot be assured. Any waiver of dividends by the MHC is
likely to result in an adjustment to the
22
<PAGE>
ratio pursuant to which shares of Common Stock are exchanged for shares of the
converted MHC in a conversion transaction, which adjustment will have the effect
of diluting Minority Stockholders' interests. The Board of Directors of the MHC
has no intention of converting to stock form. See "The MHC May Consider
Converting to Stock Form in the Future."
The MHC's Board of Directors may conclude that a dividend waiver by the
MHC, which permits retention of capital by the Stock Holding Company, is in the
best interest of the MHC's members because, among other reasons:
o the MHC has no need for the dividend for its business operations;
o the cash that would be received could be invested by the Stock Holding
Company more effectively; and
o such waiver preserves the retained earnings of the MHC through its
principal asset (the Stock Holding Company), which would be available
for distribution in the unlikely event of a voluntary liquidation of
the Stock Holding Company after satisfaction of claims of depositors
and other creditors.
The Board of Directors may consider other factors in determining whether such
waiver is consistent with its fiduciary duties to members of the MHC. There is
no assurance that the MHC will waive the receipt of the dividends.
Immediately after consummation of the Reorganization and the Stock
Issuance, it is expected that the MHC's operations will consist of activities
relating to its investment in, and control of, a majority of the shares of
Common Stock of the Stock Holding Company, maintenance of books and records
relating to members of the MHC and investing funds retained by it. In the
future, the MHC may accept dividends paid by the Stock Holding Company to be
used for the payment of operating expenses and other purposes, including
purchasing Common Stock from time to time in the open market or from the Stock
Holding Company. There can be no assurance that the MHC will accept dividends
paid by the Stock Holding Company, or if such dividends are accepted, that the
MHC will purchase shares of Common Stock in the open market. Any purchases of
Common Stock other than from the MHC will increase the percentage of the Stock
Holding Company's outstanding shares of Common Stock held by the MHC and
increase the number of shares eligible to be sold in any subsequent offering or
mutual to stock conversion of the MHC. Any waiver of dividends by the MHC is
likely to result in an adjustment to the ratio pursuant to which shares of
Common Stock are exchanged for shares of the converted MHC in the event of a
conversion transaction, which adjustment will have the effect of diluting
Minority Stockholders' percentage ownership interest in the converted MHC's
shares. See "The MHC May Consider Converting to Stock Form in the Future."
23
<PAGE>
THE MHC MAY CONSIDER CONVERTING TO
STOCK FORM IN THE FUTURE
As long as the MHC remains a mutual holding company, it must own at least a
majority of the outstanding voting stock of the Stock Holding Company. OTS
regulations specifically authorize mutual holding companies to convert to stock
form and to exchange stock issued by the converted holding company for stock
issued by a subsidiary holding company. OTS regulations require that such
exchange be "fair and reasonable" but do not specify the basis for such
exchange. Although the MHC could convert to stock form in the future, the Bank
and the MHC have no current plans and there can be no assurance as to when, if
ever, such a conversion will occur. Any conversion transaction would be subject
to federal securities laws and regulations of the OTS in effect at the time of
the conversion transaction. In addition, the OTS may, in the future, authorize
alternative forms of structure or organization for mutual holding companies or
their affiliates or subsidiaries. Although the Bank and the MHC may consider
such alternative forms of structure or organization, there can be no assurances
as to when, if ever, the Bank and the MHC will choose to avail itself of any
such alternative form of structure or organization. A decision by the MHC to
convert to stock form would require the approval of its members prior to the
conversion transaction. It is expected that these members will have subscription
rights to purchase stock of the converted MHC. In a conversion transaction, the
MHC, the Stock Holding Company or the Bank will have to demonstrate to the OTS
that the terms of such exchange are fair and reasonable and comply with the
stock purchase limitations of the OTS conversion regulations. This may, as a
condition to OTS approval of the conversion transaction, in certain limited
circumstances, require certain insiders of the Bank who have accumulated shares
in excess of stock purchase limitations in the conversion transaction to divest
such shares in connection with such conversion transaction, and also potentially
restrict or prohibit additional purchases of Common Stock in the conversion
transaction by other stockholders that would be in excess of such stock purchase
limitations. The fairness of the exchange may be supported by an opinion from an
independent third party.
The OTS policy with respect to dividends waived by mutual holding companies
requires that, in the case of mutual to stock conversions of recently formed
mutual holding companies, such as the MHC, the aggregate amount of cash
dividends waived by a mutual holding company must be considered when
establishing a fair and reasonable basis for exchanging subsidiary holding
company common stock for converted MHC common stock. The OTS will not permit a
pro rata exchange if the mutual holding company has waived the receipt of cash
dividends by the subsidiary holding company. Accordingly, the precise treatment
of any conversion transaction cannot be assured. Any waiver of dividends by the
MHC is likely to result in an adjustment to the ratio pursuant to which shares
of Common Stock are exchanged for shares of the converted MHC in a conversion
transaction, which adjustment will have the effect of diluting Minority
Stockholders' ownership interests. The percentage of the converted MHC's common
stock received by Minority Stockholders in any conversion transaction may also
be affected by purchases of Common Stock by the MHC, subsequent offerings or
other stock issuances by the Stock Holding Company, including share issuances
under the terms of the Capitol Federal Financial Stock Option Plan subject to
approval of the Stock Holding Company's stockholders ("Stock Option Plan") and
the Capitol Federal Financial Recognition and Retention Plan subject to approval
of the Stock Holding Company's stockholders ("RRP"), any intervening
acquisitions
24
<PAGE>
by the MHC, the Stock Holding Company's dividend policy, including special
dividends and the amount of dividends paid by the Stock Holding Company.
As an alternative to the exchange of shares discussed above, if the
stockholders of the Stock Holding Company do not receive shares of the converted
MHC or the stock institution resulting from the conversion transaction based
upon a fair and reasonable exchange ratio, or cash from the resulting
institution in an amount equal to the fair market value of their stock given the
circumstances of the conversion transaction, the Stock Holding Company or the
MHC and its successors may elect to purchase all shares of the Common Stock not
owned by it simultaneously with the consummation of the conversion transaction
at the fair market value of the stock on the date of the conversion transaction,
subject to OTS approval and compliance with the limitations of the OTS
regulations governing capital distributions and other conditions that the OTS
may impose. Such fair market value of the Stock Holding Company's Common Stock
shall be established by an independent appraisal, and may be greater than or
less than $10.00 per share (the "Purchase Price"). Moreover, if the Common Stock
is traded and has an established and liquid trading market, of which there is no
assurance, the fair market value of the Common Stock, as established by the
independent appraisal, may be greater than or less than the trading price of
such stock.
Moreover, in the event that the MHC converts to stock form in a conversion
transaction, any options or other convertible securities held by an officer,
director or employee of the Stock Holding Company, convertible into shares of
Common Stock shall become options to purchase or convertible into shares of the
converted MHC; provided, however, that if such options or convertible shares
cannot be so reconstituted, the holders of such options or other convertible
securities shall be entitled to receive cash payment for such shares in an
amount equal to the offering price of the number of shares of the converted MHC
into which such securities would otherwise be converted, less the exercise price
of such options of other convertible securities. Any such exchange or redemption
of these securities will be subject to the written approval of the OTS, and
there can be no assurance that such approval would be obtained. In addition, the
OTS may place restrictions on the Stock Holding Company's or the MHC's ability
to purchase Common Stock that are more restrictive than the OTS regulations
governing capital distributions. The fair market value of the common stock of
the converted MHC shall be established by the independent appraisal utilized in
the conversion transaction pursuant to the OTS regulations governing
conversions. However, there is no plan, agreement or understanding with respect
to such a conversion, and there can be no assurance that such a conversion will
occur.
Further, if the MHC were to undertake a conversion transaction, and in
connection therewith additional shares of stock of the converted MHC were
proposed to be contributed to the Capitol Federal Foundation (the "Foundation"),
any conversion transaction and contribution of additional shares of Common Stock
to the Foundation will be voted on as separate matters and both matters will
require the approval of a majority of the total outstanding vote of the members
of the MHC eligible to be cast and a majority vote of the total outstanding
shares of Common Stock held by stockholders other than the MHC and the
Foundation.
25
<PAGE>
MARKET FOR THE COMMON STOCK
The Stock Holding Company and the Bank have never issued capital stock,
and, consequently, there is no established market for the Common Stock at this
time. The Stock Holding Company has applied to have its Common Stock quoted on
the Nasdaq National Market under the symbol "CFFN." Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at these quoted prices, subject to various
securities laws and other regulatory requirements. Additionally, the development
of a liquid public market depends on the existence of willing buyers and
sellers, the presence of which is not within the control of the Stock Holding
Company, the Bank or any market maker. Accordingly, the number of active buyers
and sellers of the Common Stock at any particular time may be limited. The Stock
Holding Company intends to meet the requirements for listing on the Nasdaq
National Market. There can be no assurance, however, that purchasers will be
able to sell their shares when desired, or at or above the Purchase Price.
THE BANK EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At September 30, 1998, the Bank exceeded all of the regulatory capital
requirements applicable to it. The table on the following page sets forth the
historical regulatory capital of the Bank at September 30, 1998 and the pro
forma regulatory capital of the Bank after giving effect to the Reorganization
and Stock Issuance, based upon the sale of the number of shares shown in the
table. The pro forma regulatory capital amounts reflect the receipt by the Bank
of the net Stock Issuance proceeds, minus expenses, the amounts to be loaned to
the ESOP and contributed to the RRP and $50.0 million to be retained by the
Stock Holding Company. The pro forma risk-based capital amounts assume the
investment of the net proceeds received by the Bank in assets which have a
risk-weight of 20% under applicable regulations, as if such net proceeds had
been received and so applied at September 30, 1998.
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1998
-------------------------------------------------------------------------------------------------
32,136,106 Shares 37,807,183 Shares 43,487,261 Shares 50,000,000 Shares
Historical at Sold at $10.00 Sold at $10.00 Sold at $10.00 Sold at $10.00
September 30, 1998 per Share per Share per Share per Share
------------------- ------------------- ------------------ ----------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(1) Amount Assets Amount Assets Amount Assets Amount Assets
------------------- ------------------- ------------------ ----------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:
Actual.................. $649,199 12.20% $863,596 15.31% $910,581 16.00% $957,566 16.67% $1,011,599 17.43%
Requirement............. 79,724 1.50 84,609 1.50 85,381 1.50 86,154 1.50 87,043 1.50
---------- ----- -------- ----- -------- ----- -------- ----- ---------- -----
Excess.................. $569,475 10.70% $778,987 13.81% $825,200 14.50% $871,412 15.17% 924,556 15.93%
======== ===== ======== ===== ======== ===== ======== ===== ========== =====
Core capital:
Actual.................. $649,199 12.20% $863,596 15.31% $910,581 16.00% $957,566 16.67 $1,011,599 17.43%
Requirement............. 159,447 3.00 169,218 3.00 170,762 3.00 172,308 3.00 174,086 3.00
--------- ------ -------- ----- -------- ----- -------- ----- ---------- -----
Excess.................. $489,752 9.20% $694,378 12.31% $739,819 13.00% $785,258 13.67% 837,513 14.43%
======== ====== ======== ===== ======== ===== ======== ===== ========= ====
Risk-based capital
Actual.................. $650,584 27.32% $868,246 35.43% $915,231 37.19% $962,216 38.93 $1,016,249 40.92%
Requirement............. 191,168 8.00 196,071 8.00 196,895 8.00 197,720 8.00 198,668 8.00
--------- ------ -------- ----- -------- ----- -------- ----- ---------- -----
Excess.................. $459,416 19.32% $672,175 27.43% $718,336 29.19% $764,496 30.93% 817,581 32.92%
======== ====== ======== ===== ======== ===== ======== ===== ========= =====
<FN>
- ----------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
</FN>
</TABLE>
27
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 30, 1998, and the pro forma consolidated capitalization of the Stock
Holding Company after giving effect to the Reorganization, based upon the sale
of the number of shares shown below and the other assumptions set forth under
"Pro Forma Data."
<TABLE>
<CAPTION>
The Stock Holding Company - Pro Forma
Based Upon Sale at $10.00 Per Share
-----------------------------------------------------------------------------
50,000,000
32,136,106 37,807,183 43,478,261 Shares(1)
The Bank - Shares Shares Shares (Maximum of
Historical (Minimum of (Midpoint of (Maximum of Range, as
Capitalization Range) Range) Range) Adjusted)
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2)........................................ $3,894,180 $3,894,180 $3,894,180 $3,894,180 $3,894,180
Borrowings:
FHLB advances.................................. 500,000 500,000 500,000 500,000 500,000
Securities sold under agreement to
repurchase.................................... 175,000 175,000 175,000 175,000 175,000
---------- ---------- ---------- ---------- ----------
Total deposits and borrowings...................... $4,569,180 $4,569,180 $4,569,180 $4,569,180 $4,569,180
========== ========== ========== ========== ==========
Stockholders' equity
Preferred Stock, $.01 par value, 50,000,000
shares authorized; none to be issued.......... $ --- $ --- $ --- $ --- $ ---
Common Stock, $.01 par value, 450,000,000
shares authorized; shares to be issued as
reflected(3).................................. --- 778 915 1,052 1,210
Additional paid-in capital..................... --- 315,138 371,058 426,981 491,290
Retained earnings.............................. 649,199 649,099 649,099 649,099 649,099
Shares issued to Foundation(4)................. --- 12,854 15,123 17,391 20,000
Net unrealized gains on mortgage-related
securities available for sale................. 13,133 13,133 13,133 13,133 13,133
Less:
Expense of contribution to Foundation,
net(5)........................................ --- (15,940) (18,752) (21,565) (24,800)
Common Stock to be acquired by the
ESOP(6)....................................... --- (25,709) (30,246) (34,783) (40,000)
Common Stock to be acquired by the
RRP(7)........................................ --- (12,854) (15,123) (17,391) (20,000)
---------- ------------ ------------ ---------- ----------
Total stockholders' equity......................... $ 662,332 $ 936,499 $ 985,207 $1,033,917 $1,089,932
========== ============ ============ ========== ==========
</TABLE>
- ----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
28
<PAGE>
(3) Reflects the issuance of the shares of Common Stock to be sold in the
Offerings including the issuance of additional shares of Common Stock to
the Foundation. No effect has been given to the issuance of additional
shares of Common Stock pursuant to the proposed Stock Option Plan. See "Pro
Forma Data" and "Management - Benefits - Other Stock Benefit Plans."
(4) Reflects shares to be contributed to the Foundation at an assumed value of
$10.00 per share.
(5) Net of the tax effect of the contribution of Common Stock and cash to the
Foundation based upon an assumed 38.0% tax rate. The realization of the
deferred tax benefit is limited annually to 10% of the Stock Holding
Company's annual taxable income, subject to the ability of the Stock
Holding Company to carry forward any unused portion of the deduction for
five years following the year in which the contribution is made. Historical
equity has been reduced in the pro forma presentation by $100,000 due to
the retention of such amount by the MHC as its initial capitalization upon
consummation of the MHC.
(6) Assumes that 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction from stockholders'
equity. The ESOP shares will be purchased with funds loaned to the ESOP by
the Stock Holding Company. See "Pro Forma Data" and "Management - Benefits
- Employee Stock Ownership Plan."
(7) The Stock Holding Company intends to adopt the RRP and to submit such plan
to stockholders at an annual or special meeting of stockholders held at
least six months following the consummation of the Reorganization. If the
plan is approved by stockholders, the Stock Holding Company intends to
contribute sufficient funds to the RRP to enable the plan to purchase a
number of shares of Common Stock equal to 4.0% of the Common Stock sold in
the Offerings. Assumes that stockholder approval has been obtained and that
the shares have been purchased in the open market at the Purchase Price.
However, in the event the Stock Holding Company issues authorized but
unissued shares of Common Stock to the RRP in the amount of 4.0% of the
Common Stock sold in the Offerings, the voting interests of existing
stockholders would be diluted approximately 3.8%. The shares are reflected
as a reduction of stockholders' equity. See "Pro Forma Data" and
"Management - Benefits - Other Stock Benefit Plans."
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Reorganization is completed. However, net proceeds are
currently estimated to be between $303.1 million and $410.6 million, or $472.5
million in the event the Estimated Offering Range is increased by 15%, based
upon the following assumptions:
o all shares of Common Stock will be sold in the offering of
non-transferable rights to subscribe for the Common Stock, in order of
priority, to Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, Other Members and Directors, Officers and Employees
("Subscription Offering");
o no fees will be paid to Charles Webb & Company, a division of Keefe,
Bruyette & Woods, Inc. ("Webb") on shares purchased by (1) the ESOP
and any other employee benefit plan of the Stock Holding Company or
the Bank, (2) officers, directors, employees and members of their
immediate families or (3) the Foundation;
o Webb will receive a fee equal to 1.25% of the aggregate Purchase Price
for sales in the Subscription Offering (excluding the sale of shares
to the ESOP, employee benefit plans, officers, directors and their
immediate families and the Foundation);
29
<PAGE>
o the Stock Holding Company will contribute to the Foundation an amount
of cash equal to the value of 4.0% of the Common Stock sold in the
Offerings and an amount of Common Stock equal to 4.0% of the Common
Stock sold in the Offerings from authorized but unissued shares; and
o total expenses, including the marketing fees paid to Webb will be
between $5.4 million and $6.8 million, or $7.5 million in the event
the Estimated Offering Range is increased by 15%. Actual expenses may
vary from those estimated.
Pro forma consolidated net income and stockholders' equity of the Stock
Holding Company have been calculated for the fiscal year ended September 30,
1998, as if the Common Stock to be issued in the Offerings had been sold at the
beginning of the period and the net proceeds had been invested at 4.39%, which
represents the yield on one-year U.S. Government securities at September 30,
1998. In light of changes in interest rates in recent periods, this yield is
deemed by the Stock Holding Company and the Bank to more accurately reflect pro
forma reinvestment rates than the arithmetic average method. The effect of
withdrawals from deposit accounts for the purchase of Common Stock has not been
reflected. A tax rate of 38.0% has been assumed for the period, resulting in an
after-tax yield of 2.72% for the year ended September 30, 1998. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock, as adjusted to
give effect to the shares purchased by the ESOP and the effect of the issuance
of shares to the Foundation. See Note 3 to the tables below. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "How We Intend to Use the
Proceeds," the Stock Holding Company intends to make a loan to fund the purchase
of 8.0% of the Common Stock by the ESOP and intends to retain $50 million of the
net proceeds from the Offerings.
No effect has been given in the tables to the issuance of additional shares
of Common Stock pursuant to the proposed Stock Option Plan. See "Management -
Benefits - Other Stock Benefit Plans." The table below gives effect to the RRP,
which is expected to be adopted by the Stock Holding Company following the
Reorganization and presented along with the Stock Option Plan to stockholders
for approval at an annual or special meeting of stockholders to be held at least
six months following the consummation of the Reorganization. If the RRP is
approved by stockholders, the RRP intends to acquire an amount of Common Stock
equal to 4.0% of the shares of Common Stock sold in the Offerings, either
through open market purchases or from authorized but unissued shares of Common
Stock, if permissible. The table below assumes that stockholder approval has
been obtained, as to which there can be no assurance, and that the shares
acquired by the RRP are purchased in the open market at the Purchase Price. No
effect has been given to the Stock Holding Company's results of operations after
the Reorganization, the market price of the Common Stock after the
Reorganization or a less than 4.0% purchase by the RRP.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents
30
<PAGE>
the difference between the stated amount of assets and liabilities of the Stock
Holding Company computed in accordance with generally accepted accounting
principles ("GAAP").
The following table gives effect to the issuance of authorized but unissued
shares of the Common Stock to the Foundation concurrently with the completion of
the Reorganization. The pro forma stockholders' equity is not intended to
represent the fair market value of the Common Stock and may be different than
amounts that would be available for distribution to stockholders in the event of
liquidation.
<TABLE>
<CAPTION>
43,478,261 50,000,000
32,136,106 37,807,183 Shares Sold at Shares Sold at
Shares Sold at Shares Sold at $10.00 Per Share $10.00 Per Share
$10.00 Per Share $10.00 Per Share (Maximum of (Maximum of
(Minimum of (Midpoint of Range) Range, as
Range) Range) Adjusted)(8)
-------------- ------------ ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross Proceeds..................................... $321,361 $378,072 $434,783 $500,000
Plus: Shares acquired by Foundation
(equal to 4.0% of the shares sold in
the Offerings).................................... 12,854 15,123 17,391 20,000
---------- ---------- ---------- ----------
Pro forma market capitalization.................... $334,215 $393,195 $452,174 $520,000
======== ======== ======== ========
Gross proceeds..................................... $321,361 $378,072 $434,783 $500,000
Less cash contribution to Foundation............... (12,854) (15,123) (17,391) (20,000)
Less offering expenses and commissions............. (5,446) (6,098) (6,750) (7,500)
----------- ----------- ------------ ------------
Estimated net proceeds......................... 303,061 356,851 410,642 472,500
Less: Shares purchased by the ESOP............... (25,709) (30,246) (34,783) (40,000)
Shares purchased by the RRP................ (12,854) (15,123) (17,391) (20,000)
---------- ---------- ---------- ----------
Total estimated net proceeds, as adjusted(1)....... $264,498 $311,482 $358,468 $412,500
======== ======== ======== ========
Net income(2):
Historical..................................... $ 53,991 $ 53,991 $ 53,991 $ 53,991
Pro forma income on net proceeds, as adjusted.. 7,196 8,475 9,754 11,225
Pro forma ESOP adjustment(3)................... (1,063) (1,250) (1,438) (1,653)
Pro forma RRP adjustment(4).................... (1,594) (1,875) (2,157) (2,480)
----------- ----------- ----------- -----------
Pro forma net income........................... $ 58,530 $ 59,341 $ 60,150 $ 61,083
========= ========= ========= =========
Net income per share(2)(5):
Historical..................................... $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma income on net proceeds, as adjusted.. 0.10 0.10 0.10 0.10
Pro forma ESOP adjustment(3)................... (0.01) (0.01) (0.01) (0.01)
Pro forma RRP adjustment(4).................... (0.02) (0.02) (0.02) (0.02)
---------- ----------- ----------- -----------
Pro forma net income per share(4)(6)........... $ 0.79 $ 0.68 $ 0.60 $ 0.53
=========== =========== =========== ===========
Number of shares outstanding for pro forma net
income per share calculations(5).................. 75,385,948 88,689,351 101,992,753 117,291,667
========== ========== =========== ===========
Offering price to pro forma net income per share(5) 12.66x 14.71x 16.67x 18.87x
===== ===== ===== =====
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
50,000,000
32,136,106 37,807,183 43,478,261 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Range, as
Range) Range) Range) Adjusted)(8)
----------------- ------------------ ------------------ -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Stockholders' equity:
Historical....................................... $662,232 $662,232 $ 662,232 $ 662,232
Estimated net proceeds........................... 303,061 356,851 410,642 472,500
-------
Plus: Shares issued to Foundation............... 12,854 15,123 17,391 20,000
Less: Contribution to Foundation................ (12,854) (15,123) (17,391) (20,000)
Plus: Tax benefit of the contribution to 9,769 11,493 13,217 15,200
Foundation...............................
Less: Common Stock acquired by the ESOP(3)...... (25,709) (30,246) (34,783) (40,000)
Common Stock to be acquired by
the RRP(4)............................... (12,854) (15,123) (17,391) (20,000)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(6)(7).......... $936,499 $985,207 $1,033,917 $1,089,932
======== ======== ========== ==========
Stockholders' equity per share(5):
Historical....................................... $ 8.51 $ 7.24 $ 6.29 $ 5.47
Estimated net proceeds........................... 3.90 3.90 3.90 3.90
Plus: Shares issued to Foundation............... 0.17 0.17 0.17 0.17
Less: Contribution to Foundation................ (0.17) (0.17) (0.17) (0.17)
Plus: Tax benefit of the contribution to 0.13 0.13 0.13 0.13
Foundation...............................
Less: Common Stock acquired by the ESOP(3)...... (0.33) (0.33) (0.33) (0.33)
Common Stock to be acquired by
the RRP(4)............................... (0.17) (0.17) (0.17) (0.17)
------ ------ ------ ------
Pro forma stockholders' equity per share(4)(6)(7) $12.04 $10.77 $ 9.82 $ 9.00
====== ====== ====== ======
Offering price as a percentage of pro forma
stockholders' equity per share(5)................... 83.06% 92.85% 101.83% 111.11%
===== ===== ====== ======
Number of shares outstanding for pro forma 77,785,444 91,512,288 105,239,130 121,025,000
stockholders' equity per share calculations(5)...... ========== ========== =========== ===========
</TABLE>
- -----------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offerings minus (i) the proceeds attributable to the purchase by
the ESOP and (ii) the value of the shares to be purchased by the RRP,
subject to stockholder approval, after the Reorganization at an assumed
purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be recognized
in fiscal 1999 as a result of the contribution to the Foundation. The Stock
Holding Company will recognize an after-tax expense for the amount of the
cash and shares contributed to the Foundation which is expected to total
$15.9 million, $18.8 million, $21.6 million and $24.8 million at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Offering Range, respectively. Assuming the contribution to the Foundation
was expensed during the year ended September 30, 1998, pro forma net income
per share would be $0.56, $0.46, $0.38 and $0.31 at the minimum, midpoint,
maximum and maximum, as adjusted, respectively. Per share net income data
is based on 75,385,948 shares of Common Stock outstanding at the minimum of
the Estimated Offering Range, 88,689,351 shares of Common Stock outstanding
at the midpoint of such range, 101,992,753 shares of Common Stock
outstanding at the maximum of such range and 117,291,667 shares of Common
Stock outstanding at 15% above the maximum of such range, respectively,
which
32
<PAGE>
represents shares issued to the MHC, shares sold in the Offerings,
shares contributed to the Foundation and shares to be allocated or
distributed under the ESOP and RRP for the period presented.
(3) It is assumed that 8.0% of the shares of Common Stock sold in the
Offerings will be purchased by the ESOP with funds loaned by the Stock
Holding Company. The Stock Holding Company and the Bank intend to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The pro forma net
earnings assumes (i) that the loan to the ESOP is payable over 15 years,
with the ESOP shares having an average fair value of $10.00 per share in
accordance with SOP 93-6, entitled "Employers' Accounting for Employee
Stock Ownership Plans," of the AICPA, and (ii) the effective tax rate
was 38.0% for the period. See "Management - Benefits -- Employee Stock
Ownership Plan."
(4) It is assumed that the RRP will purchase, following stockholder approval of
such plan, a number of shares of Common Stock equal to 4.0% of the shares
of Common Stock sold in the Offerings for issuance to directors, officers
and employees. Funds used by the RRP to purchase the shares initially will
be contributed to the RRP by the Stock Holding Company. It is further
assumed that the shares were acquired by the RRP at the beginning of the
period presented in open market purchases at the Purchase Price and that
20% of the amount contributed, net of taxes, was an amortized expense
during the year ended September 30, 1998. The issuance of authorized but
unissued shares of Common Stock pursuant to the RRP in the amount of 4.0%
of the Common Stock sold in the Offerings would dilute the voting interests
of existing Minority Stockholders by approximately 1.65% and under such
circumstances pro forma net earnings per share for the year ended September
30, 1998 would be $0.77, $0.67, $0.59 and $0.52, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Offering Range,
respectively, and pro forma stockholders' equity per share at September 30,
1998 would be $12.01, $10.75, $9.82 and $9.01 at the minimum, midpoint,
maximum and 15% above the maximum of such range, respectively. There can be
no assurance that the actual purchase price of shares purchased by or
issued to the RRP will be equal to the Purchase Price. See "Management -
Benefits -- Other Stock Benefit Plans."
(5) The per share calculations are determined by adding the number of shares
assumed to be issued to the MHC and sold in the Offerings as well as
contributed to the Foundation and for purposes of calculating earnings per
share, in accordance with SOP 93-6, subtracting 2,454,727 shares, 2,822,936
shares, 3,246,377 shares, and 3,733,333 shares, respectively, representing
the ESOP shares which have not been committed for release during the year
ended September 30, 1998. Thus, it is assumed at September 30, 1998 that
77,121,175shares of Common Stock are outstanding at the minimum of the
Estimated Offering Range, 88,689,351shares of Common Stock are outstanding
at the midpoint of such range, 101,992,753 shares of Common Stock are
outstanding at the maximum of such range and 117,291,667 shares of Common
Stock are outstanding at 15% above the maximum of the such range,
respectively. Assuming the uncommitted ESOP shares were not subtracted from
the number of shares of Common Stock outstanding at September 30, 1998, the
offering price as a multiple of pro forma net earnings per share would be
13.57x, 15.42x, 17.50x and 19.81x at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Offering Range, respectively. For
purposes of calculating pro forma stockholders' equity per share, it is
assumed that shares outstanding total 77,785,444 shares at the minimum of
the estimated pro forma market value of the Bank on a fully converted basis
(the "Estimated Valuation Range"), 91,512,288 shares at the midpoint of
such range, 105,239,130 shares at the maximum of such range and 121,025,000
shares at 15% above the maximum of the such range, respectively.
(6) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan, which will be adopted by the Stock
Holding Company following the Reorganization and presented for approval by
stockholders at an annual or special meeting of stockholders of the Stock
Holding Company held at least six months following the consummation of the
Reorganization. If the Stock Option Plan is approved by stockholders, an
amount equal to 10% of the Common Stock sold in the Offerings, or 3,213,611
shares at the minimum of the Estimated Offering Range, 3,780,718 shares at
the midpoint of such range, 4,347,826 shares at the maximum of such range
and 5,000,000 shares at 15% above the maximum of the such range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plan will
result in the dilution of existing Minority Stockholders' voting interests
by approximately 3.97%. Assuming stockholder approval of the Stock Option
Plan, that all these options were exercised at the beginning of the period
at an exercise price of $10.00 per share and that the shares to fund the
RRP are acquired through open market purchases at the Purchase Price, pro
forma net earnings per share for the year ended September 30, 1998 would be
$0.76, $0.65, $0.58, and $0.51 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Offering Range, respectively, and pro
forma stockholders' equity per share at September 30, 1998 would be $11.94,
$10.72, $7.81 and $9.02 at the minimum, midpoint, maximum and 15% above the
maximum of such range, respectively. See "Management - Benefits -- Other
Stock Benefit Plan." -
33
<PAGE>
(7) The retained earnings of the Bank will be substantially restricted because
certain distributions from the Bank's retained earnings may be treated as
being from its accumulated bad debt reserve for tax purposes, which would
cause the Bank to have additional taxable income. See "Taxation - Federal
Taxation." Pro forma stockholders' equity and pro forma stockholders'
equity per share do not give effect to the bad debt reserves established by
the Bank for federal income tax purposes in the event of a liquidation of
the Bank. Pro forma retained earnings have been reduced by $100,000 to
reflect the proposed capitalization of the MHC.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Reorganization, RP Financial, LC., independent appraiser ("RP Financial") has
estimated that the pro forma aggregate market capitalization of the Stock
Holding Company would be approximately $420.1 million at the midpoint, which is
approximately $26.9 million greater than the pro forma aggregate market
capitalization of the Stock Holding Company if the Foundation is included, and
would result in an approximately $42.0 million increase in the amount of Common
Stock offered for sale in the Stock Issuance. At the mid-point, the pro forma
price to book ratio and pro forma price to earnings ratio without the Foundation
would be 97.66% and 15.87x, respectively, compared to 92.85% and 14.71x,
respectively, with the Foundation. Further, assuming the midpoint of the
Estimated Offering Range, pro forma stockholders' equity per share and pro forma
earnings per share without the Foundation would be $10.24 and $0.63,
respectively, and $10.93 and $0.68, respectively, with the Foundation. There is
no assurance that in the event the Foundation was not formed that the appraisal
prepared at the time would have concluded that the pro forma market value of the
Stock Holding Company would be the same as that estimated herein. Any appraisals
prepared at that time would be based on the facts and circumstances existing at
that time, including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Offering Range, assuming the Reorganization and Stock
Issuance was completed at September 30, 1998 without the establishment of the
Foundation.
34
<PAGE>
<TABLE>
<CAPTION>
At the Maximum,
At the Minimum At the Midpoint At the Maximum As Adjusted
---------------------- ---------------------- --------------------- -----------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
----------- ----------- ---------- ----------- ---------- ----------- ----------- -----------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount............ $ 321,361 $ 357,068 $ 378,072 $ 420,080 $ 434,783 $ 483,092 $ 500,000 $ 555,556
Pro forma market capitalization...... 334,215 357,068 393,195 420,080 452,174 483,092 520,000 555,556
Total assets......................... 5,589,068 5,623,165 5,637,777 5,677,890 5,686,486 5,732,616 5,742,501 5,795,551
Total liabilities.................... 4,652,569 4,652,569 4,652,569 4,652,569 4,652,569 4,652,569 4,652,569 4,652,569
Pro forma stockholders' equity....... 936,499 970,596 985,207 1,025,321 1,033,917 1,080,047 1,089,932 1,142,982
Pro forma consolidated net earnings.. 58,530 59,429 59,341 60,398 60,150 61,367 61,083 62,480
Pro forma stockholders' equity
per share.......................... 12.04 11.41 10.77 10.24 9.82 9.39 9.00 8.64
Pro forma consolidated net earnings 0.79 0.73 0.68 0.63 0.60 0.55 0.53 0.49
per share...........................
Pro forma pricing ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share.................. 83.06% 87.64% 92.85% 97.66% 101.83% 106.50% 111.11% 115.74%
Offering price to pro forma net 12.66x 13.70x 14.71x 15.87x 16.67x 18.18x 18.87x 20.41x
earnings per share(1).............
Pro forma market capitalization
to assets........................ 5.98% 6.35% 6.97% 7.40% 7.95% 8.43% 9.06% 9.59%
Pro forma financial ratios:
Return on assets(2)................ 1.05% 1.06% 1.05% 1.06% 1.06% 1.07% 1.06% 1.08%
Return on stockholders' equity(3).. 6.25% 6.12% 6.02% 5.89% 5.82% 5.68% 5.60% 5.47%
Stockholders' equity to assets..... 16.76% 17.26% 17.48% 18.06% 18.18% 18.84% 18.98% 19.72%
Minority shares...................... 32,136,106 35,706,784 37,807,183 42,007,982 43,478,261 48,309,179 50,000,000 55,555,556
Share dilution..................... 10.00% 3,570,678 10.00% 4,200,798 10.00% 4,830,918 10.00% 5,555,556
Voting share....................... 41.31% 42.01% 41.31% 42.01% 41.31% 42.01% 41.31% 42.01%
Dilution....................... 0.69% 0.69% 0.69% 0.69%
Foundation shares.................... 1,285,444 1,512,287 1,739,130 2,000,000
Share dilution..................... N/A N/A N/A N/A
Voting share....................... 1.65% 1.65% 1.65% 1.65%
Dilution....................... N/A N/A N/A N/A
Mutual Holding Company shares........ 44,363,894 49,293,216 52,192,817 57,992,018 60,021,739 66,690,821 69,025,000 76,694,444
Share dilution..................... 10.00% 4,929,322 10.00% 5,799,201 10.00% 6,669,082 10.00% 7,669,444
Voting share....................... 57.03% 57.99% 57.03% 57.99% 57.03% 57.99% 57.03% 57.99%
Dilution....................... 0.96% 0.96% 0.96% 0.96%
<FN>
- ----------------
(1) If the contribution to the Foundation had been expensed during the year
ended September 30, 1998, the offering price to pro forma net earnings per
share would have been 17.70x, 21.85x, 26.43x and 32.43x at the minimum,
midpoint, maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended September 30, 1998, return on assets would have been 0.76%, 0.72%,
0.68% and 0.63% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended September 30, 1998, return on stockholders' equity would have been
4.55%, 4.12%, 3.73% and 3.33% at the minimum, midpoint, maximum and
maximum, as adjusted, respectively.
</FN>
</TABLE>
35
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- - ------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
INTEREST AND DIVIDEND INCOME:
Loans receivable ............................ $268,446 $240,009 $211,458
Mortgage-related securities ................. 57,967 41,473 48,642
Investment securities ....................... 23,025 43,641 41,004
Securities purchased under agreement
to resell .................................. 6,955
Cash and cash equivalents ................... 4,065 2,507 2,948
Capital stock of Federal Home Loan Bank ..... 3,186 2,647 2,337
-------- -------- --------
Total interest and dividend income .. 363,644 330,097 306,389
INTEREST EXPENSE:
Deposits .................................... 203,426 202,429 195,765
Borrowings .................................. 31,471 5,028 4,636
-------- -------- --------
Total interest expense .............. 234,897 207,457 200,401
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME .............. 128,747 122,640 105,988
PROVISION FOR LOAN LOSSES ..................... 3,362 56 865
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN LOSSES .................... 125,385 122,584 105,123
OTHER INCOME:
Automated teller and debit card
transaction fees ........................... 3,267 2,528 1,291
Checking account transaction fees ........... 2,791 2,359 2,845
Loan fees ................................... 2,340 2,563 2,830
Insurance commissions ....................... 1,424 1,479 1,388
Other, net .................................. 3,031 2,158 3,043
-------- -------- --------
Total other income .................. 12,853 11,087 11,397
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits .............. 26,157 23,710 21,572
Occupancy of premises ....................... 7,756 6,477 5,894
Office supplies and related expenses ........ 3,325 3,275 2,842
Deposit and loan transaction fees ........... 2,915 2,856 2,407
Advertising ................................. 2,564 2,709 2,726
Federal insurance premium ................... 2,409 3,391 8,729
BIF/SAIF special assessment ................. 24,158
Other, net .................................. 4,340 2,858 3,177
-------- -------- --------
Total other expenses ................ 49,466 45,276 71,505
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE .............. 88,772 88,395 45,015
INCOME TAX EXPENSE ............................ 34,781 35,691 18,393
-------- -------- --------
NET INCOME .................................... $ 53,991 $ 52,704 $ 26,622
======== ======== ========
See notes to consolidated financial statements.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in understanding the
financial condition and results of operations of Capital Federal Savings. The
discussion and analysis does not include any comments relating to Capital
Federal Financial since Capitol Federal Financial has no significant operations.
The information contained in this section should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements and the other sections contained in the Prospectus.
The Bank's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans and mortgage-related and investment
securities, and interest expense on interest-bearing liabilities which
principally consist of deposits and borrowings. The Bank's results of operations
also are affected by the level of its noninterest income and expenses, and
income tax expense.
Forward-Looking Statements
This Prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of the Stock
Holding Company. These forward-looking statements are generally identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar words. Our ability to predict results or the actual effect
of future plans or strategies is uncertain. Factors which could have a material
adverse effect on our operations include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market areas and accounting
principles and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and you should not rely too much on these
statements. We do not undertake - and specifically disclaim any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
these statements or to reflect the occurrence of anticipated or unanticipated
events.
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.
37
<PAGE>
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
1998, we originated $1.08 billion of one- to four-family loans. At
September 30, 1998, we had $3.50 billion of these loans, representing
93.5% of our total loan portfolio.
o Commitment to Cost Control. We are very effective at controlling our
costs of operations. Lending and deposit support functions are
centralized for efficient processing, using technology to increase
productivity. Our average deposits per full service branch at
September 30, 1998 were over $150 million. As a result of these
efforts, our ratio of operating expenses to average total assets was
.97% for the year ended September 30, 1998 and our efficiency ratio, a
commonly used industry ratio measuring the cost of producing each
dollar of revenue, was 35.8%. These ratios are both significantly
better than peer group and national averages.
o Strong Capital Position. Our policy has always been to protect the
safety and soundness of the Bank through conservative risk management,
balance sheet strength, consistent earnings and sound operations. At
September 30, 1998, our ratio of equity to total assets was 12.5% and
our return on average assets for the fiscal year was 1.05%.
o Excellent Asset Quality. Through our commitment to single family
lending, we have minimal delinquencies and, in management's view, very
little credit risk. At September 30, 1998, our ratio of non-performing
assets to total assets was 0.15%.
o Wholesale Borrowings and Investments. In order to reduce our interest
rate risk we have borrowed money and invested in adjustable rate
mortgage-related securities. At September 30, 1998, we had $675.0
million in borrowings. See pages 38 to 42 for a discussion of how
these borrowings have reduced our interest rate risk. We intend to
extend this borrowing strategy to leverage the capital we raise in the
Reorganization. See page 11.
Asset and Liability Management and Market Risk
Qualitative Aspects of Market Risk. As stated above, we derive our income
primarily from the excess of interest collected over interest paid. The rates of
interest we earn on assets and pay on liabilities generally are established
contractually for a period of time. Market interest rates change over time.
Accordingly, our results of operations, like those of other financial
institutions, are impacted by changes in interest rates and the interest rate
sensitivity of our assets and liabilities. The risk associated with changes in
interest rates and our ability to adapt to these changes is known as interest
rate risk and is the Bank's most significant market risk.
38
<PAGE>
Quantitative Aspects of Market Risk. In an attempt to manage our exposure
to changes in interest rates and comply with applicable regulations, we monitor
the Bank's interest rate risk. In monitoring interest rate risk we continually
analyze and manage assets and liabilities based on their payment streams and
interest rates, the timing of their maturities, and their sensitivity to actual
or potential changes in market interest rates.
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during the
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities repricing during the same period, and is considered
negative when the amount of interest-rate sensitive liabilities exceeds the
amount of interest-rate sensitive assets. Generally, during a period of rising
interest rates, a negative gap within shorter repricing periods would adversely
affect net interest income, while a positive gap within shorter repricing
periods would result in an increase in net interest income. During a period of
falling interest rates, the opposite would be true. As of September 30, 1998,
the ratio of the Bank's one-year gap to total assets was a positive 3.8% and its
ratio of interest-earning assets to interest-bearing liabilities maturing or
repricing within one year was 1.1%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Bank's results of operations, the
Bank has adopted asset and liability management policies to better match the
maturities and repricing terms of the Bank's interest -earning assets and
interest-bearing liabilities. The Board of Directors sets and recommends the
asset and liability policies of the Bank which are implemented by the Asset and
Liability Management Committee ("ALCO"). The ALCO is chaired by the Chief
Financial Officer and is comprised of members of the Bank's senior management.
The purpose of the ALCO is to communicate, coordinate and control
asset/liability management consistent with the Bank's business plan and Board
approved policies. The ALCO establishes and monitors the volume and mix of
assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs. The objectives are to manage
assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The ALCO
generally meets on a monthly basis to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and
capital positions, anticipated changes in the volume and mix of assets and
liabilities and interest rate risk exposure limits versus current projections
pursuant to gap analysis and income simulations. At each meeting, the ALCO
recommends appropriate strategy changes based on such review. The Chief
Financial Officer or his designee is responsible for reviewing and reporting on
the effects of the policy implementations and strategies to the Board of
Directors, at least quarterly.
In order to manage its assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, the Bank has focused its strategies on:
o originating adjustable rate loans,
39
<PAGE>
o maintaining a significant level of investment securities and
mortgage-related securities with maturities of less than five years or
with interest rates that reprice in less than three years,
o managing its 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 the Bank's loan
portfolio.
At times, depending on the level of general interest rates, the
relationship between long- and short-term interest rates, market conditions and
competitive factors, the ALCO may determine to increase the Bank's interest rate
risk position somewhat in order to maintain its net interest margins. In the
future, the Bank intends to increase its emphasis on the origination of
relatively short-term and/or adjustable rate consumer loans.
The ALCO regularly reviews interest rate risk by forecasting the impact of
alternative interest rate environments on net interest income and market value
of portfolio equity ("MVPE"), which is defined as the net present value of an
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and MVPE that are authorized by the Board of Directors of the
Bank.
The following table sets forth at September 30, 1998 the estimated
percentage change in the Bank's net interest income over a four-quarter period
and MVPE based on the indicated changes in interest rates.
Estimated Change in
-----------------------------------
Change (in Basis Points) Net Interest Income
in Interest Rates(1) (next four quarters) MVPE
--------------------------- ---------------------- ----------
-400 bp -29.83% -3.55%
-300 bp -18.50% -3.20%
-200 bp -9.47% -5.07%
-100 bp -2.18% -0.60%
0 bp 0 0
100 bp -3.15% -7.85%
200 bp -6.10% -19.48%
300 bp -8.90% -34.71%
400 bp -12.04% -51.99%
- -----------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of the
Bank's operations to changes in interest rates in the table above are utilized
in, and set forth under, the gap table below. Although management finds these
assumptions reasonable, the interest rate sensitivity of the Bank's assets and
liabilities and the estimated effects of changes in interest rates on the Bank's
net interest income and MVPE indicated in the above table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions.
40
<PAGE>
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of
September 30, 1998, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
More Than One More Than
Within Three Three to Twelve Year to Three Three Years to Over
Months Months Years Five Years Five Years Total
------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Fixed......................... $ 67,439 $ 176,669 $ 545,504 $374,477 $955,923 $2,120,012
Adjustable.................... 264,346 665,708 500,384 70,443 --- 1,500,881
Other loans...................... 101,304 29,804 10,875 1,328 48 143,359
Securities:
Non-mortgage(3).................. 150,470 --- 10,100 --- --- 160,570
Mortgage-related fixed(4)........ 17,084 46,504 118,661 59,887 37,561 279,697
Mortgage-related adjustable(4)... 399,416 276,233 93,219 --- --- 768,868
Other interest-earning assets....... 254,570 --- --- --- --- 254,570
----------- ----------- ----------- --------- --------- -----------
Total interest-earning assets. 1,254,629 1,194,918 1,278,743 506,135 993,532 5,227,957
----------- ----------- ----------- --------- --------- -----------
Interest-bearing liabilities:
Deposits:
NOW accounts(5).................. 52,088 145,846 52,192 9,188 1,126 260,440
Savings accounts(5).............. 32,295 77,508 16,470 2,907 --- 129,180
Money market deposit
accounts(5).................... 82,986 187,292 117,895 26,189 24,175 438,537
Certificates of deposit.......... 731,934 935,355 1,309,967 86,830 1,937 3,066,023
Other borrowings(6)................. --- --- --- --- 675,000 675,000
----------- ----------- ----------- --------- --------- -----------
Total interest-bearing
liabilities................. 899,303 1,346,001 1,496,524 125,114 702,238 4,569,180
----------- ----------- ----------- --------- --------- -----------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities................ $ 355,326 $ (151,083) $ (217,781) $381,021 $291,294 $ 658,777
=========== =========== =========== ======== ======== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities....... $ 355,326 $ 204,243 $ (13,538) $367,483 $658,777 $ 658,777
=========== =========== =========== ======== ======== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities as a
percent of total assets............ 6.69% 3.84% (0.25)% 6.91% 12.39%
Cumulative one-year gap at
September 30, 1997................. 9.31%
Cumulative one-year gap at 0.35%
September 30, 1996.................
- -----------------
</TABLE>
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, as adjusted to
take into account estimated prepayments in assessing the interest rate
sensitivity of saving associations in the Bank's region.
(2) Balances have not been reduced for non-performing loans, which amounted to
$6.2 million at September 30, 1998.
41
<PAGE>
(3) Based on contractual maturities.
(4) Reflects estimated prepayments in the current interest rate environment.
(5) Although the Bank's NOW accounts, passcard savings accounts and money
market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer effective maturities. The decay rates used on these
accounts are based on the latest available OTS assumptions and should not
be regarded as indicative of the actual withdrawals that may be experienced
by the Bank. If all of the Bank's NOW accounts, passcard savings accounts
and money market deposit accounts had been assumed to be subject to
repricing within one year, interest-bearing liabilities which were
estimated to mature or reprice within one year would have exceeded
interest-earning assets with comparable characteristics by $45.9 million,
for a cumulative one-year gap of (0.86)% of total assets.
(6) Assumes call features will not be exercised in the current interest rate
environment.
Certain assumptions are contained in the above table which affect the
presentation. Although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.
Changes in Financial Condition
General. The Bank's total assets increased by $391.2 million or 7.9% to
$5.31 billion at September 30, 1998 compared to $4.92 billion at September 30,
1997. The increase was primarily due to a $388.2 million or 11.7% increase in
loans, which totaled $3.71 billion at September 30, 1998 compared to $3.32
billion at September 30, 1997. This increase was also due to the Bank's decision
to leverage its capital through an increase in mortgage-related securities of
$194.2 million, acquired through the utilization of proceeds from additional
borrowings. These increases were partially offset by a decrease of $189.8
million or 32.4% in investment securities and securities purchased under
agreement to resell.
Loans. The Bank's net loan portfolio increased from $3.32 billion at
September 30, 1997 to $3.71 billion at September 30, 1998. The increase in the
loan portfolio over this time period was due to increased loan demand caused
both by low interest rates and significant increases in home-building activities
in Kansas. The loan portfolio increased in all categories, with the largest
increase occurring in the one- to four-family category, from $3.15 billion at
September 30, 1997 to $3.50 billion at September 30, 1998. Loan origination and
purchase volume for 1998 exceeded 1997 by $638.1 million. The lower interest
rates on mortgage loans increased refinancing activity from $144.5 million for
fiscal year 1997 to $438.4 million for fiscal year 1998.
Securities. Investment securities and securities purchased under agreement
to resell amounted to $585.4 million at September 30, 1997, and $395.6 million
at September 30, 1998, respectively. The decrease of $189.8 million or 32.4% was
primarily due to the use of funds from maturities and prepayments to fund the
Bank's loan and mortgage-related securities growth.
42
<PAGE>
In order to reduce interest-rate risk exposure, the Bank decided to shorten
the maturities of new investments by purchasing mortgage-related securities,
under agreement to resell, with maturities of less than 90 days. At September
30, 1998 these securities totaled $235.0 million. The Bank's mortgage-related
securities are generally comprised of mortgage-backed securities issued by
Fannie Mae ("FNMA") or Freddie Mac ("FHLMC"), which minimizes credit risk, and
these are delivered, in the Bank's name to our account at the Federal Reserve in
exchange for the funds we wish to invest.
Liabilities. The Bank's total liabilities increased $333.7 million or 7.71%
to $4.65 billion at September 30, 1998 compared to $4.32 billion at September
30, 1997. Such increase was due primarily to an increase in borrowed funds of
$225.0 million to fund mortgage-related securities growth and, to a lesser
extent, an increase in deposits of $107.1 million.
Equity. Total equity amounted to $662.3 million at September 30, 1998 and
$604.8 million at September 30, 1997, or 12.5%, and 12.3% of total assets at
such dates. The increase in equity over the period was due to continued
profitable operations and an increase in the unrealized gains on securities
available for sale, net, from $9.6 million at September 30, 1997 to $13.1
million at September 30, 1998.
43
<PAGE>
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances (we do not believe that the
use of monthly averages rather than daily averages has a significant effect upon
our results). Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------ -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- -------- ------------ -------- -------- ------------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................... $3,470,898 $264,752 7.63% $3,065,946 $236,105 7.70% $2,757,878 $207,056 7.51%
Other loans........................... 46,082 3,694 8.02 48,689 3,904 8.02 53,667 4,402 8.20
Mortgage-related securities........... 911,659 57,967 6.36 592,719 41,473 7.00 693,797 48,642 7.01
Investment securities................. 556,646 34,045 6.12 717,114 45,968 6.41 734,516 43,952 5.98
FHLB stock............................ 41,598 3,186 7.66 38,698 2,647 6.84 36,272 2,337 6.44
----------- -------- ---------- -------- ---------- --------
Total Interest-Earning Assets(1)..... $5,026,883 363,644 7.23 $4,463,166 330,097 7.40 $4,276,130 306,389 7.17
========== -------- ========== -------- ========== --------
Interest-Bearing Liabilities:
Savings deposits...................... $ 131,343 2,918 2.22 $ 131,912 2,931 2.22 134,337 2,985 2.22
Demand and NOW deposits............... 661,871 19,861 3.00 570,865 15,141 2.65 578,325 15,879 2.75
Certificate accounts.................. 3,071,829 180,647 5.88 3,082,984 184,357 5.98 2,963,367 176,901 5.97
Borrowings............................ 548,275 31,471 5.74 87,140 5,028 5.77 77,917 4,636 5.95
---------- -------- ---------- -------- --------- --------
Total Interest-Bearing Liabilities... $4,413,318 234,897 5.32 $3,872,901 207,457 5.36 $3,753,946 200,401 5.34
========== -------- ========== -------- ========== --------
Net interest income.................... $128,747 $122,640 $105,988
======== ======== ========
Net interest rate spread............... 1.91% 2.04% 1.83%
==== ==== ====
Net earning assets..................... $ 613,565 $ 590,265 $ 522,184
========== ========== ==========
Net interest margin.................... 2.56% 2.75% 2.48%
==== ==== ====
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities.. 113.90% 115.24% 113.91%
====== ====== ======
<FN>
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
</FN>
</TABLE>
44
<PAGE>
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume).
<TABLE>
<CAPTION>
Year Ended September 30,
1997 vs. 1998 1996 vs. 1997
--------------------------------------------- -----------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
--------------------------------- Total --------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Rate Volume Volume (Decrease)
--------------------------------- ---------- --------------------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $31,265 $ (2,383) $ (445) $28,437 $23,050 $ 5,030 $ 471 $28,551
Mortgage-related securities........... 21,995 (5,524) 23 16,494 (5,318) (1,755) (96) (7,169)
Investment securities................. (7,884) (2,886) (1,153) (11,923) (35) 2,100 (49) 2,016
Other................................. 198 317 24 539 155 145 10 310
---------- --------- -------- -------- -------- -------- -------- --------
Total interest-earning assets....... $45,574 $(10,476) $(1,551) $33,547 $17,852 $ 5,520 $ 336 $23,708
======= ======== ======= ------- ======= ======= ======== =======
Interest-bearing liabilities:
Savings deposits...................... $ (13) $ --- $ --- $ (13) $ (54) $ --- $ --- $ (54)
Demand and NOW deposits............... 2,412 1,998 319 4,729 (205) (578) 7 (776)
Borrowings............................ 26,498 (9) (46) 26,443 549 (140) (17) 392
Certificate accounts.................. (647) (3,083) 11 (3,719) 7,186 296 12 7,494
---------- --------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities.. $28,250 $ (1,094) $ 284 $27,440 $ 7,476 $ (422) $ 2 $ 7,056
======= ======== ======= ------- ======= ======== ======== ========
Net interest income.................... $ 6,107 $16,652
======== =======
</TABLE>
45
<PAGE>
The following table presents the weighted average yields earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on savings deposits and borrowings and the resultant interest rate spreads
at the dates indicated. Weighted average balances are based on monthly balances.
At September 30,
1998 1997 1996
----- ------ ------
Weighted average yield on:
Loans receivable......................................... 7.38% 7.63% 7.51%
Mortgage-related securities.............................. 6.66% 6.75% 6.86%
Investment securities.................................... 5.93% 6.52% 6.45%
Other interest-earning assets............................ 5.26% 5.67% 5.83%
Combined weighted average yield on interest-earning
assets............................................... 7.07% 7.32% 7.22%
Weighted average rate paid on:
Savings deposits......................................... 3.64% 3.02% 2.88%
Demand and NOW deposits.................................. 1.50% 1.88% 2.14%
Certificate accounts..................................... 5.75% 5.92% 5.98%
Borrowings............................................... 5.73% 5.75% 5.78%
Combined weighted average rate paid on interest-
bearing liabilities.................................. 5.24% 5.35% 5.37%
Spread.................................................... 1.83% 1.97% 1.86%
Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997
General. The Bank reported net income of $54.0 million for the year ended
September 30, 1998 compared to net income of $52.7 million for the year ended
September 30, 1997, an increase of $1.3 million or 2.5%. The increase in 1998
was primarily due to an increase in net interest income, which was partially
offset by increases in total other expenses and the provision for loan losses.
Net Interest Income. Net interest income increased $6.1 million or 5.0% to
$128.7 million for 1998 compared to 1997, reflecting a $33.5 million or 10.2%
increase in interest income which was partially offset by a $27.4 million or
13.2% increase in interest expense. The Bank's interest rate spread and net
interest margin decreased to 1.91% and 2.56%, respectively, for 1998 compared to
2.04% and 2.75%, respectively, for 1997. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
113.9% for 1998 compared to 115.2% for 1997.
Interest Income. The increase in interest income during the year ended
September 30, 1998 was primarily due to an increase in the average balance of
the Bank's interest-earning assets. The average balance of the loan portfolio
increased $402.3 million or 12.9% to $3.52 billion for 1998 compared to 1997 due
to increased loan demand. The average balance of the Bank's mortgage-related
securities and investment securities portfolios increased $158.5 million or
12.1% to $1.47 billion for 1998 compared to 1997 primarily as a result of the
use of additional
46
<PAGE>
borrowings to purchase mortgage-related assets. The average yield earned on the
Bank's loan portfolio decreased from 7.71% in 1997 to 7.63% in 1998, and the
average yield earned on the Bank's mortgage-related and investment securities
portfolios decreased from 6.68% for 1997 to 6.27% for 1998. The decrease in
average yield earned on the Bank's mortgage-related and investment securities
portfolios was primarily due to the purchase of lower-yielding mortgage-related
securities that had adjustable rates of interest, consistent with the Bank's
asset and liability management policies.
Interest Expense. The increase in interest expense during the year ended
September 30, 1998 was primarily due to the increase of $461.1 million or 529.2%
in the average balance of borrowings and to an increase in the average balance
of deposits. The average balance of deposits increased $79.3 million or 2.1% to
$3.87 billion for 1998, $90.4 million of which consisted of an increase in
demand deposits, including noninterest-bearing checking, NOW and money market
accounts and $11.2 million of which consisted of a decrease in the average
balance of certificates of deposit. The average rate paid on deposits decreased
slightly from 5.35% in 1997 to 5.26% in 1998. The average rate paid on
borrowings decreased from 5.77% in 1997 to 5.74% in 1998.
Provision for Loan Losses. For the year ended September 30, 1998, the
expense provision for loan losses amounted to $3.4 million compared to a
provision for loan losses in 1997 of $56,000. At September 30, 1998, the Bank's
allowance for loan losses was $4,981,000 or .13% of the total loan portfolio and
approximately 80% of total nonaccrual loans. This compares with an allowance for
loan losses of $1,639,000 or .05% of the total loan portfolio and approximately
27% of the total nonaccrual loans as of September 30, 1997. At fiscal year end
1998, the unallocated portion of the allowance for loan losses was $960,000
related to unused commitments to provide financing. The allocated portion of the
allowance of $4,021,000 is composed of credit losses related to the loan
portfolio. See "Business of the Bank - Asset Quality - Allowance for Loan
Losses."
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. In addition, as described
below, the Bank allocated a portion of the allowance resulting from the
unallocated allowance to unused commitments to provide financing.
During 1998, the Bank's single family residential loan portfolio increased
by $359.6 million over 1997 primarily due to an increased number of borrowers
being overextended. In addition, the non-performing single-family loans
increased 21% in 1998 over 1997 amounts. The provision for loan losses in fiscal
1998 of $2.0 million, representing 2.2% of pretax earnings, was recorded in
allocated allowance to reflect the increase 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 .56% of the 1998 increase in the portfolio.
The increase in the formula allowance was primarily driven by slower market
growth in the portfolio segment as a result of increased prepayments caused by
refinancings and the exposure presented by the level of nonperforming loans.
Based upon the foregoing analysis of the Bank's reserving methodology, it is
management's belief that
47
<PAGE>
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 the Bank will realize in the
future related to the increase in the single family residential loan portfolio.
During 1998, a provision for loan losses was recorded for $400,000
relating to letters of credit supporting bond issues used to construct apartment
buildings in Kansas. During 1998, one of the bond issues appeared to be in the
position of defaulting. In case of default, the Bank would have to honor the
letter of credit, repossess the property and incur a loss on the sale of the
apartment complex.
During 1998, the Bank's unallocated allowance increased to $960,000 in 1998
from $239,000 in 1997. The unallocated allowance represents the credit losses
inherent in the unused commitments to provide financing. During 1998, the Bank's
consumer loan lines of credit increased $33.8 million to $122.8 million from $89
million in 1997. Additionally, at September 30, 1998, there were off-balance
sheet commitments of $171.2 million consisting of $21.7 million of unfunded
portions on construction loans, $140.7 million of commitments to originate
single-family mortgage loans and $8.8 million of non-mortgage loans. The level
of commitments impacted the Bank's risk evaluation resulting in an exposure
requiring the Bank to provide $500,000 in loan loss provision in accordance with
the Bank's reserving methodology. The provision represents .25% of the increase
in the level of commitments in 1998. The evaluations of these inherent losses
are subject to higher degrees of uncertainty because they are not identified
with specific problem credits.
Other Income. Other income amounted to $12.9 million and $11.1 million for
the years ended September 30, 1998 and 1997, respectively. The increase
consisted primarily of a $1.2 million or 24.0% increase in automated teller and
debit card transaction fees and checking account transaction fees, resulting
from increased debit card usage and from an increased number of checking
accounts.
Other Expenses. Other expenses increased $4.2 million or 9.3% to $49.5
million for the year ended September 30, 1998 compared to the year ended
September 30, 1997. This increase was primarily due to a $2.4 million or 10.3%
increase in personnel expenses and a $1.3 million or 19.8% increase in occupancy
costs resulting from the addition of two limited service branch offices in 1998.
Provision for Income Taxes. The provision for income taxes amounted to
$34.8 million and $35.7 million for 1998 and 1997, respectively, resulting in
effective tax rates of 39.2% and 40.4%, respectively.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
General. The Bank's net income amounted to $52.7 million for the year ended
September 30, 1997 compared to $26.6 million for the year ended September 30,
1996, an increase of $26.1 million or 98.1%. However, the $26.6 million of net
income for 1996 reflects a $14.5 million after-tax charge for the Savings
Association Insurance Fund of the FDIC
48
<PAGE>
("SAIF") special assessment. Without such assessment, net income for 1996 would
have been $41.1 million. During 1997 compared to 1996, net interest income
increased $16.7 million or 15.7% and total other income decreased $300,000 or
2.7%. Total other expenses excluding the special assessment, decreased $2.1
million or 4.4%.
Net Interest Income. The increase in net interest income in 1997 compared
to 1996 reflects an increase of $23.7 million or 7.7% in interest income, which
was partially offset by an increase of $7.1 million or 3.5% in interest expense.
The interest rate spread increased to 2.04% for 1997 compared to 1.83% for 1996,
and the Bank's net interest margin increased to 2.75% for 1997 compared to 2.48%
for 1996. In addition, the ratio of average interest-earning assets to average
interest-bearing liabilities increased to 115.2% for 1997 compared to 113.9% for
1996.
Interest Income. The increase in interest income of $23.7 million or 7.7%
to $330.1 million in 1997 compared to 1996 was primarily due to an increase in
the average volume of loans outstanding and an increase in the average yield
earned on the Bank's loan and mortgage-related and investment securities
portfolios, partially offset by a decrease in the average volume of the
securities portfolios (primarily the mortgage-related securities portfolio). The
average balance of the Bank's loan portfolio increased $303.1 million or 10.8%
to $3.11 billion for the year ended September 30, 1997 compared to $2.81 billion
for the year ended September 30, 1996 due to an increase in loan demand. In
addition, the average yield on the Bank's loan and mortgage-related and
investment securities portfolios increased from 7.52% and 6.48%, respectively,
in 1996 to 7.71% and 6.68%, respectively, for 1997. The increase in the average
yield earned on the Bank's loan portfolio was due primarily to the adjustment of
certain of the Bank's adjustable-rate loans to the fully indexed rate. The
increase in the average yield earned on the Bank's mortgage-related and
investment securities portfolios was due to the maturity of lower yielding
securities and the reinvestment of these funds in higher yielding securities.
The average balance of the mortgage-related and investment securities portfolios
decreased $118.5 million or 8.3% to $1.31 billion for 1997 compared to 1996.
Interest Expense. The increase in interest expense of $7.1 million or 3.5%
to $207.5 million during 1997 compared to $200.4 million during 1996 was due
primarily to an increase in the average balance of deposits and borrowings,
primarily with respect to certificates of deposit. During 1998, the Bank had
several advertising campaigns to attract longer-term certificate of deposit
accounts at competitive rates. The Bank also restructured offering rates on new
accounts, to help in reducing its interest-rate risk in the future. The average
balance of deposits increased $109.7 million or 3.0% to $3.79 billion for 1997.
The average rate paid on deposits increased to 5.35% for 1997 compared to 5.33%
for 1996, due primarily to the Bank's increasing balance of higher rate
certificate of deposit accounts.
Other Expenses. The decrease in other expenses of $26.2 million or 36.6% to
$45.3 million in 1997 from $71.5 million in 1996 was primarily due to the
one-time $24.2 million special assessment in 1996 and a decrease in SAIF
insurance premiums of $5.3 million, partially offset by a $2.1 million increase
in personnel expenses as a result of the addition of two limited service branch
offices, a customer service call center and the introduction of the debit card
operations center.
49
<PAGE>
Provision for Income Taxes. The provision for income taxes amounted to
$35.7 million and $18.4 million for the years ended September 30, 1997 and 1996,
respectively, resulting in effective tax rates of 40.4% and 40.9%, respectively.
Liquidity and Commitments
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Bank invests excess funds in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
Historically, the Bank has been able to generate sufficient cash through its
deposits and has only utilized borrowings to a limited degree. The Bank utilizes
repurchase agreements and FHLB advances to leverage its capital base and provide
funds for its lending and investment activities, and to enhance its interest
rate risk management. The Bank intends to increase its use of borrowed funds to
leverage its capital after the Reorganization. See "How We Intend to Use the
Proceeds."
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. On a longer term basis,
the Bank maintains a strategy of investing in various lending products as
described in greater detail under "Business of the Bank - Lending Activities."
The Bank uses its sources of funds primarily to meet its ongoing commitments, to
pay maturing certificates of deposit and savings withdrawals, to fund loan
commitments and to maintain its portfolio of mortgage-backed and
mortgage-related securities and investment securities. At September 30, 1998,
the total approved loan origination commitments outstanding amounted to $140.7
million. At the same date, the unadvanced portion of construction loans was
$21.3 million. Unused home equity lines of credit were $123.0 million as of
September 30, 1998 and outstanding letters of credit totaled $4.0 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
1998, totaled $1.55 billion. Investment and mortgage-related securities
scheduled to mature in one year or less at September 30, 1998 totaled $391.5
million. Based on historical experience, management believes that a significant
portion of maturing deposits will remain with the Bank. The Bank anticipates
that it will continue to have sufficient funds, through deposits and borrowings,
to meet its current commitments.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $662.3
million at September 30, 1998, or 12.5% of total assets on that date. As of
September 30, 1998, the Bank exceeded all capital requirements of the OTS. The
Bank's regulatory capital ratios at September 30, 1998 were as follows: Tier I
(leverage)
50
<PAGE>
capital, 12.2%; Tier I risk-based capital, 27.2%; and Total risk-based capital,
27.3%. The regulatory capital requirements to be considered well capitalized are
5.0%, 6.0%, and 10.0%, respectively.
Year 2000 Issues
General. The Year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors, centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institution
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors with respect to data exchange and the potential impact of the Y2K issue
on their customers, suppliers and borrowers. These statements also require each
federally regulated financial institution to survey its exposure, measure its
risk and prepare a plan to address the Y2K issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions to assure resolution of any Y2K problems. The
federal banking agencies have assured that Y2K testing and certification is a
key safety and soundness issue in conjunction with regulatory exams and thus,
that an institution's failure to address appropriately the Y2K issue could
result in supervisory action, including the reduction of the institution's
supervisory ratings, the denial of applications for approval of mergers or
acquisitions or the imposition of civil money penalties.
Risk. Like most financial service providers, the Bank and its operations
may be significantly affected by the Y2K issue due to its dependence on
technology and date-sensitive data. Computer software, hardware and other
equipment, both within and outside the Bank's direct control and third parties
with whom the Bank electronically or operationally interfaces are likely to be
affected. If computer systems are not modified in order to be able to identify
the year 2000, many computer applications could fail or create erroneous
results. As a result, many calculations which rely on date field information,
such as interest, payment or due dates and other operating functions, could
generate results which are significantly misstated, consequently the Bank could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances a
failure to adequately address the Y2K issue could adversely affect the viability
of the Bank's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Y2K issue could result in a significant
adverse impact on the Bank's operations and, in turn, its financial condition
and results of operations.
State of Readiness. During April 1997, the Bank formulated its plan to
address the Y2K issue. Since that time, the Bank has taken the following steps:
51
<PAGE>
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 Began computer code testing;
o Initiated vendor compliance verification;
o Began awareness and education activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank's senior management formally established a
Y2K plan, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes
milestones, budget estimates, strategies, and methodologies to track and
report the status of the project. Members of the project team also attended
conferences and information sharing sessions to gain more insight into the
Y2K issue and potential strategies for addressing it. This stage is
substantially complete.
Assessment Phase. The Bank's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was made to quantify the extent of the Bank's Y2K
exposure. A corporate inventory (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases)
was developed to identify and monitor Y2K readiness for information systems
(hardware, software, utilities, and vendors) as well as environmental
systems (security systems, facilities, etc.). Systems were prioritized
based on business impact and available alternatives. As part of this
process, 118 vendors and 2,458 programs were identified as mission
critical. Mission critical systems supplied by vendors were researched to
determine Y2K readiness. As of September 30, 1998, 8.5% of the mission
critical vendors and 91.0% of the mission critical programs were identified
as or determined to be Y2K-ready. If Y2K-ready versions were not available,
the Bank began identifying functional replacements which were upgradable or
are currently Y2K-ready, and a formal plan was developed to repair, upgrade
or replace all mission critical systems. This phase is substantially
complete.
By June 1998, the Bank's larger borrowers were evaluated for Y2K
exposure using a questionnaire developed by the Bank's Y2K Business Systems
Team. As part of the current credit approval process, all new and renewed
loans are evaluated for Y2K risk.
52
<PAGE>
The Bank's 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 0.24% of total loans and all are secured 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 at the Bank. While the Bank will
continue to monitor the progress being made by its larger borrowers in
addressing their own Y2K issues, to date the Bank is generally satisfied
with these customers' responses to the Bank's inquiries.
Renovation Phase. The Bank's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems,
and these Y2K-ready versions have been delivered, installed and have
entered the validation process. The Bank has substantially renovated all
mission critical proprietary software.
Validation Phase. The validation phase is designed to test the ability
of hardware and software to accurately process date sensitive data. The
Bank currently is in the process of validation testing of each mission
critical system. The Bank has created a test environment comprised of an
IBM Multiprise 2000 dedicated to Y2K testing which is virtually insulated
from production and development environments. The Bank anticipates that the
validation phase will follow the estimated industry norm in that it will
absorb at least 50% of the total Y2K resources (computer and personnel)
over the life cycle of the project. The Bank has increased staff in
anticipation of that work effort. The Bank's validation phase is expected
to be completed by December 31, 1998 for all mission critical systems.
During the validation testing process to date, no significant Y2K problems
have been identified relating to any modified or upgraded mission critical
systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready code
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed and placed into
production with respect to all proprietary mission critical systems.
Bank Resources Invested. The Bank's Y2K project team has been assigned the
task of ensuring that all mission critical systems across the Bank are
identified, analyzed for Y2K compliance, corrected if necessary, tested, and
changes put into service by the end of 1998. The Y2K project team members
represent all functional areas of the Bank, including branches, data processing,
loan administration, accounting, item processing and operations, compliance,
internal audit, human resources, and marketing. The team is headed by an
Executive Vice President who reports directly to the President. The Bank's Board
of Directors oversees the Y2K plan and provides guidance and resources to and
receives monthly updates from the Y2K project team leader.
The Bank is expensing all costs associated with required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows. The total cost of the Y2K conversion project for the Bank is estimated to
be $2.3 million. Expenses of approximately
53
<PAGE>
$914,000 were incurred and expensed through September 30, 1998. Y2K expenses are
not expected to exceed the budget, and the Bank does not expect significant
increases in future data processing costs relating to Y2K compliance.
Contingency Plans. During the assessment phase, the Bank began to develop
back-up or contingency plans for each of its mission critical systems. A few of
the Bank's mission critical systems are dependent upon third party vendors or
service providers, therefore, contingency plans include selecting a new vendor
or service provider and converting to their system. In the event a current
vendor's system fails during the validation phase, and it is determined that the
vendor is unable or unwilling to correct the failure, the Bank will convert to a
new system from a pre-selected list of prospective vendors. In each case,
realistic trigger dates have been established to allow for orderly and
successful conversions. For some systems, contingency plans consist of using or
reverting to manual systems until system problems can be corrected.
The Bank has 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 1 day. Contingency planning is an integral part of the Bank's 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 Bank personnel. The contingency plans are tested when
practical to validate the effectiveness of contingent procedures.
Virtually all of the Bank's mission critical systems are written and
maintained by the Bank's Information Systems Department. The Bank has already
hired additional programmers to assist in completing the project on time.
Contingency plans have been adopted which includes hiring more programmers or to
contract with programmers to speed the renovation process, if necessary. As of
November 16, 1998, 98.6% of all mission critical proprietary software has been
renovated. Although there can be no assurances, the Bank does not anticipate any
material adverse effect on its operations as a result of the impact of the Y2K
issue.
Impact of Accounting Pronouncements
New Statements of Financial Accounting Standards - In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share". The Statement
establishes standards for computing and presenting earnings per share ("EPS").
It replaces the presentation of primary EPS with a presentation of basic EPS.
The Statement is effective for the Bank's financial statements as of September
30, 1999. The Bank will compute earnings per share under the new standard upon
completion of its stock offering. See Note 20 of the Notes to Consolidated
Financial Statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". The Statement establishes standards for disclosing
information about an entity's capital structure. The Statement is effective for
the Bank's financial statements as of September 30, 1999. The Bank is prepared
to comply with the additional reporting requirements of this Statement, and does
not anticipate that the implementation of this Statement will have a material
impact on the Bank's consolidated financial statements.
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<PAGE>
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement requires that
the Bank (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for the Bank's financial statements for the fiscal year
ending September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the Bank's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Statement is effective for the Bank's financial statements for the fiscal year
ending September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the Bank's
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post-retirement Benefits". The Statement revises
employers' disclosures about pensions and other post-retirement benefit plans.
The Statement does not change the measurement or recognition of those plans. The
Statement is effective for the Bank's financial statements for the fiscal year
ending September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the Bank's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities. The Statement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Statement is
effective for the Bank's financial statements for the fiscal year ending
September 30, 2000. The adoption of this Statement is not expected to have a
material impact on the Bank's consolidated financial statements.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". The Statement changes the way mortgage banking
firms account for
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<PAGE>
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. The Statement is effective for the Bank's
financial statements as of January 1, 1999. The Bank does not anticipate that
the implementation of this Statement will have a material impact on the
consolidated financial statements.
BUSINESS OF THE STOCK HOLDING COMPANY
The Bank will be reorganized into a three-tier mutual holding company with
a minority stock issuance by Capitol Federal Financial, a majority-owned
subsidiary of Capitol Federal Savings Bank MHC. Capitol Federal Financial
initially will not be an operating company and, after the Reorganization, is not
expected to engage in any significant business activity other than to hold the
Common Stock of the Bank and the ESOP loan, and to invest the funds retained by
it.
Capitol Federal Financial is not expected to own or lease real or personal
property initially, but will instead use the facilities of the Bank. At the
present time, Capitol Federal Financial does not intend to employ any persons
other than certain officers of the Bank, but will utilize the support staff of
the Bank from time to time.
BUSINESS OF THE BANK
General
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences. We also
originate a limited amount of loans secured by first mortgages on
nonowner-occupied one- to four-family residences, consumer loans, permanent and
construction loans secured by commercial real estate, multi-family real estate
loans and land acquisition and development loans. While our primary business is
the origination of one- to four-family residential mortgage loans funded through
retail deposits, we also purchase whole loans and invest in certain investment
and mortgage-related securities.
Our revenues are derived principally from interest on mortgage loans and
interest on investment and mortgage-related securities.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and non-interest bearing checking
accounts and certificates of deposit with varied terms ranging from 91 days to
96 months. We only solicit deposits in our market areas and we have not accepted
brokered deposits.
Market Areas
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We primarily serve the
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<PAGE>
entire metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and
Salina, Kansas and a portion of the metropolitan area of greater Kansas City. We
may originate loans outside of these areas on occasion, and we do purchase whole
loans secured by properties located outside of these areas from correspondent
lenders, to the extent such loans meet our underwriting criteria.
Lending Activities
General. Our primary lending activity is the origination of loans
secured by first mortgages on one- to four-family residential properties. We
also make a limited number of consumer loans and loans secured by multi-family
dwellings, commercial properties and land acquisition and development loans. Our
mortgage loans carry either a fixed or an adjustable rate of interest. Mortgage
loans are generally long-term and amortize on a monthly basis with principal and
interest due each month. At September 30, 1998, our net loan portfolio totaled
$3.71 billion, which constituted 69.8% of our total assets.
All originated loans are generated by our own employees, with larger loans
subject to approval by the Board of Directors. Loans over $450,000 must be
underwritten by two underwriters. Any mortgage loan over $750,000 must be
approved by the ALCO and loans over $1.5 million must be approved by the Board
of Directors. For loans requiring Board approval, management is responsible for
presenting to the Board information about the creditworthiness of a borrower and
the estimated value of the subject property. Information pertaining to
creditworthiness of a borrower generally consists of a summary of the borrower's
credit history, employment, employment stability, net worth and income. The
estimated value of the property must be supported by an independent appraisal
report prepared in accordance with our appraisal policy.
At September 30, 1998, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was approximately $97.6
million. At that date, we had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount.
Our largest lending relationship to a single borrower or a group of related
borrowers consisted of six loans totaling $26.5 million at September 30, 1998.
The largest of these was a $14.0 million line of credit to be used solely for
the acquisition and development of a 320 acre residential housing community
located in Overland Park, Kansas. The loan balance at September 30, 1998 was
$9.7 million. This loan was originated in 1995, has a term of five years with
one automatic extension of three years, has an adjustable interest rate with a
minimum and maximum rate and had a 100% loan-to-value ratio at origination.
Principal repayments are not on a monthly schedule, but are required from the
sale of each building lot. Interest payments are funded from loan proceeds. The
borrowers have provided additional collateral, in the form of $750,000 in
certificates of deposit placed in escrow in the Bank, in addition to personal
guarantees of up to $2.3 million. The loan terms require additional contingent
interest payments to the Bank of 25% of the net profits of the development, if
any. At September 30, 1998, five of a planned eight phases have been developed,
with 267 lots completed and 165 lots sold to builders, with an additional 30
lots sold but not yet closed. An additional 166 lots remained to be developed at
that date. The next largest loan to one of the partners in this group of
borrowers is a
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<PAGE>
$6.2 million, combination two year construction and 10 year permanent loan for
the construction of a 51 unit apartment building located in Kansas City,
Missouri. The loan was originated in 1997, has a fixed interest rate with a 25
year amortization and a loan-to-value ratio, as completed, of 79%. The loan
requires the payment of interest only during the construction period, which may
be funded from loan proceeds. This loan is fully guaranteed by the borrower, is
cross-collateralized with other loan collateral held by the Bank, and the Bank
has an assignment of leases. The remaining three loans to this borrower each
have a balance of $3.0 million or less. Each of the loans to this group of
borrowers was current and performing in accordance with its terms at September
30, 1998.
The second largest lending relationship at September 30, 1998, consisted of
loans totaling $13.5 million for numerous multi-family and commercial real
estate projects throughout Kansas. No single loan in this group exceeded $3.0
million at that date. All of these loans were current and performing in
accordance with their terms at September 30, 1998.
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<PAGE>
Loan Portfolio Composition. The following table presents information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- ---------- -------- --------- -------- ---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family............. $3,504,799 93.47% $3,145,799 93.69% $2,794,342 93.80% $2,611,554 94.29% $2,155,272 93.23%
Multi-family.................... 40,361 1.08 26,688 0.79 29,341 0.98 32,795 1.18 44,082 1.91
Commercial...................... 9,069 0.24 5,924 0.18 4,999 0.17 4,721 0.17 5,301 0.23
Construction and development.... 52,086 1.39 51,157 1.52 38,488 1.29 14,088 0.51 11,069 0.48
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans.... 3,606,315 96.18 3,229,568 96.18 2,867,170 96.24 2,663,158 96.15 2,215,724 95.85
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Other Loans:
Consumer Loans:
Savings...................... 16,446 0.44 16,314 0.49 16,703 0.56 16,016 0.58 14,690 0.64
Student...................... 20,120 0.54 23,365 0.70 27,703 0.93 32,765 1.18 27,881 1.21
Home improvement............. 2,776 0.07 3,341 0.10 2,183 0.07 2,221 0.08 1,900 0.08
Automobile................... 5,758 0.15 4,120 0.12 2,372 0.08 2,183 0.08 1,953 0.08
Home equity.................. 97,829 2.61 80,640 2.40 62,895 2.11 53,107 1.92 49,226 2.13
Other........................ 420 0.01 294 0.01 309 0.01 234 0.01 279 0.01
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer loans....... 143,349 3.82 128,074 3.82 112,165 3.76 106,526 3.85 95,929 4.15
Commercial business loans....... 10 --- --- --- --- --- --- --- --- ---
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans.......... 143,359 3.82 128,074 3.82 112,165 3.76 106,526 3.85 95,929 4.15
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans receivable 3,749,674 100.00% 3,357,642 100.00% 2,979,335 100.00% 2,769,684 100.00% 2,311,653 100.00%
====== ====== ====== ====== ======
Less:
Loans in process................ 21,690 21,872 21,047 5,773 8,024
Deferred fees and discounts..... 12,751 12,029 11,799 10,918 11,279
Allowance for losses............ 4,981 1,639 1,583 1,359 3,878
---------- ---------- ---------- ---------- ----------
Total loans receivable, net..... $3,710,252 $3,322,102 $2,944,906 $2,751,634 $2,288,472
========== ========== ========== ========== ==========
</TABLE>
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<PAGE>
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- --------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........... $2,010,809 53.64% $1,403,790 41.81% $1,085,992 36.45% $ 817,233 29.51% $ 640,240 27.70%
Multi-family.................. 34,266 0.91 19,069 0.57 16,113 0.54 18,469 0.67 18,671 0.81
Commercial.................... 8,208 0.22 4,667 0.14 3,463 0.12 2,734 0.10 2,968 0.13
Construction and development.. 19,829 0.53 9,404 0.28 6,315 0.21 5,292 0.19 2,629 0.11
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans...... 2,073,112 55.29 1,436,930 42.80 1,111,883 37.32 843,728 30.47 664,508 28.75
Consumer....................... 29,970 0.80 27,335 0.81 22,585 0.76 21,586 0.78 28,016 1.21
Commercial business............ 10 --- --- --- --- --- --- --- --- ---
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total fixed-rate loans........ 2,103,092 56.09 1,464,265 43.61 1,134,468 38.08 865,314 31.25 692,524 29.96
Adjustable-Rate Loans:
Real estate:
One- to four-family........... 1,493,990 39.85 1,742,009 51.88 1,708,350 57.34 1,794,322 64.77 1,515,032 65.53
Multi-family.................. 6,095 0.16 7,619 0.23 13,228 0.44 14,326 0.52 25,411 1.10
Commercial.................... 861 0.02 1,257 0.04 1,536 0.05 1,987 0.07 2,333 0.10
Construction and development.. 32,257 0.86 41,753 1.24 32,173 1.08 8,796 0.32 8,440 0.37
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans....... 1,533,203 40.89 1,792,638 53.39 1,755,287 58.91 1,819,431 65.68 1,551,216 67.10
Consumer....................... 113,379 3.02 100,739 3.00 89,580 3.01 84,939 3.07 67,913 2.94
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total adjustable-rate loans... 1,646,582 43.91 1,893,377 56.39 1,844,867 61.92 1,904,370 68.75 1,619,129 70.04
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans................... 3,749,674 100.00% 3,357,642 100.00% 2,979,335 100.00% 2,769,684 100.00% 2,311,653 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............... 21,690 21,872 21,047 5,773 8,024
Deferred fees and discounts.... 12,751 12,029 11,799 10,918 11,279
Allowance for loan losses...... 4,981 1,639 1,583 1,359 3,878
---------- ---------- ---------- ---------- ----------
Total loans receivable, ne..... $3,710,252 $3,322,102 $2,944,906 $2,751,634 $2,288,472
========== ========== ========== ========== ==========
</TABLE>
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<PAGE>
The following schedule illustrates the contractual maturity of the Bank's
loan portfolio at September 30, 1998. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
Real Estate
------------------------------------------------------
Multi-family and Construction Commercial
One- to Four-Family Commercial and Development Consumer Business Total
------------------- ---------------- ----------------- --------------- --------------- ------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
September 30,
- -----------------------
1998(1)................ $ 2,881 7.05% $ --- ---% $ 384 9.50% --- ---% $ --- ---% $ 3,265 7.33%
1999................... 32,094 6.33 1,037 7.50 5,800 9.50 10,158 7.59 --- --- 49,089 6.99
2000................... 11,639 6.90 --- --- 9,000 9.00 6,573 8.33 10 10.50 27,222 7.94
2001 and 2002.......... 18,781 7.62 --- --- 25,559 8.50 7,062 8.82 --- --- 51,402 8.22
2003 to 2004........... 22,744 6.87 716 7.67 11,343 6.97 3,625 9.10 --- --- 38,428 7.12
2005 to 2019........... 971,850 6.71 43,326 8.16 --- --- 86,781 8.75 --- --- 1,101,957 6.93
2020 and beyond........ 2,444,810 6.66 4,351 7.70 --- --- 29,150 9.02 --- --- 2,478,311 6.69
<FN>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</FN>
</TABLE>
The total amount of loans due after September 30, 1999 which have
predetermined interest rates is $2.10 billion, while the total amount of loans
due after such date which have floating or adjustable interest rates is $1.60
billion.
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<PAGE>
One- to Four-Family Residential Real Estate Lending. Residential loan
originations are generated by referrals from real estate brokers and builders,
our marketing efforts and existing and walk-in customers. We focus our lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied one- to four-family residences in our market areas. In order to
generate additional lending volume, we purchase whole loans throughout the
midwest. These purchases allow us to attain geographic diversification and
manage credit concentration risks in the loan portfolio. At September 30, 1998,
one- to four-family residential mortgage loans totaled $3.50 billion, or 93.5%
of our gross loan portfolio.
We generally underwrite our one- to four-family loans based on the
applicant's employment, credit history, and appraised value of the subject
property. Presently, we lend up to 97% of the lesser of the appraised value or
purchase price for one- to four-family residential loans. For loans with a
loan-to-value ratio in excess of 80%, we require private mortgage insurance in
order to reduce our exposure below 80%. Properties securing our one- to
four-family loans are appraised by either staff appraisers or independent fee
appraisers approved by the Board of Directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
We currently originate one- to four-family mortgage loans on either a fixed
or adjustable basis, as consumer demand dictates. Our pricing strategy for
mortgage loans includes setting interest rates that are competitive with FNMA
and FHLMC, other local financial institutions, and our internal needs.
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 indexes to
reprice our ARM loans. During the 1998 and 1997 fiscal years, we originated
$198.9 million and $315.3 million of one- to four-family ARM loans, and $878.6
million and $413.0 million of one- to four-family fixed-rate mortgage loans,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Asset and Liability Management and Market Risk."
Fixed-rate loans secured by one- to four-family residences have contractual
maturities of up to 30 years, and are fully amortizing, with payments due
monthly. These loans normally remain outstanding, however, for a substantially
shorter period of time because of refinancing and other prepayments. A
significant change in the current level of interest rates could alter the
average life of a residential loan in our portfolio considerably. Our one- to
four-family loans are generally not assumable, do not contain prepayment
penalties and do not permit negative amortization of principal. Our real estate
loans generally contain a "due on sale" clause allowing us to declare the unpaid
principal balance due and payable upon the sale of the security property.
Our one- to four-family residential ARM loans are fully amortizing loans
with contractual maturities of up to 30 years, with payments due monthly. Our
ARM loans generally provide for specified minimum and maximum interest rates,
with a lifetime cap and floor, and an annual adjustment on the interest rate
over the rate in effect on the date of origination. As a consequence of using
caps, the interest rates on these loans may not be as rate sensitive as is our
cost of funds. Our ARM loans are not convertible into fixed-rate loans.
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<PAGE>
In order to remain competitive in our market areas, we currently originate
ARM loans at initial rates below the fully indexed rate, and qualify borrowers
based on this initial discounted rate for our three and five year ARMs and at 2%
over the initial rate for one-year ARMs.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality --Nonperforming
Assets" and "-Asset Quality -- Classified Assets." At September 30, 1998, our
one- to four-family ARM loan portfolio totaled $1.49 billion, or 39.9% of our
gross loan portfolio. At that date the fixed-rate one- to four-family mortgage
loan portfolio totaled $2.01 billion, or 53.6% of our gross loan portfolio.
Multi-family and Commercial Real Estate Lending. We offer a variety of
multi-family and commercial real estate loans. These loans are secured primarily
by multi-family dwellings, small retail establishments and small office
buildings located in our market areas. At September 30, 1998, multi-family and
commercial real estate loans totaled $49.4 million or 1.3% of our gross loan
portfolio.
Our loans secured by multi-family and commercial real estate are originated
with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indexes, generally determined
through negotiation with the borrower. Loan-to-value ratios on our multi-family
and commercial real estate loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments and have maximum maturities of 25 years. While maximum maturities may
extend to 30 years, loans frequently have shorter maturities and may not be
fully amortizing, requiring balloon payments of unamortized principal at
maturity.
Loans secured by multi-family and commercial real estate are granted based
on the income producing potential of the property and the financial strength of
the borrower. The net operating income (the income derived from the operation of
the property less all operating expenses) must be sufficient to cover the
payments related to the outstanding debt. We generally require personal
guarantees of the borrowers covering a portion of the debt in addition to the
security property as collateral for such loans. We generally require an
assignment of rents or leases in order to be assured that the cash flow from the
project will be used to repay the debt. Appraisals on properties securing
multi-family and commercial real estate loans are performed by independent state
certified fee appraisers approved by the Board of Directors. See "-- Loan
Originations, Purchases, Sales and Repayments."
The Bank does not generally maintain a tax or insurance escrow account for
its loans secured by multi-family and commercial real estate. In order to
monitor the adequacy of cash flows on income-producing properties of $1.0
million or more, the borrower is notified annually to provide financial
information including rental rates and income, maintenance costs and an update
of real estate property tax payments, as well as personal financial information.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans.
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<PAGE>
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. The Bank
also makes a limited number of construction loans to individuals for the
construction of their residences. Presently, all of these loans are secured by
property located within our market areas. At September 30, 1998, we had $35.5
million in construction loans outstanding, representing 1.0% of our gross loan
portfolio.
Construction loans are obtained principally through continued business with
builders who have previously borrowed from the Bank. The application process
includes submission of accurate plans, specifications and costs of the project
to be constructed. These items are used as a basis to determine the appraised
value of the subject property. Loans are based on the lesser of current
appraised value and/or the cost of construction, 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 the
Bank. At September 30, 1998, the Bank had four acquisition and development loans
totaling $16.6 million, representing 0.4% of our gross loan portfolio.
Loans secured by building lots or raw land held for development are
generally granted with terms of up to five years and are available with either
fixed or adjustable interest rates and on individually negotiated terms. During
the development or construction phase, the borrower pays interest only, which
payments may be funded from the loan proceeds. These loans may require monthly
payments or may be established as line of credit loans with no fixed repayment
schedule. On line of credit loans, repayment is required as building lots are
sold. In addition to the agreed upon interest rate on these loans, we may
negotiate a contingent interest payment based on the profitability of the
project.
Loan-to-value ratios on our construction and development loans typically do
not exceed 80% of the appraised value of the project on an as completed basis,
although the Bank's largest acquisition and development loan was originated with
a 100% loan-to-value ratio and a 25% contingent interest payment based on net
profits of the project, if any. See "- Lending Activities -- General."
Loans secured by building lots or raw land for development are granted
based on both the financial strength of the borrower and the value of the
underlying property. We generally obtain phase 1 environmental reports on
construction loans and acquisition and development loans of $1.0 million or
more, and require personal guarantees from the borrowers for all or a portion of
the debt. We also require updated financial statements from the borrowers on an
ongoing basis.
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<PAGE>
Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans. In addition, payment of interest from loan proceeds can make it difficult
to monitor the progress of a project.
Consumer Lending. Consumer loans generally have shorter terms to maturity,
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, 1998, our consumer loan portfolio totaled $143.3 million, or 3.8% of our
gross loan portfolio.
The Bank offers a variety of secured consumer loans, including home equity
loans and lines of credit, home improvement loans, auto loans, student loans and
loans secured by savings deposits. We also offer a very limited amount of
unsecured loans. We currently originate all of our consumer loans in our market
areas. The Bank's home equity loans, including lines of credit, and home
improvement loans comprised approximately 70.2% of our total consumer loan
portfolio at September 30, 1998. These loans may be originated in amounts,
together with the amount of the existing first mortgage, of up to 100% of the
value of the property securing the loan. In order to minimize risk of loss, home
equity loans in excess of 80% of the value of the property are partially insured
against loss. The term to maturity on our home equity and home improvement loans
may be up to 15 years. Home equity lines of credit have no stated term to
maturity and require the payment of 2% of the outstanding loan balance per
month, which amount may be reborrowed at any time. Other consumer loan terms
vary according to the type of collateral, length of contract and
creditworthiness of the borrower. The majority of the Bank's consumer loan
portfolio is comprised of home equity lines of credit, which have interest rates
that adjust based upon changes in the prime rate.
We do not originate any consumer loans on an indirect basis. Indirect loans
are contracts purchased from retailers of goods or services which have extended
credit to their customers.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles.
65
<PAGE>
Loan Originations, Purchases, Sales and Repayments
We originate loans through referrals from real estate brokers and builders,
our marketing efforts, and our existing and walk-in customers. While we
originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon customer demand for loans in our market areas. Demand is
affected by local competition and the interest rate environment. During the last
several years, our dollar volume of fixed-rate, one- to four-family loans has
exceeded the dollar volume of the same type of adjustable-rate loans. While our
primary business is the origination of one- to four-family mortgage loans,
competition from other lenders in our market areas limits, to a certain extent,
the volume of loans we have been able to originate and place in our portfolio.
As a result we have purchased mortgage loans and investment and mortgage-related
securities to supplement our portfolios. Such whole loan purchases also serve to
reduce our risk of geographic concentration. We sell a limited amount of loans
and some of our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, we, like many other
financial institutions, have experienced significant prepayments on loans and
mortgage-related securities due to the low interest rate environment prevailing
in the United States.
Purchased whole loans are originated by one or two lenders who have a
regional or national presence. By contractual agreement, the loan product is
originated for us to our specifications. Each loan is underwritten by a third
party contract underwriter who is under contract with the Bank. We set prices
for the loan product once each week. Mortgage servicing for purchased whole
loans is retained by the originating lender.
In periods of economic uncertainty, the ability of financial institutions,
including the Bank, to originate or purchase large dollar volumes of real estate
loans may be substantially reduced or restricted, with a resultant decrease in
interest income.
66
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1998 1997 1996
-------------- -------------- -----------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........... $ 198,857 $315,314 $253,596
- multi-family................ --- 6,240 18,000
- commercial.................. --- --- ---
Non-real estate - consumer.................. 86,848 71,536 58,808
- commercial business.... 10 --- ---
----------- --------- ---------
Total adjustable-rate................ 285,715 393,090 330,404
----------- --------- ---------
Fixed rate:
Real estate - one- to four-family........... 878,567 412,960 384,842
- multi-family................ --- 250 2,600
- commercial.................. 350 --- 264
Non-real estate - consumer.................. 26,312 26,514 20,554
----------- --------- ---------
Total fixed-rate..................... 905,229 439,724 408,260
----------- --------- ---------
Total loans originated............... 1,190,944 832,814 738,664
----------- --------- ---------
Purchases:
Real estate - one- to four-family........... 124,725 106,403 38,086
- multi-family................ --- --- ---
- commercial.................. --- --- ---
Non-real estate - consumer.................. 30 --- ---
----------- --------- ---------
Total loans purchased................ 124,755 106,403 38,086
Mortgage-related securities (excluding
REMICs and CMOs)............................ 256,076 245,102 ---
REMICs and CMOs............................. 363,068 112,442 ---
----------- --------- ---------
Total purchased...................... 743,899 463,947 38,086
----------- --------- ---------
Sales and Repayments:
Real estate - one- to four-family........... 23,160 4,563 15,588
Non-real estate - consumer (student loans).. 13,620 15,059 20,168
----------- --------- ---------
Total loans sold..................... 36,780 19,622 35,756
Mortgage-backed securities.................. --- --- ---
----------- --------- ---------
Total sales.......................... 36,780 19,622 35,756
Principal repayments........................ 1,113,628 558,990 588,565
----------- --------- ---------
Total reductions..................... 1,150,408 578,612 624,321
----------- --------- ---------
Increase in other items, net.................. 202,101 91,511 105,576
----------- --------- ---------
Net increase......................... $ 582,334 $626,638 $ 46,853
=========== ========= ========
</TABLE>
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
67
<PAGE>
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 the
Bank's Board of Directors, will turn over the account to our legal counsel with
instructions to initiate foreclosure.
Delinquent Loans. The following table sets forth our loans delinquent 30 -
89 days by type, number, amount and percentage of type at September 30, 1998.
Loans Delinquent for
30-89 Days
-----------------------------------------
Percent of
Total Delinquent
Number Amount Loans
--------- --------- ------------------
(Dollars in Thousands)
Real Estate:
One- to four-family.......... 312 $18,669 98%
Multi-family................. --- --- ---
Commercial................... --- --- ---
Construction or development.. --- --- ---
Consumer....................... 34 316 2
Commercial business............ --- --- ---
---- ------- ----
Total..................... 346 $18,985 100%
=== ======= ===
68
<PAGE>
Non-performing Assets. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates. Real estate owned
include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family........................ $6,048 $4,989 $3,889 $3,950 $5,150
Multi-family............................... --- --- --- --- 477
Commercial real estate..................... --- 1,042 --- --- ---
Construction or development................ --- --- 100 228 288
Consumer................................... 181 78 1 23 15
Commercial business........................ --- --- --- --- ---
------ ----- ----- ------ ------
Total................................... 6,229 6,109 3,990 4,201 5,930
------ ----- ----- ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family........................ --- --- --- --- ---
Multi-family............................... --- --- --- --- ---
Commercial real estate..................... --- --- --- --- ---
Construction or development................ --- --- --- --- ---
Consumer................................... --- --- --- --- ---
Commercial business........................ --- --- --- --- ---
------ ----- ----- ------ ------
Total................................... --- --- --- --- ---
------ ----- ----- ------ ------
Real estate owned:
One- to four-family........................ 1,964 2,435 3,552 1,864 2,054
Multi-family............................... --- --- --- 11,852 ---
Commercial real estate..................... --- --- --- --- ---
Construction or development................ --- --- --- --- ---
Consumer................................... --- --- --- --- ---
Commercial business........................ --- --- --- --- ---
------ ----- ----- ------ ------
Total................................... 1,964 2,435 3,552 13,716 2,054
------ ----- ----- ------ ------
Total non-performing assets.................. $8,193 $8,544 $7,542 $17,917 $7,984
====== ====== ====== ======= ======
Total as a percentage of total assets........ 0.15% 0.17% 0.17% 0.41% 0.20%
===== ===== ===== ====== =====
</TABLE>
For the year ended September 30, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $227,000. The amount that was included in
interest income on such loans was $64,700 for the year ended September 30, 1998.
Non-performing Loans. At September 30, 1998, we had $6.2 million in
non-performing loans, which constituted 0.2% of our gross loan portfolio. At
that date, there were no non-performing loans to any one borrower or group of
related borrowers that exceeded either individually or in the aggregate $1.0
million.
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<PAGE>
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of September 30, 1998, there was also an aggregate of
$373,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. These loans have been considered in
management's determination of the adequacy of our allowance for loan losses.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management and approved by the Board of Directors. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS and the FDIC, which may
order the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the OTS and in
accordance with our classification of assets policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets, at September 30, 1998, we had classified $8.6
million of our assets as substandard, none as doubtful and none as loss. The
amount classified substandard represented 1.3% of our retained earnings and 0.2%
of our assets at September 30, 1998.
Provision for Loan Losses. The Bank recorded a provision for loan losses in
fiscal 1998 of $3,362,000, compared to $56,000 in fiscal 1997 and $865,000 in
fiscal 1996. The provision for loan losses is charged to income to bring the
Bank's 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 1997 was based on management's review of
such factors which indicated that the allowance for loan losses was adequate to
cover losses
70
<PAGE>
inherent in the loan portfolio and firm commitments at each quarter end,
including September 30, 1997.
Allowance for Loan Losses. The Bank maintains 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, and to a lesser extent, unused commitments to provide financing. The
Bank's 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 Statement of Financial Accounting
Standards ("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 and certain unused commitments, in each case based on the internal risk
evaluation of such loans, pools of loans or commitments. Changes in risk
evaluations of both performing and nonperforming loans affect the amount of the
formula allowance. Loss factors are based both on the Bank's 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 impairment on a loan by loan basis. 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, consumer loans and commitments.
The appropriateness of the allowance is reviewed by management based upon
its evaluation of then-existing economic and business conditions affecting the
key lending areas of the Bank 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 the Bank's 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
71
<PAGE>
the estimated amounts. The Bank's 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 loss factors. By assessing the estimated losses inherent in the loan
portfolio on a quarterly basis, the Bank is able to adjust specific and inherent
loss estimates based upon any more recent information that has become available.
At September 30, 1998, the Bank's allowance for loan losses was $4,981,000
or .13% of the total loan portfolio and approximately 80% of total nonaccrual
loans. This compares with an allowance for loan losses of $1,639,000 or .05% of
the total loan portfolio and approximately 27% of the total nonaccrual loans as
of September 30, 1997. At fiscal year end 1998, the unallocated portion of the
allowance for loan losses was $960,000 related to unused commitments to provide
financing. The allocated portion of the allowance of $4,021,000 is composed of
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. In addition, as described
below, the Bank allocated a portion of the allowance resulting from the
unallocated allowance to unused commitments to provide financing.
During 1998, the Bank's single family residential loan portfolio increased
by $359.6 million over 1997. In addition, the non-performing single-family loans
increased 21% in 1998 over 1997 amounts primarily due to an increased number of
borrowers being overextended. The provision for loan losses in fiscal 1998 of
$2.0 million, representing 2.2% of pretax earnings, was recorded in allocated
allowance to reflect the increase 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 .56% of the 1998 increase in the portfolio. The increase in
the formula allowance was primarily driven by slower market growth in the
portfolio segment as a result of increased prepayments caused by refinancings
and the exposure presented by the level of nonperforming loans. Based upon the
foregoing analysis of the Bank's 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 the Bank will realize in the
future related to the increase in the single family residential loan portfolio.
During 1998, a provision for loan losses was recorded for $400,000 relating
to letters of credit supporting bond issues used to construct apartment
buildings in Kansas. During 1998, one of the bond issues appeared to be in the
position of defaulting. In case of default, the Bank would have to honor the
letter of credit, repossess the property and incur a loss on the sale of the
apartment complex.
During 1998, the Bank's unallocated allowance increased to $960,000 in 1998
from $239,000 in 1997. The unallocated allowance represents the credit losses
inherent in the unused commitments to provide financing. During 1998, the Bank's
consumer loan lines of credit increased $33.8 million to $122.8 million from $89
million in 1997. Additionally, at September
72
<PAGE>
30, 1998 there were off-balance sheet commitments of $171.2 million consisting
of $21.7 million of unfunded portions on construction loans, $140.7 million of
commitments to originate single-family mortgage loans and $8.8 million of
non-mortgage loans. The level of commitments impacted the Bank's risk evaluation
resulting in an exposure requiring the Bank to provide $500,000 in loan loss
provision in accordance with the Bank's reserving methodology. The provision
represents .25% of the increase in the level of commitments in 1998. The
evaluations of these inherent losses are subject to higher degrees of
uncertainty because they are not identified with specific problem credits.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance when taken as a whole, is adequate to absorb reasonable estimated loan
losses inherent in the Bank's loan portfolios.
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........................ $1,639 $1,583 $1,359 $3,878 $6,935
Charge offs:
One- to four-family................................. 20 --- --- --- ---
Multi-family........................................ --- --- 641 2,519 1,071
Commercial real estate.............................. --- --- --- --- ---
Construction or development......................... --- --- --- --- ---
Consumer............................................ --- --- --- --- ---
Commercial business................................. --- --- --- --- ---
------ ------ ------ ------ ------
Total charge-offs................................. 20 --- 641 2,519 1,071
------ ------ ------ ------ ------
Recoveries............................................ --- --- --- --- ---
Net charge-offs....................................... 20 --- 641 2,519 1,071
Provisions (recoveries) charged to operations......... 3,362 56 865 --- (1,986)
------ ------ ------ ------ ------
Balance at end of period............................ $4,981 $1,639 $1,583 $1,359 $3,878
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period.......... ---% ---% 0.02% 0.10% 0.04%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average non-performing assets........................ 0.06% ---% 1.26% 4.86% 2.58%
====== ====== ====== ====== ======
Allowance as a percentage of non-performing
loans................................................ 79.96% 26.83% 39.67% 32.35% 65.40%
====== ====== ====== ====== ======
Allowance as a percentage of total loans
(end of period)...................................... 0.13% 0.05% 0.05% 0.05% 0.17%
====== ====== ====== ====== ======
</TABLE>
73
<PAGE>
The distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
---------------------------------- -------------------------------- ---------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Amount of Loan Category Amount of Loan Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance by Category Loans Allowance by Category Loans Allowance by Category Loans
--------- ------------- ------- --------- ------------- ------- --------- ------------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ $3,222 $3,496,699 94.12% $1,208 $3,137,101 94.38% $1,011 $2,784,247 94.49%
Multi-family............... 200 40,091 1.08 66 26,416 0.79 427 29,341 1.00
Commercial real estate..... 77 9,006 0.24 18 5,864 0.18 9 4,999 0.17
Construction or
development.............. 348 31,610 0.85 67 30,900 0.93 85 17,547 0.60
Consumer................... 174 137,817 3.71 41 123,460 3.71 42 110,355 3.75
Commercial business........ --- 10 --- --- --- --- --- --- ---
Unallocated................ 960 --- --- 239 --- --- 9 --- ---
------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Total................. $4,981 $3,715,233 100.00% $1,639 $3,323,741 100.00% $1,583 $2,946,489 100.00%
====== ========== ====== ====== ========== ====== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
1995 1994
---------------------------------- -----------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Amount of Loan Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance by Category Loans Allowance by Category Loans
--------- ------------- ------- --------- ------------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 994 $2,602,296 94.53% $ 947 $2,144,988 93.57%
Multi-family............... 63 32,795 1.19 79 44,082 1.92
Commercial real estate..... 17 4,646 0.17 19 5,223 0.23
Construction or
development.............. 29 8,333 0.30 21 3,130 0.14
Consumer................... 21 104,923 3.81 15 94,927 4.14
Commercial business........ --- --- --- --- --- ---
Unallocated................ 234 --- --- 2,797 --- ---
------ ---------- ------ ------ ---------- ------
Total................. $1,358 $2,752,993 100.00% $3,878 $2,292,350 100.00%
====== ========== ====== ====== ========== ======
</TABLE>
74
<PAGE>
Investment Activities
We are required to maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, we have maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and above levels believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At September 30, 1998, our regulatory liquidity ratio, 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 45.3%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, including callable agency securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds. Subject
to various restrictions, federally chartered savings institutions may also
invest their assets in investment grade commercial paper and corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. See "Regulation - The Bank and - Qualified Thrift Lender Test" for a
discussion of additional restrictions on our investment activities.
The Chief Financial Officer has the basic responsibility for the management
of the Bank's investment portfolio, subject to the direction and guidance of the
ALCO. The Chief Financial Officer considers various factors when making
decisions, including the marketability, maturity and tax consequences of the
proposed investment. The maturity structure of investments will be affected by
various market conditions, including the current and anticipated slope of the
yield curve, the level of interest rates, the trend of new deposit inflows, and
the anticipated demand for funds via deposit withdrawals and loan originations
and purchases.
The general objectives of our investment portfolio are to: provide
liquidity when loan demand is high and 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."
Our investment securities currently consist of U.S. Government and Agency
securities and securities purchased under agreements to resell which are fully
collateralized short-term investments. See Note 5 of the Notes to Consolidated
Financial Statements. Our mortgage-related securities portfolio currently
consists of securities issued under government-sponsored agency programs. A
portion of this portfolio consists of collateralized mortgage obligations
("CMOs"). CMOs are special types of pass-through debt securities in which the
stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules, as well as a residual interest, with
each such class possessing different risk characteristics. The Bank intends to
increase its current portfolio of these securities by
75
<PAGE>
utilizing its portion of the net proceeds from the Stock Issuance to increase
its existing wholesale leveraging activities. See "Risk Factors - Our use of
proceeds from this offering to buy mortgage-related securities could increase
our risk that changes in market interest rates will result in lower income."
Our policy is to purchase only CMOs that are Agency backed. The expected
life of our CMOs is typically under five years at the time of purchase. Premiums
associated with CMOs purchased are not significant; therefore, the risk of
significant yield adjustments because of accelerated prepayments is limited.
Yield adjustments are encountered as interest rates rise or decline, which in
turn slows or increases prepayment rates and affects the average lives of the
CMOs. At September 30, 1998, we held CMOs totaling $320.4 million, all of which
were secured by underlying collateral issued under government agency-sponsored
programs. All of our CMOs are currently classified as held to maturity. At
September 30, 1998, our CMOs did not qualify as high risk mortgage securities as
defined under OTS regulations. The Bank does not invest in residual interests of
CMOs.
While mortgage-backed and mortgage-related securities, such as CMOs and
REMICs, carry a reduced credit risk as compared to whole loans, such securities
remain subject to the risk that a fluctuating interest rate environment, along
with other factors such as the geographic distribution of the underlying
mortgage loans, may alter the prepayment rate of such mortgage loans and so
affect both the prepayment speed, and value, of such securities.
The following table sets forth the composition of our investment and
mortgage-backed and related securities portfolio at the dates indicated. Our
investment securities portfolio at September 30, 1998, contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of our retained earnings, excluding those issued by the United
States Government or its agencies.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1998 1997 1996
-------------------- ----------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
-------- --------- --------- ---------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale, at fair value:
Mortgage-backed securities................... $747,991 100.00% $754,179 100.00% $607,738 100.00%
U.S. government and agency securities........ --- --- --- --- --- ---
-------- ------ -------- ------ -------- ------
Total securities available for sale....... $747,991 100.00% $754,179 100.00% $607,738 100.00%
======== ====== ======== ====== ======== ======
Investment securities, at amortized cost:
U.S. Government and Agency securities........ $160,469 33.37 $585,294 82.97 $717,248 97.67
Collateralized mortgage obligations
and REMICs................................. 320,379 66.61 120,007 17.01 17,006 2.32
Other investment securities.................. 100 0.02 100 0.02 100 0.01
-------- ------ -------- ------ -------- ------
Total investment securities............... $480,948 100.00% $705,401 100.00% $734,354 100.00%
======== ====== ======== ====== ======== ======
Investment securities, at fair value........... $479,840 99.77% $704,935 99.93% $718,393 97.83%
======== ====== ======== ====== ======== ======
</TABLE>
76
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years Total Securities
----------------- ------------ ------------- --------------- ----------------------------
Fair
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate Value
---------- ------ ------- ---- -------- ---- --------- ----- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and
Agency securities...................... $ 20,825 5.50% $30,981 6.65% $3,729 8.08% $670,569 6.81% $726,104 6.77% $747,991
-------- ---- ------- ---- ------ ---- -------- ---- -------- ---- --------
Total securities available for sale... $ 20,825 5.50% $30,981 6.65% $3,729 8.08% $670,569 6.81% $726,104 6.77% $747,991
======== ==== ======= ==== ====== ==== ======== ==== ======== ==== ========
Investment securities:
U.S. Government and Agency securities.... $135,469 5.48% $25,000 5.93% $ --- ---% $ --- ---% $160,469 5.55% $160,612
Securities purchased under agreement
to resell............................... 235,000 5.51 --- --- --- --- --- --- 235,000 5.51 235,000
Collateralized mortgage obligations and
REMICs................................. 192 4.75 --- --- --- --- 320,187 6.40 320,379 6.40 319,128
Other investment securities.............. --- --- 100 1.50 --- --- --- --- 100 1.50 100
-------- ---- ------- ---- ----- ---- ------ ---- -------- ---- --------
Total investment securities.......... $370,661 5.50% $25,100 5.91% $ --- ---% $320,187 6.40% $715,948 5.92% $714,840
======== ==== ======= ==== ====== ==== ======== ==== ======== ==== ========
</TABLE>
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<PAGE>
Sources of Funds
General. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.
Deposits. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and passcard savings
accounts, money market deposit accounts, NOW accounts, non-interest bearing
checking accounts and certificates of deposit. We only solicit deposits in our
market areas and have not accepted brokered deposits. We primarily rely on
competitive pricing policies, marketing and customer service to attract and
retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The variety of deposit accounts we offer has allowed us to be competitive
in obtaining funds and to respond with flexibility to changes in consumer
demand. We have become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. We endeavor to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives. Based on our experience, we
believe that our deposits are relatively stable sources of funds. Despite this
stability, our ability to attract and maintain these deposits and the rates paid
on them has been and will continue to be significantly affected by market
conditions.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Year Ended September 30,
---------------------------------------------
1998 1997 1996
---------- -------------- ----------------
(Dollars in Thousands)
Opening balance....... $3,787,123 $3,740,718 $3,673,630
Deposits.............. 4,725,985 4,367,361 4,134,148
Withdrawals........... 4,795,516 4,496,198 4,235,171
Interest credited..... 176,588 175,242 168,111
------------ ----------- ------------
Ending balance........ $3,894,180 $3,787,123 $3,740,718
========== ========== ==========
Net increase.......... $ 107,057 $ 46,405 $ 67,088
=========== =========== ============
Percent increase...... 2.83% 1.24% 1.83%
==== ==== ====
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<PAGE>
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs we offered for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ --------------------- --------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ----------- ---------- ---------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Demand deposits.............................. $ 260,440 6.68% $ 249,585 6.58% $ 235,542 6.29%
Passbook and Passcard........................ 129,180 3.31 131,854 3.48 130,493 3.48
Money market select.......................... 213,181 5.47 30,405 0.80 --- ---
Cash fund.................................... 225,356 5.78 293,108 7.73 326,435 8.71
----------- ------ ---------- ------ ---------- ------
Total non-certificates....................... $ 828,157 21.24 704,952 18.59 692,470 18.48
----------- ------ ---------- ------ ---------- ------
Certificates (by rate):
3.00 - 3.99%................................ 5,900 0.15 7,866 0.21 8,193 0.22
4.00 - 4.99%................................ 429,108 11.01 25,822 0.68 76,961 2.05
5.00 - 5.99%................................ 1,684,996 43.22 2,224,325 58.67 1,568,715 41.89
6.00 - 6.99%................................ 715,234 18.34 598,005 15.77 997,695 26.63
7.00 - 7.99%................................ 227,695 5.84 220,048 5.80 375,960 10.04
8.00 - 8.99%................................ 2,405 0.06 5,398 0.14 14,715 0.39
9.00 - 9.99%................................ 685 0.02 707 0.02 6,009 0.16
----------- ------ ---------- ------ ---------- ------
Total certificates........................... 3,066,023 78.64 3,082,171 81.29 3,048,248 81.38
----------- ------ ---------- ------ ---------- ------
Accrued interest............................. 4,674 0.12 4,718 0.12 5,413 0.14
----------- ------ ---------- ------ ---------- ------
Total deposits............................... $ 3,898,854 100.00% $3,791,841 100.00% $3,746,131 100.00%
=========== ====== ========== ====== ========== ======
</TABLE>
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<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
3.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
------ ---------- -------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
December 31, 1998.............. $5,852 $ 428,326 $ 18,064 $ 363 $ 452,605 14.77%
March 31, 1999................. 48 322,704 9,637 1,578 333,967 10.89
June 30, 1999.................. --- 311,289 23,289 359 334,937 10.92
September 30, 1999............. --- 278,241 151,073 219 429,533 14.01
December 31, 1999.............. --- 108,430 144,097 302 252,829 8.25
March 31, 2000................. --- 231,790 130,809 43 362,642 11.83
June 30, 2000.................. --- 124,860 154,706 37 279,603 9.12
September 30, 2000............. --- 63,522 107,064 172 170,758 5.57
December 31, 2000.............. --- 46,583 132 12 46,727 1.52
March 31, 2001................. --- 68,358 79 --- 68,437 2.23
June 30, 2001.................. --- 37,068 133 --- 37,201 1.21
September 30, 2001............. --- 29,251 42,800 --- 72,051 2.35
Thereafter..................... --- 63,682 161,046 5 224,733 7.33
------ ---------- -------- ------- ---------- ------
Total....................... $5,900 $2,114,104 $942,929 $ 3,090 $3,066,023 100.00%
====== ========== ======== ======= ========== ======
Percent of total............ 0.19% 68.96% 30.75% 0.10%
===== ====== ===== ====
</TABLE>
The following table indicates the amount of our certificates of deposit and
other deposits by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000... $411,948 $310,565 $690,590 $1,353,444 $2,766,547
Certificates of deposit of $100,000 or more.. 40,657 23,099 73,880 161,537 299,173
Public Funds................................. --- 303 --- --- 303
-------- -------- -------- ---------- ----------
Total certificates of deposit................ $452,605 $333,967 $764,470 $1,514,981 $3,066,023
======== ======== ======== ========== ==========
</TABLE>
Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to fund loan demand or when they meet our asset/liability management goals. Our
borrowings historically have consisted of advances from
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<PAGE>
the FHLB of Topeka and securities sold under agreement to repurchase. See Notes
11 and 12 of the Notes to Consolidated Financial Statements.
We may obtain advances from the FHLB of Topeka upon the security of certain
of our mortgage loans and mortgage-related securities. Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate, range of maturities and call features. At September 30, 1998, the
Bank had $500.0 million in FHLB advances outstanding.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and securities sold under agreements to repurchase for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1998 1997 1996
--------- --------------- -----------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances................................... $500,000 $275,000 $35,000
Securities sold under agreement to repurchase... 175,000 175,000 75,000
Average Balance:
FHLB advances................................... $365,000 $24,167 $ 2,917
Securities sold under agreement to repurchase... 175,000 82,692 75,000
</TABLE>
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1997 1996
------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances........................................ $500,000 $275,000 $ ---
Securities sold under agreement to repurchase........ 175,000 175,000 75,000
-------- -------- --------
Total borrowings................................ $675,000 $450,000 $75,000
======== ======== =======
Weighted average interest rate of FHLB advances...... 5.73% 5.76% 6.09%
Weighted average interest rate of securities sold
under agreement to repurchase....................... 5.73% 5.73% 5.78%
</TABLE>
Subsidiary and Other Activities
As a federally chartered savings association, we are permitted by OTS
regulations to invest up to 2% of our assets, or $106.3 million at September 30,
1998, in the stock of, or unsecured loans to, service corporation subsidiaries.
We may invest an additional 1% of our assets in service corporations where such
additional funds are used for inner-city or community development purposes.
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<PAGE>
At September 30, 1998, we had one subsidiary, Capitol Funds, Inc., which
has one line of credit loan outstanding for $14.0 million for the acquisition
and development of land for construction of single-family homes in Overland
Park, Kansas described under "-- Lending Activities - General." As of September
30, 1998, our total investment in this subsidiary was $11.4 million. During
fiscal 1998, Capitol Funds, Inc. reported net income of $586,000, which
consisted of interest funded from loan proceeds, net of income taxes.
Competition
We face strong competition in originating real estate and other loans and
in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our branch office system.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions located in the same community, as well as
mutual funds and other alternative investments. We compete for these deposits by
offering superior service and a variety of deposit accounts at competitive
rates.
Employees
At September 30, 1998, we had a total of 766 employees, including 150
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Properties
The Bank owns the office building in which its home office and executive
offices are located. At September 30, 1998, the Bank owned 21 of its other
branch offices and the remaining seven branch offices, including four
supermarket locations, and a warehouse were leased. As of September 30, 1998,
the net book value of the Bank's investment in premises, equipment and
leaseholds, excluding computer equipment, was approximately $21.0 million.
The Bank believes that is current facilities are adequate to meet the
present and immediately foreseeable needs of the Bank and the Stock Holding
Company.
The Bank maintains an on-line data base of depositor and borrower customer
information. The net book value of the data processing and computer equipment
utilized by the Bank at September 30, 1998 was $1.8 million.
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<PAGE>
Legal Proceedings
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. The Bank does not
anticipate incurring any material liability as a result of such litigation.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the MHC, Stock Holding Company and the Bank. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress
that may affect the operations of the MHC, the Stock Holding Company and the
Bank. In addition, the regulations governing the MHC, the Stock Holding Company
and the Bank may be amended from time to time by the OTS. Any such legislation
or regulatory changes in the future could adversely affect the MHC, the Stock
Holding Company or the Bank. No assurance can be given as to whether or in what
form any such changes may occur.
General
The Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the FDIC,
which insures the deposits of the Bank to the maximum extent permitted by law,
and requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders. This regulatory oversight will continue
to apply to the Bank following the Reorganization.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that it may
find in the Bank's operations. The FDIC also has the authority to examine the
Bank in its role as the administrator of the SAIF. The Bank's relationship with
its depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage requirements. Any change in such
regulations, whether by the FDIC, OTS or Congress, could have a material adverse
impact on the MHC, the Stock Holding Company and the Bank and their operations.
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<PAGE>
The Mutual Holding Company
Upon completion of the Reorganization and Stock Issuance, the MHC will
become a federal mutual holding company within the meaning of Section 10(o) of
the HOLA. As such, the MHC will be required to register with and be subject to
OTS examination and supervision as well as certain reporting requirements. In
addition, the OTS has enforcement authority over the MHC and its non-savings
institution subsidiaries, if any. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the financial safety, soundness or stability of a subsidiary savings bank.
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
OTS regulations and to the activities of bank holding companies which the
Federal Reserve Board has deemed permissible by regulation under Section 4(c)(8)
of the Bank Holding Company Act of 1956, as amended (the "BHCA"), subject to
prior approval by the OTS.
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<PAGE>
The Stock Holding Company
Pursuant to regulations of the OTS and the terms of the Stock Holding
Company's federal stock charter, the purpose and powers of the Stock Holding
Company is to pursue any or all of the lawful objectives of a federal mutual
holding company and to exercise any of the powers accorded to a mutual holding
company.
If the Bank fails the qualified thrift lender ("QTL") test, the Stock
Holding Company must obtain the approval of the OTS prior to continuing after
such failure, directly or through its other subsidiaries, any business activity
other than those approved for multiple savings and loan holding companies or
their subsidiaries. In addition, within one year of such failure the MHC and the
Stock Holding Company must register as, and will become subject to, the
restrictions applicable to bank holding companies. The activities authorized for
a bank holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "--Qualified Thrift
Lender Test."
The MHC and the Stock Holding Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured institution. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings institutions in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings institution.
The Bank
The OTS has extensive authority over the operations of savings
institutions. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of the Bank was as of June 30, 1998.
Under agency scheduling guidelines, it is likely that another examination will
be initiated in the fourth quarter of 1999. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves. All savings institutions are
subject to a semi-annual assessment, based upon the savings institution's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended September 30, 1998 was $695,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank, the Stock Holding
Company and the MHC. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In
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<PAGE>
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998, the Bank's lending limit under this restriction was $97.6
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to the applicable limits by the FDIC and such insurance
is backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the SAIF or
the Bank Insurance Fund ("BIF"). The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS 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.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to
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<PAGE>
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," for an explanation on the
special SAIF assessment amount paid by the Bank.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s, equal
to approximately 6.00 basis points for each $100 in domestic deposits, while
BIF-insured institutions pay an assessment equal to approximately 1.00 basis
point for each $100 in domestic deposits. The assessment is expected to be
reduced to about 2.00 basis points no later than January 1, 2000, when BIF
insured institutions fully participate in the assessment. These assessments,
which may be revised based upon the level of BIF and SAIF deposits will continue
until the bonds mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings institutions, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio, or core
capital, requirement and a risk-based capital requirement applicable to such
savings institutions. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
At September 30, 1998, the Bank did not have any intangible assets.
At September 30, 1998, the Bank had tangible capital of $649.2 million, or
12.1% of adjusted total assets, which is approximately $569.5 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1998, the
Bank had no intangibles which were subject to these tests.
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<PAGE>
At September 30, 1998, the Bank had core capital equal to $649.2 million,
or 12.1% of adjusted total assets, which is $489.7 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings institutions to have total
capital of at least 8.0% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1998, the Bank had
$5.0 million of general loan loss reserves, which was less than 1.25% of
risk-weighted assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
On September 30, 1998, the Bank had total risk-based capital of $650.6
million (including $649.2 million in core capital and $1.4 million in qualifying
supplementary capital) and risk-weighted assets of $2.38 billion; or total
capital of 27.3% of risk-weighted assets. This amount was $459.4 million above
the 8.0% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution," 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 OTS 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 OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or has
Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital
ratio of less than 6% and is considered "significantly undercapitalized" must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically
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<PAGE>
undercapitalized" because it has a tangible capital ratio of 2% or less is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver, or conservator with the concurrence of the FDIC, for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an institution into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on its operations and profitability.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings institutions with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account.
Generally, savings institutions, such as the Bank, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "--Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution may make a
capital distribution without notice to the OTS, unless it is a subsidiary of a
holding company, provided that it has a regulatory rating in the two top
categories, is not of supervisory concern, and would remain adequately
capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution. Savings institutions that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess
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regulatory capital plus net income to date during the calendar year. A savings
institution may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
Liquidity
All savings institutions, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the
average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. For a discussion of what the Bank includes in liquid assets,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -Liquidity and Commitments." This liquid asset ratio requirement may
vary from time to time between 4% and 10% depending upon economic conditions and
savings flows of all savings institutions. At the present time, the minimum
liquid asset ratio is 4%.
Penalties may be imposed upon institutions for violations of the liquid
asset ratio requirement. At September 30, 1998, the Bank was in compliance with
the requirement, with an overall liquid asset ratio of 45.3%.
Qualified Thrift Lender Test
All savings institutions, including the Bank, are required to meet a QTL
test to avoid certain restrictions on their operations. This test requires a
savings institution to have at least 65% of its portfolio assets, as defined by
regulation, in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings institution
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At September 30, 1998, the
Bank met the test and has always met the test since its effectiveness.
Any savings institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such an institution
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
institution that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company
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and become subject to all restrictions on bank holding companies. See "--The
Stock Holding Company."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
October 28, 1996, and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the institution
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of the Bank include the Stock Holding Company
and any company which is under common control with the Bank. In addition, a
savings institution may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The OTS has the discretion to treat subsidiaries of savings
institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must generally be made on terms substantially the same as for loans to
unaffiliated individuals.
Federal Securities Law
The stock of Capital Federal Financial will be registered with the U.S.
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
The Stock Holding Company stock held by persons who are affiliates of the
Stock Holding Company may not be resold without registration or unless sold in
accordance with
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certain resale restrictions. Affiliates are generally considered to be officers,
directors and principal stockholders. If the Stock Holding Company meets
specified current public information requirements, each affiliate of the Stock
Holding Company is able to sell in the public market, without registration, a
limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts, primarily checking, NOW and Super NOW checking accounts. At September
30, 1998, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "--Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require institutions to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Topeka, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Topeka. For the year ended September 30, 1998, the Bank had an average
outstanding balance of $41.6 million in FHLB stock, which was in compliance with
this requirement. In past years, the Bank has received substantial dividends on
its FHLB stock. Over the past five fiscal years such dividends have averaged
6.71% and were 7.66% for fiscal year 1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
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For the year ended September 30, 1998, dividends paid by the FHLB of Topeka
to the Bank totaled $3.2 million, which was an increase over the amount of
dividends received in fiscal year 1997.
TAXATION
Federal Taxation
General. The Stock Holding Company and the Bank will be subject to federal
income taxation in the same general manner as other corporations with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Stock Holding
Company or the Bank. The Bank's federal income tax returns have been closed
without audit by the Internal Revenue Service ("IRS") through its fiscal year
ended September 30, 1995.
Following the Reorganization, the Stock Holding Company anticipates that it
will file a consolidated federal income tax return with the Bank commencing with
the first taxable year after consummation of the Reorganization. Accordingly, it
is anticipated that any cash distributions made by the Stock Holding Company to
its stockholders would be considered to be taxable dividends and not as a
non-taxable return of capital to stockholders for federal and state tax
purposes.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
fiscal year ending on September 30, for filing its federal income tax return.
Bad Debt Reserves. Prior to the Small Business Job Protection Act (the
"1996 Act"), the Bank was permitted to establish a reserve for bad debts and to
make annual additions to the reserve. These additions could, within specified
formula limits, be deducted in arriving at taxable income. As a result of the
1996 Act, savings associations must now use the specific chargeoff method in
computing bad debt deductions beginning with their 1996 Federal tax return. In
addition, federal legislation requires the Bank to recapture, over a six year
period, the excess of tax bad debt reserves at September 30, 1997 over those
established as of the base year reserve balance as of September 30, 1989. The
amount of such reserve subject to recapture as of September 30, 1998 for the
Bank is approximately $97.1 million. The Bank continues to utilize the reserve
method in determining its privilege tax obligations to the State of Kansas.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to the year ended September 30, 1997, were subject to
recapture into taxable income should the Bank fail to meet certain thrift asset
and definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Bank make certain non-dividend distributions or cease to
maintain a thrift charter.
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Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code")
imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of
an exemption amount. Net operating losses can offset no more than 90% of AMTI.
Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years. The Bank has not been subject to the
alternative minimum tax nor does the Bank have any such amounts available as
credits for carryover.
Net Operating Loss Carryovers. A financial institution may carryback net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years prior to August 6, 1997, the carryback period was three years and the
carryforward period was 15 years. At September 30, 1998, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Stock Holding Company may
eliminate from its income dividends received from the Bank as a wholly-owned
subsidiary of the Stock Holding Company if it elects to file a consolidated
return with the Bank. The corporate dividends-received deduction is 100% or 80%
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, dependent on the level of
stock ownership of the payor of the dividend. Corporations which own less than
20% of the stock of a corporation distributing a dividend may deduct 70% of
dividends received or accrued on their behalf.
State Taxation
The Bank files Kansas privilege tax returns. For Kansas privilege tax
purposes, for taxable years beginning after 1997, the minimum tax rate is 4.5%
of earnings, which is calculated based on federal taxable income, subject to
certain adjustments. The earnings of the Stock Holding Company may be combined
with the Bank for purposes of the Kansas Privilege Tax. If it is not, the Stock
Holding Company will file Kansas income tax returns with non-thrift members of
the affiliated group.
MANAGEMENT
Management of Capital Federal Financial
The Board of Directors of the Stock Holding Company will consist of the
same individuals who serve as directors of the Bank. The Board of Directors of
the Stock Holding Company is divided into three classes, each of which contains
approximately one-third of the Board. The directors shall be elected by the
stockholders of the Stock Holding Company for staggered three year terms, or
until their successors are elected. One class of directors, consisting of B.B.
Andersen and John C. Dicus, has a term of office expiring at the first annual
meeting of stockholders, a second class, consisting of John B. Dicus and
Frederick P. Reynolds, has a term of office expiring at the second annual
meeting of stockholders and a third class, consisting of
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Robert B. Maupin, Carl W. Quarnstrom, and Marilyn S. Ward, has a term of office
expiring at the third annual meeting of stockholders.
The following individuals are executive officers of the Stock Holding
Company and hold the offices set forth below opposite their names.
Executive Position Held with Stock Holding Company
- ---------------- -----------------------------------------
John C. Dicus Chairman and Chief Executive Officer
John B. Dicus President and Chief Operating Officer
Neil F.M. McKay Executive Vice President,
Chief Financial Officer and Treasurer
Kent G. Townsend First Vice President and Controller
The executive officers of the Stock Holding Company are elected annually
and hold office until their respective successors have been elected or until
death, resignation or removal by the Board of Directors.
Information concerning the principal occupations, employment and
compensation of the directors and officers of the Stock Holding Company is set
forth under "- Management of Capitol Federal Savings Bank" and "- Executive
Officers Who Are Not Directors." Directors of the Stock Holding Company
initially will not be compensated by the Stock Holding Company but will serve
and be compensated by the Bank. It is not anticipated that separate compensation
will be paid to directors of the Stock Holding Company until such time as these
persons devote significant time to the separate management of the Stock Holding
Company's affairs, which is not expected to occur until the Stock Holding
Company becomes actively engaged in additional businesses other than holding the
stock of the Bank. The Stock Holding Company may determine that such
compensation is appropriate in the future.
Management of Capital Federal Savings Bank
Because the Bank is a mutual savings association, its members have elected
its Board of Directors. Upon completion of the Reorganization and Stock
Issuance, the directors of the Bank immediately prior to the Stock Issuance will
continue to serve as directors of the Bank in stock form. The Board of Directors
of the Bank in stock form will consist of seven directors divided into three
classes, with approximately one-third of the directors elected at each annual
meeting of stockholders. Because the Stock Holding Company will own all the
issued and outstanding capital stock of the Bank following the Reorganization
and Stock Issuance, the Board of Directors of the Stock Holding Company will
elect the directors of the Bank. The persons who are serving as directors of the
Bank will also serve as directors of the MHC and the Stock Holding Company upon
consummation of the Reorganization and Stock Issuance.
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The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<S> <C> <C> <C> <C>
Term of
Office
Name Age(1) Positions Held With the Bank Director Since Expires
- ------------------------ ------ ---------------------------------- -------------- -------
B.B. Andersen 62 Director 1981 1999
John B. Dicus 37 President, Chief Operating Officer 1989 2000
and Director
John C. Dicus 65 Chairman, Chief Executive Officer 1963 1999
and Director
Robert B. Maupin 73 Director 1973 2001
Carl W. Quarnstrom 69 Director 1985 2001
Frederick P. Reynolds 74 Director 1979 2000
Marilyn S. Ward 59 Director 1977 2001
- -------------------------
<FN>
(1) As of September 30, 1998.
</FN>
</TABLE>
The business experience of each director for at least the past five years
is set forth below.
B.B. Andersen. Mr. Andersen had a life long career in construction and
development activities. He is currently involved in various real estate
development projects in Colorado.
John B. Dicus. Mr. Dicus is President and Chief Operating Officer of the
Bank, positions he has held since1996. Prior to that, he served as the Executive
Vice President of Corporate Services for the Bank for four years. He has been
with the Bank in various other positions since 1985. Mr. John B. Dicus is the
son of Mr. John C. Dicus.
John C. Dicus. Mr. Dicus is Chairman of the Board of Directors and Chief
Executive Officer of the Bank, positions he has held since 1989. He has served
the Bank in various capacities since 1959. He also served as President of the
Bank from 1969 until 1996.
Robert B. Maupin. Mr. Maupin is currently retired. Previously, he worked
for the Bank for over forty years. He retired in 1991 as the Bank's Senior
Executive Vice President and Chief Lending Officer.
Carl W. Quarnstrom. Mr. Quarnstrom is a partner in the law firm of Shaw,
Hergenreter, Quarnstrom & Kocher, L.L.P., located in Topeka, Kansas. The firm
serves as general counsel for the Bank.
Frederick P. Reynolds. Mr. Reynolds is currently the Chairman of the Board
of Sound Products, Inc., a music and sound system company located in Kansas
City. Over the last forty years, Mr. Reynolds has been an owner, operator and
investor in radio stations, on both a local Topeka and national level, and in
cable television in eastern Missouri.
Marilyn S. Ward. Since 1985, Ms. Ward has been Executive Director of
ERC/Resource & Referral, a family resource center located in Topeka, Kansas.
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Executive Officers Who Are Not Directors
Each of the executive officers of the Bank will retain his office following
the Reorganization. Officers are elected annually by the Board of Directors of
the Bank. The business experience of each director for at least the past five
years for the four executive officers of the Bank who do not serve as directors
is set forth below.
Stanley F. Mick. Age 59 years. Mr. Mick has served as Executive Vice
President and Chief Lending Officer of the Bank since 1991. Since 1994, he has
also served as President of Capitol Funds Inc., a subsidiary of the Bank.
Neil F.M. McKay. Age 57 years. Mr. McKay serves as Executive Vice
President, Chief Financial Officer and Treasurer of the Bank, positions he has
held since 1994. Prior to that, he served as the Chief Operating Officer and
Chief Financial Officer of another savings institution for five years.
Larry K. Brubaker. Age 51 years. Mr. Brubaker has been employed with the
Bank since 1971 and currently serves as Executive Vice President for Corporate
Services of the Bank, a position he has held since 1997. Prior to that, he was
employed by the Bank as the Eastern Region Manager for seven years.
R. Joe Aleshire. Age 51 years. Mr. Aleshire has been employed with the Bank
since 1973 and currently serves as Executive Vice President for Retail
Operations of the Bank, a position he has held since 1997. Prior to that, he was
employed by the Bank as the Wichita Area Manager for 17 years.
Meeting and Committees of the Board of Directors
Our Board of Directors meets on a monthly basis. During the year ended
September 30, 1998, the Board of Directors held 12 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and
committees on which such Board member served during this period.
We currently have standing Executive and Audit Committees. We do not have a
standing Compensation or Nominating Committee; rather, the entire Board of
Directors performs these functions.
The Executive Committee is comprised of John C. Dicus (Chairman) and
Directors John B. Dicus, Andersen and Maupin. The Executive Committee meets on
an as needed basis and exercises the power of the Board of Directors between
Board meetings, to the extent permitted by applicable law. The Executive
Committee did not meet during fiscal 1998.
The Audit Committee is comprised of Director Ward (Chairman) and Directors
Andersen, Maupin, Quarnstrom and Reynolds. The Audit Committee oversees the
audit program for the Bank and meets periodically with the Bank's accounting
firm in order to review the annual audit. This committee met three times in
fiscal 1998.
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The entire Board of Directors of the Bank is responsible for determining
salaries to be paid to officers and employees of the Bank, based on
recommendations of John C. Dicus and John B. Dicus, who excuse themselves from
Board discussions concerning their salaries as Chairman and Chief Executive
Officer, and President and Chief Operating Officer, respectively. The Board of
Directors met twice during fiscal 1998 to discuss compensation matters.
Directors' Compensation
Since January 1, 1998, each director receives a $1,000 monthly retainer,
plus $1,000 for each meeting attended. From July 1, 1997 through December 31,
1997, each director received an $800 monthly retainer, plus $1,000 for each
board meeting attended. In addition, since January 1, 1998, each non-employee
director receives $500 per committee meeting attended. From July 1, 1997 through
December 31, 1997, each non-employee director received $400 per committee
meeting. See "-- Benefits - Other Stock Benefit Plans."
Mr. Quarnstrom, a director of the Bank, is a partner in the law firm of
Shaw, Hergenreter, Quarnstrom & Kocher, L.L.P. The firm receives a retainer fee
to serve as general counsel for the Bank regarding real estate and litigation
issues. The legal fees received by the law firm for professional services
rendered to the Association during the year ending September 30, 1998 did not
exceed 5% of the firm's gross revenues.
Executive Compensation
The following table sets forth a summary of certain information concerning
the compensation paid by the Bank, including amounts deferred to future periods
by the officers, for services rendered in all capacities during the fiscal year
ended September 30, 1998 to the Chairman and Chief Executive Officer of the Bank
and the four other highest compensated executive officers of the Bank.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation(1) Compensation Awards
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) (#)(2) sation
--------------------------- ---- ------ ----- ------ ------ ------ ----------
John C. Dicus, Chairman and Chief 1998 $622,800(3) $ 95,355 109,620(4) --- --- $219,630(5)
Executive Officer
John B. Dicus, President and Chief 1998 312,800(3) 40,096 19,292(4) --- --- 76,650(5)
Operating Officer
Stanley F. Mick, Executive Vice President 1998 256,000 45,149 8,148(4) --- --- 41,850(5)
and Chief Lending Officer
Neil F. M. McKay, Executive Vice 1998 203,500 31,410 5,086(4) --- --- 29,250(5)
President, Chief Financial Officer and
Treasurer
Larry K. Brubaker, Executive Vice 1998 186,500 38,938 --- --- --- 8,250(6)
President for Corporate Services
<FN>
- -------------
(1) Does not include perquisites, which did not exceed the lesser of $50,000 or
10% of the named individuals' salary and bonus.
(2) As a mutual institution, the Bank does not have any stock options or
restricted stock plans. The Bank does, however, intend to adopt such plans
following the Reorganization. See "-- Benefits - Other Stock Benefit
Plans."
(3) Includes director fees of $22,800 for service on the Board of Directors.
(4) Represents the amount reimbursed for all or part of the tax liability
resulting from the payment of premiums on life insurance policies pursuant
to Executive Bonus Agreements.
(5) Amounts represent allocations under the Bank's Profit Sharing Plan and
premiums on universal life insurance policies pursuant to Executive Bonus
Agreements. These amounts, respectively, include $8,250 and $211,380 for
Mr. John C. Dicus; $8,250 and $68,400 for Mr. John B. Dicus; $8,250 and
$33,600 for Mr. Mick; $8,250 and $21,000 for Mr. McKay.
(6) Amount represents the allocation under the Bank's Profit Sharing Plan for
Mr. Brubaker.
</FN>
</TABLE>
Benefits
General. The Bank currently provides health and welfare benefits to its
employees, including hospitalization, major medical, dental, life and long-term
disability insurance, subject to certain deductibles and copayments by
employees.
Employees' Pension Plan. The Bank sponsors a defined benefit pension plan
for its employees (the "Pension Plan"). Such employees are eligible to
participate in the Pension Plan on the next June 1st or December 1st following
the completion of at least 1,000 hours of service
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during a continuous 12-month period and attainment of age 21. A participant must
be credited with 5 years of service before attaining a vested interest in his or
her retirement benefits, after which such participant is 100% vested. The
Pension Plan is funded solely through contributions made by the Bank.
The benefit provided to a participant at normal retirement age, which is
generally the later of age 65 or the fifth anniversary of the year in which the
participant commenced participation in the Pension Plan, is based on the average
of the participant's annual compensation during the five plan years (June 1st to
the following May 31st) of a participant's service which yields the highest
average compensation ("average annual compensation"). Compensation for this
purpose equals the participant's base salary, including any contributions
through a salary reduction arrangement to a plan described under Section 125 or
401(k) of the Code, but exclusive of overtime, discretionary bonuses, excess
commissions, severance pay, or any special payments or other deferred
compensation arrangements.
The following table sets forth, as of May 31, 1998, the fiscal year end for
this plan, estimated annual pension benefits for individuals at age 65 payable
in the form of a life annuity under the most advantageous plan provisions for
various levels of compensation and years of service. The figures in this table
are based upon the assumption that the Pension Plan continues in its present
form. At May 31, 1998, the estimated years of credited service of Messrs. John
C. Dicus, John B. Dicus, Stanley F. Mick, Neil F.M. McKay and Larry K. Brubaker
were 39, 13, 37, 4 and 27 years, respectively.
Years of Credited Service
- --------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------------------
$50,000 $9,290 $12,387 $15,483 $18,580 $21,677
$75,000 $14,694 $19,592 $24,490 $29,388 $34,285
$100,000 $20,098 $26,797 $33,496 $40,195 $46,894
$125,000 $25,501 $34,002 $42,502 $51,003 $59,503
$150,000 $30,905 $41,207 $51,508 $61,810 $72,112
$175,000 $33,067 $44,089 $55,111 $66,133 $77,155
$200,000 $33,067 $44,089 $55,111 $66,133 $77,155
The Bank intends to terminate the Pension Plan, effective May 31, 1999, and
to cease the accrual of any further benefits and the contribution of any further
amounts under the Pension Plan. Following the approval of the Pension Plan's
termination by the IRS and the Pension Benefit Guaranty Corporation, the Bank
intends to distribute the plan's assets to participants in accordance with their
accrued benefits and the requirements of applicable law.
Retirement Program. The Bank has purchased a key man life insurance policy
to fund a retirement program for John C. Dicus. The policy is designed to pay
monthly installments to the Bank for a period of twenty years following the
retirement of Mr. Dicus. A portion of the amount received by the Bank will be
paid to Mr. Dicus. Upon retirement, Mr. Dicus will receive $2,083 monthly under
this program.
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Employees' Profit Sharing Plan. The Bank has a qualified, tax-exempt profit
sharing thrift plan (the "Profit Sharing Plan"). All employees who have
completed two years of service during which they are credited with at least
1,000 hours of service are eligible to participate on the next October 1st or
April 1st.
The Bank makes two types of discretionary contributions to the Profit
Sharing Plan- profit sharing contributions of between .5% and 5% of
participants' compensation, and thrift contributions of between .5% and 10% of
participants' compensation. Thrift contributions may not be more than 5
percentage points over the percentage of participants' compensation that the
Bank makes in profit sharing contributions for the plan year (October 1st to the
following September 30th).
Participants are required to make a thrift contribution on an after-tax
basis equal to 50% of the Bank's thrift contribution for the plan year, not to
exceed 5% of their annual compensation. Participants are permitted to make
voluntary after-tax contributions which, when added to the participant's thrift
contribution shall not exceed the sum of the participant's profit sharing
contribution and the Bank's thrift contribution allocated for the participant
for the Plan Year, and, in no event, shall exceed 10% of the participant's
compensation for the Plan Year.
The Bank directs the trustees of the Profit Sharing Plan regarding the
investment of participants' accounts under the Profit Sharing Plan. Each
participant receives an annual statement which provides information regarding,
among other things, the market value of the participant's accounts and
contributions made to the Profit Sharing Plan either by the participant or on
behalf of the participant. Plan distributions are made in the form of an annuity
contract, installments or a lump sum. Participants are not permitted to borrow
against their account balance or to receive in-service withdrawals from the
Profit Sharing Plan. In the year ended September 30, 1998, the Bank's
contributions to the Profit Sharing Plan on behalf of Messrs. John C. Dicus,
John B. Dicus, Stanley F. Mick, Neil F.M. McKay and Larry K. Brubaker were
$8,250 each.
Employee Stock Ownership Plan. The Stock Holding Company intends to adopt
an ESOP for employees of the Stock Holding Company and the Bank to become
effective upon the Reorganization and Stock Issuance. Employees of the Stock
Holding Company and the Bank who have been credited with at least 1,000 hours of
service during a twelve month period are eligible to participate in the ESOP.
As part of the Reorganization and Stock Issuance, it is anticipated that
the ESOP will borrow funds from the Stock Holding Company. The ESOP will
purchase up to 8.0% of the Common Stock sold in the stock offering. It is
anticipated that such loan will equal 100% of the aggregate purchase price of
the Common Stock acquired by the ESOP. The loan to the ESOP will be repaid
principally from the Bank's contributions to the ESOP over a period of 15 years,
and the collateral for the loan will be the Common Stock purchased by the ESOP.
The interest rate for the ESOP loan is expected to be the minimum rate
prescribed by the Code. The Stock Holding Company may, in any plan year, make
additional discretionary contributions for the benefit of plan participants in
either cash or shares of Common Stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
upon
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the original issuance of additional shares by the Stock Holding Company or upon
the sale of treasury shares by the Stock Holding Company. Such purchases, if
made, would be funded through additional borrowings by the ESOP or additional
contributions from the Stock Holding Company. The timing, amount and manner of
future contributions to the ESOP will be affected by various factors, including
prevailing regulatory policies, the requirements of applicable laws and
regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released to participants' accounts as debt service
payments are made. Shares released from the ESOP will be allocated to each
eligible participant's ESOP account based on the ratio of each such
participant's compensation to the total compensation of all eligible ESOP
participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Stock Holding Company might otherwise
have contributed to the ESOP. The account balances of participants within the
ESOP will become 20% vested after three years of service, with an additional 20%
per year until full vesting after seven years of service. Credit for eligibility
and vesting is given for years of service with the Bank prior to adoption of the
ESOP. In the case of a "change in control," as defined, which triggers a
termination of the ESOP, participants will become immediately fully vested in
their account balances. Benefits are payable upon retirement or other separation
from service. The Stock Holding Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
Intrust Bank, N.A. will serve as trustee of the ESOP. Under the ESOP, the
trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees, and unallocated shares will be
voted in the same ratio on any matter as those allocated shares for which
instructions are given.
GAAP requires that any third party borrowing by the ESOP be reflected as a
liability on the Stock Holding Company's statement of financial condition. Since
the ESOP is borrowing from the Stock Holding Company, such obligation is not
treated as a liability, but will be excluded from stockholders' equity. If the
ESOP purchases newly issued shares from the Stock Holding Company, total
stockholders' equity would neither increase nor decrease, but per share
stockholders' equity and per share net earnings would decrease as the newly
issued shares are allocated to the ESOP participants.
The ESOP will be subject to the requirements of the Employment Retirement
Income Security Act of 1974, as amended ("ERISA"), and the regulations of the
IRS and the Department of Labor thereunder.
Other Stock Benefit Plans. In the future, we may consider the
implementation of a stock option plan and a restricted stock plan for the
benefit of selected directors, officers and employees. We anticipate that the
Stock Option Plan and restricted stock plan will have reserved a number of
shares equal to 10% and 4%, respectively, of the Stock Holding Company Common
Stock sold in the Stock Issuance. Grants of Common Stock pursuant to the
restricted stock plan will be issued without cost to the recipient. If a
determination is made to implement a Stock Option Plan or restricted stock plan,
it is anticipated that any such plans will be submitted to stockholders for
their consideration at which time stockholders would be provided with detailed
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information regarding such plan. If such plans are approved, and effected, they
will have a dilutive effect on the Stock Holding Company's stockholders as well
as affect the Stock Holding Company's net income and stockholders' equity,
although the actual results cannot be determined until such plans are
implemented. Any such Stock Option Plan or restricted stock plan will not be
implemented less than six months after the date of the consummation of the
Reorganization, subject to continuing OTS jurisdiction.
Loans and Other Transactions with Officers and Directors
The Bank has followed a policy of granting loans to officers and directors.
Loans to directors and executive officers are made in the ordinary course of
business and on the same terms and conditions as those of comparable
transactions with the general public prevailing at the time, in accordance with
our underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans we make to our directors and executive officers are subject to
OTS regulations restricting loan and other transactions with affiliated persons
of the Bank. Loans to all directors and executive officers and their associates
totaled approximately $1.4 million at September 30, 1998, which was 0.2% of our
equity at that date. All loans to directors and executive officers were
performing in accordance with their terms at September 30, 1998.
PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of the Bank's directors and for
all of the directors and senior officers as a group, the proposed purchases of
Common Stock, assuming sufficient shares are available to satisfy their
subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates.
<TABLE>
<CAPTION>
At the Minimum of the Estimated Offering At the Maximum of
Range Estimated Offering Range
------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ---------------------------------- ------------- ---------- ------------ ---------- -------------
B.B. Andersen $ 500,000 50,000 * 50,000 *
John B. Dicus 500,000 50,000 * 50,000 *
John C. Dicus 500,000 50,000 * 50,000 *
Robert B. Maupin 500,000 50,000 * 50,000 *
Carl W. Quarnstrom 100,000 10,000 * 10,000 *
Frederick P. Reynolds 500,000 50,000 * 50,000 *
Marilyn S. Ward 100,000 10,000 * 10,000 *
All directors and senior officers 3,505,000 350,500 1.1% 350,500 *
as a group (15 persons)
- ------------------
* Less than 1.0%
</TABLE>
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THE REORGANIZATION AND STOCK ISSUANCE
General
The Board of Directors of the Bank adopted the Plan, pursuant to which the
Bank will reorganize into the federal mutual holding company structure as a
wholly owned subsidiary of the Stock Holding Company, which in turn will be a
majority-owned subsidiary of the MHC. Following receipt of all required
regulatory approvals, the approval of the members of the Bank entitled to vote
on the Plan, and the satisfaction of all other conditions precedent to the
Reorganization, the Bank will consummate the Reorganization. Following
completion of the Reorganization, the Bank in its stock form will continue to
conduct its business and operations from the same offices with the same
personnel as the Bank conducted prior to the Reorganization. The Reorganization
will not affect the balances, interest rates or other terms of the Bank's loans
or deposit accounts, and the deposit accounts will continue to be insured by the
FDIC to the same extent as they were prior to the Reorganization. The MHC
initially will be capitalized with $100,000. Upon consummation of the
Reorganization, such capital will be used for general corporate purposes.
Pursuant to the Plan, the Reorganization will be effected as follows or in
any other manner that is consistent with applicable federal law and regulations
and the intent of the Plan:
(1) the Bank will organize an interim stock savings bank as a wholly-owned
subsidiary ("Interim One");
(2) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(3) Interim One will organize the Stock Holding Company as a wholly-owned
subsidiary;
(4) the Bank will exchange its charter for a federal stock savings bank
charter to become the Bank and Interim One will exchange its charter
for a federal mutual holding company charter to become the MHC;
(5) simultaneously with step (4), Interim Two will merge with and into the
Bank with the Bank as the resulting institution;
(6) all of the initially issued stock of the Bank will be transferred to
the MHC in exchange for membership interests in the MHC;
(7) the MHC will contribute the capital stock of the Bank to the Stock
Holding Company, and the Bank will become a wholly-owned subsidiary of
the Stock Holding Company; and
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(8) contemporaneously with the Reorganization, the Stock Holding Company
will offer for sale in the Stock Offering shares of Common Stock based
on the pro forma market value of the Stock Holding Company and the
Bank.
The Stock Holding Company expects to receive the approval of the OTS to
become a savings and loan holding company and to own all of the common stock of
the Bank. The Stock Holding Company intends to retain $50.0 million of the net
proceeds of the Stock Offering. The Reorganization will be effected only upon
completion of the sale of all of the shares of Common Stock to be issued
pursuant to the Plan.
The discussion herein provides a brief summary of material aspects of the
Reorganization and Stock Issuance. The summary is qualified in its entirety by
reference to the provisions of the Plan of Reorganization and Stock Issuance
Plan. Copies of the Plan of Reorganization and Stock Issuance Plan are available
for inspection at any office of the Bank and at the OTS. The Plan of
Reorganization and Stock Issuance Plan are also filed as an exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
The Board of Directors of the Bank and the OTS have approved the Plan,
subject to approval by the members of the Bank entitled to vote on the matter
and the satisfaction of certain other conditions. Such OTS approval, however,
does not constitute a recommendation or endorsement of the Plan by such agency.
Purposes of the Reorganization
As a mutual institution, the Bank has no authority to issue shares of
capital stock and consequently has no access to market sources of equity
capital. Only by generating and retaining earnings from year to year is the Bank
able to enhance its capital position.
As a stock corporation upon consummation of the Reorganization, the Bank
will be organized in the form used by commercial banks, most major corporations
and a majority of savings institutions. The ability to raise new equity capital
through the issuance and sale of the Bank's or Stock Holding Company's capital
stock will allow the Bank the flexibility to increase its capital position more
rapidly than by accumulating earnings and at times deemed advantageous by the
Board of Directors of the Bank. It will also support future growth and expanded
operations, including increased lending and investment activities, as business
and regulatory needs dictate. The ability to attract new capital also will
assist in increasing the capabilities of the Bank to address the needs of the
communities it serves and enhance its ability to effect acquisitions or pursue
business diversification opportunities. Thus, whereas the acquisition
alternatives available to the Bank are quite limited as a mutual institution,
because of a requirement in OTS regulations that the surviving institution in a
merger involving a mutual institution generally must be in mutual form, upon
consummation of the Reorganization, the Bank will have increased ability to
merge with other mutual and stock institutions and the Stock Holding Company may
acquire control of other mutual or stock savings associations and retain the
acquired institution as a separate subsidiary of the Stock Holding Company.
Finally, the ability to issue capital stock will enable the Bank to establish
stock compensation plans for
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directors, officers and employees, thereby granting them equity interests in the
Bank and greater incentive to improve its performance. For a description of the
stock compensation plans which will be adopted by the Bank in connection with
the Reorganization, see "Management." Although the Bank's ability to raise
capital and general business flexibility will be enhanced by organizing as a
subsidiary of a stock subsidiary of a mutual holding company, such advantages
will be limited by the requirement in applicable laws and regulations that a
mutual holding company maintain a majority ownership interest in its savings
bank holding company subsidiary . They will also be limited by the Stock Holding
Company's offering of up to 49.9% of its to-be-outstanding Common Stock,
including the proposed issuance of shares to the Foundation, which will affect
the Stock Holding Company's ability to issue additional shares of Common Stock
in the future absent additional issuances of such stock to the MHC.
The advantages of the Reorganization also could be achieved if the Bank
were to reorganize into a wholly-owned subsidiary of a stock form holding
company (a "standard conversion") rather than as a second-tier subsidiary of a
mutual holding company. A standard conversion also would free the Bank from the
restrictions on its ability to raise capital which result from the requirement
that its mutual holding company maintain a majority ownership interest in the
Stock Holding Company. Nevertheless, the Board of Directors of the Bank
unanimously believes that the Reorganization is in the best interests of the
Bank and its account holders. Because OTS regulations require that savings
institutions converting to stock form in a standard conversion sell all of their
to-be-outstanding capital stock rather than a minority interest in such capital
stock, however, the amount of equity capital that would be raised in a standard
conversion would be substantially more than that which could be raised in a
minority stock offering by a subsidiary of a mutual holding company, which would
make it more difficult for the Bank to maximize the return on its equity.
Finally, such a reorganization also would eliminate all aspects of the mutual
form of organization. Consummation of the Reorganization does not foreclose the
possibility of the MHC converting from mutual to stock form in the future;
however, no such action is contemplated at this time. See "The MHC May Consider
Converting to Stock Form in the Future."
After considering the advantages and disadvantages of the Reorganization,
as well as applicable fiduciary duties and alternative transactions, including a
reorganization into a wholly-owned subsidiary of a stock form holding company
rather than as a second-tier subsidiary of a mutual holding company, the Board
of Directors of the Bank unanimously approved the Reorganization as being in the
best interests of the Bank and equitable to its account holders.
Effects of the Reorganization
General. The Reorganization will have no effect on the Bank's present
business of accepting deposits and investing its funds in loans and other
investments permitted by law. The Reorganization will not result in any change
in the existing services provided to depositors and borrowers, or in existing
offices, management and staff. The Bank will continue to be subject to
regulation, supervision and examination by the OTS and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Bank at the
time of the Reorganization will continue as an account holder in the Bank after
the Reorganization, and the
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Reorganization will not affect the deposit balance, interest rate or other terms
of such accounts. Each account will be insured by the FDIC to the same extent as
before the Reorganization. Depositors in the Bank will continue to hold their
existing certificates, passbooks and other evidence of their accounts. The
Reorganization will not affect the loans of any borrower from the Bank. The
amount, interest rate, maturity, security for and obligations under each loan
will remain contractually fixed as they existed prior to the Reorganization. See
"-- Voting Rights" and "-- Liquidation Rights" below for a discussion of the
effects of the Reorganization on the voting and liquidation rights of the
depositors of the Bank.
Continuity. During the Reorganization and Stock Issuance process, the
normal business of the Bank of accepting deposits and making loans will continue
without interruption. Following consummation of the Reorganization and Stock
Issuance, the Bank will continue to be subject to regulation by the OTS, and
FDIC insurance of accounts will continue without interruption. After the
Reorganization and Stock Issuance, the Bank will continue to provide services
for depositors and borrowers under current policies and by its present
management and staff.
The Board of Directors presently serving the Bank will serve as the Board
of Directors of the Bank after the Reorganization and Stock Issuance. The
initial members of the Board of Directors of the Stock Holding Company and the
MHC will consist of the individuals currently serving on the Board of Directors
of the Bank. Thereafter, the voting stockholders of the Stock Holding Company
will elect approximately one-third of the Stock Holding Company's directors
annually, and approximately one-third of the directors of the MHC will be
elected annually by the members of the MHC who will consist of certain of the
former Members of the Bank and all persons who become Depositors of the Bank
after the Reorganization. All current officers of the Bank will retain their
positions with the Bank after the Reorganization and Stock Issuance.
Voting Rights. Upon the completion of the Reorganization and Stock
Issuance, depositor and borrower members as such will have no voting rights in
the Bank or the Stock Holding Company and, therefore, will not be able to elect
directors of the Bank or the Stock Holding Company or to control their affairs.
Currently these rights are accorded to depositors and certain borrowers of the
Bank. Subsequent to the Reorganization and Stock Issuance, voting rights will be
vested exclusively in the stockholders of the Stock Holding Company which, in
turn, will own all of the stock of the Bank. Each holder of Common Stock shall
be entitled to vote on any matter to be considered by the stockholders of the
Stock Holding Company, subject to the provisions of the Stock Holding Company's
Charter.
As a federally-chartered mutual holding company, the MHC will have no
authorized capital stock and, thus, no stockholders. The MHC will be controlled
by members of the Bank, which include depositors and certain borrowers. Such
members have granted proxies in favor of the Bank's management. According to
regulations of the OTS, the revocable proxies that members of the Bank have
granted to the Board of Directors of the Bank, which confer on the Board of
Directors of the Bank general authority to cast a member's vote on any and all
matters presented to the members, shall be deemed to cover the member's votes as
members of the MHC, and such authority shall be conferred on the Board of
Directors of the MHC. The Plan also provides for the transfer of proxy rights to
the Board of Directors of the MHC. Accordingly, the Board of Directors of the
Bank will, in effect, be able to govern the operations of the MHC, and
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hence the Stock Holding Company, notwithstanding objections raised by members of
the MHC or stockholders of the Stock Holding Company, respectively, so long as
the Board of Directors has been appointed proxy for a majority of the
outstanding votes of members of the MHC and such proxies have not been revoked.
In addition, all persons who become depositors of the Bank following the
Reorganization will have membership rights with respect to the MHC. Borrowers
who were borrowers of the Bank under its existing charter immediately prior to
the Reorganization and whose loans continue in existence are members of the Bank
and will have membership rights in the MHC; all other borrowers are not members
of the Bank and, thus, will not receive membership rights in the MHC.
Liquidation Rights. In the event of a voluntary liquidation of the Bank
prior to the Reorganization, holders of deposit accounts in the Bank would be
entitled to distribution of any assets of the Bank remaining after the claims of
such depositors, to the extent of their deposit balances, and all other
creditors are satisfied. Following the Reorganization, the holder of the Bank's
Common Stock, i.e., the Stock Holding Company, would be entitled to any assets
remaining upon a liquidation, dissolution or winding up of the Bank and, except
through their liquidation interests in the MHC, discussed below, holders of
deposit accounts in the Bank would not have interest in any such assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the MHC following consummation of the Reorganization, holders of
deposit accounts in the Bank would be entitled, pro rata to the value of their
accounts, to distribution of any assets of the MHC remaining after the claims of
all creditors of the MHC are satisfied. Stockholders of the Stock Holding
Company will have no liquidation or other rights with respect to the MHC in
their capacities as such.
In the event of a liquidation, dissolution or winding up of the Stock
Holding Company, each holder of shares of the Common Stock would be entitled to
receive, after payment of all debts and liabilities of the Stock Holding
Company, a pro rata portion of all assets of the Stock Holding Company available
for distribution to holders of the Common Stock.
There currently are no plans to liquidate the Bank, the Stock Holding
Company or the MHC in the future.
Tax Effects. The Bank has received an opinion from its special counsel,
Silver, Freedman & Taff L.L.P., Washington, D.C., as to the material federal
income tax consequences of the Reorganization and Stock Issuance to the Bank,
the Stock Holding Company and the MHC, and as to the generally applicable
material federal income tax consequences of the Reorganization and Stock
Issuance to the Bank's account holders and to persons who purchase Common Stock
in the Offering. In the following discussion, "Stock Bank" refers to the Bank
after the Reorganization and Stock Issuance.
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The opinion provides that, among other things:
o the Bank's adoption of a charter in stock form (the "Bank
Conversion") will qualify as a tax-free reorganization under
Internal Revenue Code of 1986, as amended, Section 368(a)(1)(F);
o no gain or loss will be recognized by the Bank or the Stock Bank
in the Bank Conversion;
o no gain or loss will be recognized by the depositors of the Bank
on the receipt of equity interests with respect to the MHC in
exchange for their equity interests surrendered therefor;
o the receipt of stock by depositors for equity interests in the
MHC will constitute a tax-free exchange of property solely for
voting "stock" pursuant to Code Section 351;
o the transfer by the MHC of the Stock Bank's stock to the Stock
Holding Company will constitute a tax-free exchange of property
solely for voting stock pursuant to Code Section 351;
o the MHC will recognize no gain or loss upon the transfer of the
Stock Bank stock to the Stock Holding Company in exchange for
Common Stock pursuant to Code Section 351;
o the Stock Holding Company will recognize no gain or loss upon its
receipt of Stock Bank stock from the MHC in exchange for Common
Stock;
o the Stock Holding Company will recognize no gain or loss upon the
receipt of money in exchange for shares of Common Stock;
o no gain or loss will be recognized by the Bank's account holders
upon the issuance to them of accounts in the Stock Bank in stock
form immediately after the Reorganization and Stock Issuance, in
the same dollar amounts and on the same terms and conditions as
their accounts at the Bank immediately prior to the
Reorganization and Stock Issuance; and
o gain or loss will be recognized to account holders upon the
receipt or exercise of Subscription Rights in the Reorganization
and Stock Issuance, but only to the extent such Subscription
Rights are deemed to have value, as discussed below.
The opinion of Silver, Freedman & Taff, L.L.P. is based in part upon, and
subject to the continuing validity in all material respects through the date of
the Reorganization and Stock Issuance of various representations of the Bank and
upon certain assumptions and qualifications, including that the Reorganization
and Stock Issuance are consummated in the manner and according to the terms
provided in the Plan of Reorganization and Stock Issuance Plan. Such
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opinion is also based upon the Code, regulations now in effect or proposed
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change and such change may be made with retroactive
effect. Unlike private letter rulings received from the IRS, an opinion is not
binding upon the IRS and there can be no assurance that the IRS will not take a
position contrary to the positions reflected in such opinion, or that such
opinion will be upheld by the courts if challenged by the IRS.
The Bank has also obtained an opinion from outside tax advisors, that the
income tax effects of the Reorganization and Stock Issuance under Kansas tax
laws will be substantially the same as described above with respect to federal
income tax laws.
The Stock Holding Company and the Bank have received a letter from RP
Financial, stating its belief that the subscription rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration, and afford the recipients the
right only to purchase the Common Stock at a price equal to its estimated fair
market value, which will be the same price as the Purchase Price for the
unsubscribed shares of Common Stock. If the subscription rights granted to
eligible subscribers are deemed to have an ascertainable value, receipt of such
rights would be taxable probably only to those eligible subscribers who exercise
the subscription rights, either as a capital gain or ordinary income, in an
amount equal to such value, and the Stock Holding Company and the Bank could
recognize gain on such distribution. Eligible subscribers are encouraged to
consult with their own tax advisor as to the tax consequences in the event that
such subscription rights are deemed to have an ascertainable value. Unlike
private rulings, the letter of RP Financial is not binding on the IRS, and the
IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Establishment of the Foundation
General. Continuing the Bank's commitment to the communities that it
serves, the Plan provides that the Bank and the Stock Holding Company will
establish the Foundation, which will be incorporated under Kansas law as a
non-stock corporation, and will fund the Foundation with cash and Common Stock
in an amount up to 8.0% of the aggregate value of shares of Common Stock sold in
the Offerings. By increasing the Bank's visibility and reputation in the
communities that it serves, the Bank believes that the Foundation will enhance
the long-term value of the Bank's community banking franchise. The Foundation
will be dedicated to the promotion of charitable purposes within the Bank's
market areas.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes including education, affordable housing
activities, the United Way and other charitable purposes within the communities
served by the Bank. Traditionally, the Bank has emphasized community lending and
community development activities within the communities that it serves. The
Foundation is being formed as a complement to the Bank's existing community
activities. The Bank believes that the Foundation will enable the Stock Holding
Company and the Bank to assist their local communities in areas beyond community
development and lending. The Bank believes the establishment of the Foundation
will enhance
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its activities in the affordable housing area. In this regard, the Board of
Directors believes the establishment of a charitable foundation is consistent
with the Bank's commitment to community service. The Board further believes that
the funding of the Foundation with Common Stock of the Stock Holding Company is
a means of enabling the communities served by the Bank to share in the growth
and success of the Stock Holding Company long after completion of the
Reorganization. The Foundation will accomplish that goal by providing for
continued ties between the Foundation and Bank, thereby forming a partnership
with the Bank's communities. The establishment of the Foundation will also
enable the Stock Holding Company and the Bank to develop a unified charitable
donation strategy. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending
activities. In this respect, subsequent to the Reorganization, the Bank may
continue to make contributions to other charitable organizations and/or it may
make additional contributions to the Foundation.
Structure of the Foundation. The Foundation will be incorporated under
Kansas law as a non-stock corporation. Pursuant to the Foundation's Bylaws, the
Foundation's initial Board of Directors will be comprised of two members of the
Stock Holding Company and the Bank's Boards of Directors (Messrs. John C. Dicus
and John B. Dicus) and three other individuals chosen in light of their
commitment and service to charitable and community purposes. The other persons
expected to serve as directors of the Foundation are Nancy J. Perry (President
and C.E.O. of the United Way of Greater Topeka), Rick C. Jackson (First Vice
President - Community Development Director of the Bank) and Ronald W. Roskens
(President, Global Connections, Inc., former president of the University of
Nebraska and former Administrator of the Agency for International Development,
Washington, D.C.). Mr. Roskens is the father-in-law of Mr. John B. Dicus. There
are no plans to change the size of the Foundation's Board of Directors during
the one-year period subsequent to consummation of the Reorganization. The Bank
currently intends that less than a majority of the Bank's directors will also
serve as directors of the Foundation. A Nominating Committee of the Foundation's
Board will nominate individuals eligible for election to the Board of Directors.
The members of the Foundation will elect the Directors at the annual meeting of
the Foundation from those nominated by the Nominating Committee. Directors will
be divided into three classes with each class appointed for three-year terms.
For a period of five years, one director will be chosen from the communities
served by the Foundation, be independent and have experience with local
community foundations and making grants; and one director will be chosen from
the directors of the Bank. No determination has been made what, if any,
compensation the Foundation directors will receive. The articles of
incorporation of the Foundation provides that the corporation is organized
exclusively for charitable purposes, including community development, as set
forth in Section 501(c)(3) of the Code. The Foundation's articles of
incorporation further provide that no part of the net earnings of the Foundation
will inure to the benefit of, or be distributable to its directors, officers or
members. No award, grant or distribution shall be made by the Foundation to any
director, officer or employee of the Stock Holding Company or the Bank or any
affiliate thereof. In addition, any of such persons, to the extent that they
serve as an officer, director or employee of the Foundation will be subject to
the conflict of interest regulations of the OTS.
The authority for the affairs of the Foundation will be vested in the Board
of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies
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of the Foundation with respect to grants or donations by the Foundation,
consistent with the purposes for which the Foundation was established. Although
no formal policy governing Foundation grants exists at this time, the
Foundation's Board of Directors will adopt such a policy upon establishment of
the Foundation. As directors of a nonprofit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purposes for which the Foundation
is established. The directors of the Foundation will also be responsible for
directing the activities of the Foundation, including the management of the
Common Stock of the Stock Holding Company held by the Foundation. However, it is
expected that as a condition to receiving the approval of the OTS to the Bank's
Reorganization, the Foundation will be required to commit to the OTS that all
shares of Common Stock held by the Foundation will be voted in the same ratio as
all other shares of the Stock Holding Company's Common Stock on all proposals
considered by stockholders of the Stock Holding Company; provided, however,
that, consistent with such expected condition, the OTS would waive this voting
restriction under certain circumstances if compliance with the voting
restriction would:
o cause a violation of the law of the State of Kansas and the OTS
determines that federal law would not preempt the application of
the laws of Kansas to the Foundation;
o would cause the Foundation to lose its tax-exempt status, or
cause the IRS to deny the Foundation's request for a
determination that it is an exempt organization or otherwise have
a material and adverse tax consequence on the Foundation; or
o would cause the Foundation to be subject to an excise tax under
Section 4941 of the Code.
In order for the OTS to waive such voting restriction, the Stock Holding
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the OTS that compliance with the voting requirement
would have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS would grant a waiver of the voting restriction upon
submission of such legal opinions(s) by the Stock Holding Company or the
Foundation that are satisfactory to the OTS. In the event that the OTS were to
waive the voting requirement, the Directors would direct the voting of the
Common Stock held by the Foundation.
The Foundation's place of business is expected to initially be located at
the Bank's executive offices and initially the Foundation is expected to have no
separate employees but will utilize the staff of the Bank for which the Bank
will be reimbursed. The Board of Directors of the Foundation expects to hire a
full time executive director. The Board of Directors of the Foundation will
appoint such officers as may be necessary to manage the operations of the
Foundation. In this regard, it is expected that the Bank will be required to
provide the OTS with a commitment that, to the extent applicable, the Bank will
comply with the affiliate restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act with respect to any transactions between the Bank and the
Foundation.
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The Stock Holding Company intends to capitalize the Foundation with an
amount equal to 8.0% of the aggregate value of shares of Common Stock sold in
the Offerings, 50% in Common Stock and 50% in cash, which would have a total
market value of $25.7 million to $34.8 million ($40.0 million at the maximum, as
adjusted), based on the Purchase Price of $10.00 per share. Messrs. John C. and
John B. Dicus, who will serve as initial directors of the Foundation, and their
affiliates intend to purchase, subject to availability, an aggregate of 100,000
shares of Common Stock. The other directors of the Foundation expect to purchase
shares of Common Stock as follows: Perry - 1,000 shares; Jackson - 4,000 shares
and Roskens -1,000 shares. The shares of Common Stock to be acquired by the
Foundation, when combined with the proposed purchases of shares of Common Stock
by all Foundation directors and their affiliates will total 1.8 million shares
or 1.7% of the total number of shares of Common Stock to be issued and
outstanding (assuming the sale of 43.5 million shares of Common Stock).
The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. Failure to distribute such a
minimum return will require substantial federal taxes to be paid. One of the
conditions imposed on the gift of Common Stock by the Stock Holding Company is
that the amount of Common Stock that may be sold by the Foundation in any one
year shall not exceed 5% of the average market value of the assets held by the
Foundation, except where the Board of Directors of the Foundation determines
that the failure to sell an amount of Common Stock greater than such amount
would result in a longer term reduction of the value of the Foundation's assets
and as such would jeopardize the Foundation's capacity to carry out its
charitable purposes. Upon completion of the Reorganization and the Stock
Issuance and the contribution of shares of Common Stock to the Foundation, the
Stock Holding Company would have 77,785,444 shares, 91,512,288 shares,
105,239,130 shares and 128,025,000 shares issued and outstanding based on the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Offering
Range. Because the Stock Holding Company will have an increased number of shares
outstanding, the voting and ownership interests of Minority Stockholders in the
Stock Holding Company's Common Stock would be diluted to 41.31% as compared to a
42.01% interest in the Stock Holding Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Pro Forma
Data."
Tax Considerations. The Stock Holding Company and the Bank have been
advised by their outside tax advisors that an organization created and operated
for the above charitable purposes would generally qualify as a Section 501(c)(3)
exempt organization under the Code, and further that such an organization should
be classified as a private foundation as defined in Section 509 of the Code. The
Foundation will submit a timely request to the IRS to be recognized as an exempt
organization. As long as the Foundation files its application for recognition of
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization. The Stock Holding Company's and the
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Bank's outside tax advisor, however, has not rendered any advice on the
regulatory condition to the contribution which is expected to require that all
shares of Common Stock of the Stock Holding Company held by the Foundation must
be voted in the same ratio as all other outstanding shares of Common Stock of
the Stock Holding Company on all proposals considered by stockholders of the
Stock Holding Company. Consistent with the expected condition, in the event that
the Stock Holding Company or the Foundation receives an opinion of its legal
counsel that compliance with this voting restriction would have the effect of
causing the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation, or subject the
Foundation to an excise tax under Section 4941 of the Code, it is expected that
the OTS would waive such voting restriction upon submission of a legal
opinion(s) by the Stock Holding Company or the Foundation satisfactory to the
OTS. See "-- Regulatory Conditions Imposed on the Foundation."
Under the Code, the Stock Holding Company is generally allowed a deduction
for charitable contributions made to qualifying donees within the taxable year
of up to 10% of the combined taxable income of the consolidated groups of
corporations (with certain modifications) for such year. Charitable
contributions made by the Stock Holding Company in excess of the annual
deductible amount will be deductible over each of the five succeeding taxable
years, subject to certain limitations. The Stock Holding Company and the Bank
believe that the Reorganization presents a unique opportunity to establish and
fund a charitable foundation given the substantial amount of additional capital
being raised in the Reorganization. In making such a determination, the Stock
Holding Company and the Bank considered the dilutive impact of the contribution
of Common Stock to the Foundation on the amount of Common Stock available to be
offered for sale in the Reorganization. Based on such consideration, the Stock
Holding Company and Bank believe that the contribution to the Foundation in
excess of the 10% annual deduction limitation is justified given the Bank's
capital position and its earnings, the substantial additional capital being
raised in the Stock Issuance and the potential benefits of the Foundation to the
communities served by the Bank. In this regard, assuming the sale of shares at
the maximum of the Estimated Offering Range, the Stock Holding Company would
have pro forma stockholders' equity of $1.03 billion or 18.18% of pro forma
consolidated assets and the Bank's pro forma tangible, core and total risk-based
capital ratios would be 16.67%, 16.67% and 38.93%, respectively. See "The Bank
Exceeds All Regulatory Capital Requirements," "Capitalization," "Pro Forma
Data," and "Comparison of Valuation and Pro Forma Information with No
Foundation." The Stock Holding Company and the Bank believe that the amount of
the charitable contribution is reasonable given the Stock Holding Company's and
the Bank's pro forma capital positions. As such, the Stock Holding Company and
the Bank believe that the contribution does not raise safety and soundness
concerns.
The Stock Holding Company and the Bank have received an opinion from their
outside tax advisors that the Stock Holding Company's contribution of its own
stock and cash to the Foundation should not constitute an act of self-dealing.
The Stock Holding Company should also be entitled to a deduction in the amount
of the cash and , more likely than not, a deduction for the fair market value of
the stock contributions to the Foundation less any nominal par value that the
Foundation may be required to pay to the Stock Holding Company for such stock,
subject to the annual deduction limitation described above. The Stock Holding
Company, however, would be able to carryforward any unused portion of the
deduction for five
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years following the contribution, subject to certain limitations. The Stock
Holding Company's and the Bank's outside tax advisor, however, has not rendered
advice as to fair market value for purposes of determining the amount of the tax
deduction. If the Foundation would have been established in fiscal 1998, the
Stock Holding Company would have received tax benefits of approximately $13.2
million based on the Bank's pre-tax income for fiscal 1998, an assumed tax rate
of 38.0% and a deduction for the contribution of cash and Common Stock equal to
$34.8 million. Assuming the close of the Offerings at the maximum of the
Estimated Price Range, the Stock Holding Company estimates that all of the
contribution should be deductible over the six-year period. The Stock Holding
Company and/or the Bank may make further contributions to the Foundation
following the initial contribution. In addition, the Bank and the Stock Holding
Company also may continue to make charitable contributions to other qualifying
organizations. Any such decisions would be based on an assessment of, among
other factors, the financial condition of the Stock Holding Company and the Bank
at that time, the interests of stockholders and depositors of the Stock Holding
Company and the Bank, and the financial condition and operations of the
Foundation.
Although the Stock Holding Company and the Bank have received an opinion of
their outside tax advisors that the Stock Holding Company will more likely than
not be entitled to an income tax deduction for the stock portion of the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that a deduction
for the charitable contribution will be allowed. See "Risk Factors - The
establishment of the Capitol Federal Foundation will reduce our earnings" and "-
The contribution to the Capitol Federal Foundation means that your total
ownership will be 1.65% less after we make the contribution."
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year. The Foundation will be required to publish a
notice that the annual information return will be available for public
inspection for a period of 180 days after the date of such public notice. The
information return for a private foundation must include, among other things, an
itemized list of all grants made or approved, showing the amount of each grant,
the recipient, any relationship between a grant recipient and the Foundation's
managers and a concise statement of the purpose of each grant. Numerous other
requirements exist in the operation of the Foundation including transactions
with related entities, level of investments and distributions for charitable
purposes.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is expected to be subject to the following conditions being agreed to
by the Foundation in writing as a condition to receiving the OTS' approval of
the Reorganization:
(1) the Foundation will be subject to examination by the OTS;
(2) the Foundation must comply with supervisory directives imposed by
the OTS;
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(3) the Foundation will operate in accordance with written policies
adopted by its Board of Directors, including a conflict of
interest policy;
(4) any shares of Common Stock held by the Foundation must be voted
in the same ratio as all other shares of Common Stock voting on
all proposals considered by stockholders of the Stock Holding
Company; provided, however, that, consistent with the condition,
the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would:
o cause a violation of the law of the State of Kansas, and the
OTS determines that federal law would not preempt the
application of the laws of Kansas to the Foundation;
o would cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the
Foundation; or
o would cause the Foundation to be subject to an excise tax
under Section 4941 of the Code; and
(5) any shares of Common Stock subsequently purchased by the
Foundation will be aggregated with any shares repurchased by the
Stock Holding Company or the Bank for purposes of calculating the
number of shares which may be repurchased during the three-year
period subsequent to Reorganization.
In order for the OTS to waive such voting restriction, the Stock Holding
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the OTS. While there is no current intention for the
Stock Holding Company or the Foundation to seek a waiver from the OTS from such
restrictions, there can be no assurances that a legal opinion addressing these
issues could be rendered, or if rendered, that the OTS would grant an
unconditional waiver of the voting restriction. If the voting restriction is
waived or becomes unenforceable, the OTS may either impose a condition that
provides a certain portion of the members of the Foundation's Board of Directors
shall be persons who are not directors, officers or employees of the Stock
Holding Company, the Bank or any affiliate or impose such other conditions
relating to control of the Foundation's Common Stock as is determined by the OTS
to be appropriate at the time. In no event would the voting restriction survive
the sale of shares of the Common Stock held by the Foundation.
Various OTS regulations may be deemed to apply to the Foundation including
regulations regarding:
o transactions with affiliates;
o conflicts of interest;
o capital distributions; and
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o repurchases of capital stock within the three-year period
subsequent to the Stock Issuance.
Because only two of the directors of the Stock Holding Company and the Bank are
expected to serve as directors of the Foundation, the Stock Holding Company and
the Bank do not believe that the Foundation should be deemed an affiliate of the
Bank. The Stock Holding Company and the Bank anticipate that the Foundation's
affairs will be conducted in a manner consistent with the OTS' conflict of
interest regulations. The Bank has provided information to the OTS demonstrating
that the initial contribution of Common Stock to the Foundation would be within
the amount which the Bank would be permitted to make as a capital distribution
assuming such contribution is deemed to have been made by the Bank.
Stock Pricing and Number of Shares to be Issued
The Plan requires that the purchase price of the Common Stock must be based
on the appraised pro forma market value of the Stock Holding Company and Bank,
as determined on the basis of an independent valuation. The Bank has retained RP
Financial to make such valuation. For its services in making such appraisal, RP
Financial's fees and out-of-pocket expenses are estimated to be $117,500. The
Bank has agreed to indemnify RP Financial and any employees of RP Financial who
act for or on behalf of RP Financial in connection with the appraisal against
any and all loss, cost, damage, claim, liability or expense of any kind,
including claims under federal and state securities laws, arising out of any
misstatement or untrue statement of a material fact or an omission to state a
material fact in the information supplied by the Bank to RP Financial, unless RP
Financial is determined to be negligent or otherwise at fault.
An appraisal has been made by RP Financial in reliance upon the information
contained in this Prospectus, including the Financial Statements. RP Financial
also considered the following factors, among others: the present and projected
operating results and financial condition of the Stock Holding Company and the
Bank and the economic and demographic conditions in the Bank's existing
marketing areas; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other similarly situated publicly traded mutual holding
companies; the aggregate size of the offering of the Common Stock; the impact of
the Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Stock Holding Company and the Bank; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities. In its review of the appraisal provided by RP
Financial, the Board of Directors reviewed the methodologies and the
appropriateness of the assumptions used by RP Financial in addition to the
factors enumerated above, and the Board of Directors believes that such
assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised the Stock Holding
Company and the Bank that in its opinion, dated November 20, 1998, the estimated
pro forma market value of the Common Stock on a fully converted basis, assuming
a contribution to a charitable foundation in an amount equal to 8.0% of the
shares sold, ranged from a minimum of $795.6 million to a maximum of $1.08
billion with a midpoint of $936.0 million. The Board of Directors of the Bank
determined that the Common Stock should be sold at $10.00 per share and that
42.01% of
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the to-be-outstanding shares, prior to the contribution to the Foundation,
should be offered to Minority Stockholders. Based on the Estimated Valuation
Range and the Purchase Price, the number of shares of Common Stock that the
Stock Holding Company will issue will range from between 32,136,106 shares to
43,478,261 shares, with a midpoint of 37,807,183 shares. The anticipated
issuance of a number of shares equal to 4.0% of the shares of Common Stock sold
in the Offering to the Foundation as part of the Stock Issuance will result in
shareholders other than the MHC and the Foundation owning 41.31% of the shares
of the Common Stock outstanding at the conclusion of the Reorganization and
Stock Issuance. The remaining shares of the Stock Holding Company's Common Stock
that are not sold in the Offerings or contributed to the Foundation will be
issued to the MHC. The Estimated Valuation Range may be amended with the
approval of the OTS, if required, or if necessitated by subsequent developments
in the financial condition of the Stock Holding Company and the Bank or market
conditions generally, or to fill the order of the ESOP. In the event the
Estimated Valuation Range is updated to amend the value of the Common Stock
below $795.6 million or above $1.08 billion, which is the maximum of the
Estimated Valuation Range, as adjusted by 15%, the new appraisal will be filed
with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices and
policies of the OTS, in the event the Stock Holding Company receives orders for
Common Stock in excess of $434.8 million (the maximum of the Estimated Offering
Range) and up to $500.0 million (the maximum of the Estimated Offering Range, as
adjusted by 15%), the Stock Holding Company may be required by the OTS to accept
all such orders. No assurances, however, can be made that the Stock Holding
Company will receive orders for Common Stock in excess of the maximum of the
Estimated Offering Range or that, if such orders are received, that all such
orders will be accepted because the Stock Holding Company's final valuation and
number of shares to be issued are subject to the receipt of an updated appraisal
from RP Financial which reflects such an increase in the valuation and the
approval of such increase by the OTS. In addition, an increase in the number of
shares above 43,478,261 shares will first be used, if necessary, to fill the
order of the ESOP. There is no obligation or understanding on the part of
management to take and/or pay for any shares in order to complete the
Reorganization.
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares. RP
Financial did not independently verify the consolidated financial statements and
other information provided by the Bank, nor did RP Financial value independently
the assets or liabilities of the Bank. The valuation considers the Bank as a
going concern and should not be considered as an indication of the liquidation
value of the Bank. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing
Common Stock in the Offerings will thereafter be able to sell such shares at
prices at or above the Purchase Price or in the range of the foregoing valuation
of the pro forma market value thereof.
Prior to completion of the Reorganization, the maximum of the Estimated
Offering Range may be increased up to 15% and the number of shares of Common
Stock may be increased to 50,000,000 shares to reflect changes in market and
financial conditions or to fill the order of the ESOP, without the
resolicitation of subscribers. See "-- Limitations on Stock Holding Company
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Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
Estimated Offering Range to fill unfilled orders in the Subscription Offering.
No sale of shares of Common Stock in the Reorganization may be consummated
unless prior to such consummation RP Financial confirms that nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the aggregate value of the Common Stock to be
issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of the Stock Holding Company and Bank. If
such confirmation is not received, the Stock Holding Company may cancel the
Offerings, extend the Offerings and establish a new estimated valuation range
and/or estimated price range, extend, reopen or hold a new Offering or take such
other action as the OTS may permit.
Depending upon market or financial conditions following the commencement of
the Subscription Offering, the total number of shares of Common Stock may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the Purchase Price is not below
the minimum or more than 15% above the maximum of the Estimated Offering Range.
In the event market or financial conditions change so as to cause the aggregate
Purchase Price of the shares to be below the minimum of the Estimated Offering
Range or more than 15% above the maximum of such range, purchasers will be
resolicited and be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded with interest at the Bank's passbook rate of interest, or be permitted
to modify or rescind their subscriptions. Any change in the Estimated Offering
Range must be approved by the OTS. If the number of shares of Common Stock
issued in the Reorganization is increased due to an increase of up to 15% in the
Estimated Offering Range to reflect changes in market or financial conditions or
to fill the order of the ESOP, persons who subscribed for the maximum number of
shares will be given the opportunity to subscribe for the adjusted maximum
number of shares. See "-- Limitations on Stock Holding Company Common Stock
Purchases."
An increase in the number of shares of Common Stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Stock Holding Company's pro forma net
income and stockholders' equity on a per share basis while increasing pro forma
net income and stockholders' equity on an aggregate basis. A decrease in the
number of shares of Common Stock would increase both a subscriber's ownership
interest and the Stock Holding Company's pro forma net income and stockholders'
equity on a per share basis while decreasing pro forma net income and
stockholders' equity on an aggregate basis. See "Risk Factors - We intend to
grant stock options and restricted stock to the board and management following
the change in structure and stock offering which could further reduce your
voting interest" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed report of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
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Subscription Offering and Subscription Rights
In accordance with the Plan of Reorganization and Stock Issuance Plan,
rights to subscribe for the purchase of Common Stock have been granted under the
Plan to the following persons in the following order of descending priority:
o depositors of the Bank with account balances of at least $50.00
as of the close of business on June 30, 1997 ("Eligible Account
Holders"),
o Tax-Qualified Employee Plans,
o depositors of the Bank with account balances of at least $50.00
as of the close of business on December 31, 1998 ("Supplemental
Eligible Account Holders"),
o depositors and certain borrowers of the Bank as of the close of
business on __________, 1999, other than Eligible Account Holders
or Supplemental Eligible Account Holders ("Other Members") and
o Directors, Officers and Employees of the Bank.
All subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan and as described below under "- Limitations on Stock
Holding Company Common Stock Purchases."
Preference Category No.1: Eligible Account Holders. Each Eligible Account
Holder shall receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for shares of Common Stock in an amount equal
to the greater of (i) $500,000 or 50,000 shares of Common Stock, (ii) one-tenth
of one percent (0.10%) of the total offering of shares of Common Stock or (iii)
15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction, of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders in the converting Bank in each case as
of the close of business on June 30, 1997 (the "Eligibility Record Date"),
subject to the overall purchase limitations. See "-- Limitations on Stock
Holding Company Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the extent possible, to purchase
a number of shares sufficient to make his total allocation equal to the lesser
of the number of shares subscribed for or 100 shares. Thereafter, any shares
remaining after each subscribing Eligible Account Holder has been allocated the
lesser of the number of shares subscribed for or 100 shares will be allocated
among the subscribing Eligible Account Holders pro rata whose subscriptions
remain unfilled in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of qualifying deposits of all
subscribing Eligible Account Holders whose subscriptions remain
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unfilled. Subscription Rights of Eligible Account Holders will be subordinated
to the priority rights of Tax-Qualified Employee Stock Benefit Plans to purchase
shares in excess of the maximum of the Estimated Offering Range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding June 30, 1997.
Preference Category No. 2: Tax-Qualified Employee Plans. Each Tax-Qualified
Employee Plan, including the ESOP shall be entitled to receive, without payment
therefor, second priority, nontransferable subscription rights to purchase up to
10% of Common Stock, provided that individually or in the aggregate such plans
(other than that portion of such plans which is self-directed) shall not
purchase more than 10% of the shares of Common Stock, including any increase in
the number of shares of Common Stock after the date hereof as a result of an
increase of up to 15% in the maximum of the Estimated Offering Range. The ESOP
intends to purchase 8.0% of the shares of Common Stock sold in the Offering, or
2,570,888 shares and 3,478,261 shares based on the minimum and maximum of the
Estimated Offering Range, respectively. Subscriptions by any of the
Tax-Qualified Employee Plans will not be aggregated with shares of Common Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription and Direct Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. Subscription rights received pursuant to this Category shall be
subordinated to all rights received by Eligible Account Holders to purchase
shares pursuant to Category No.1; provided, however, that notwithstanding any
other provision of the Plan to the contrary, the Tax-Qualified Employee Plans
shall have a first priority subscription right to the extent that the total
number of shares of Common Stock sold in the Stock Offering exceeds the maximum
of the estimated valuation range as set forth in this Prospectus. In the event
that the total number of shares offered in the Offerings is increased to an
amount greater than the number of shares representing the maximum of the
Estimated Offering Range ("Maximum Shares"), each Tax-Qualified Employee Plan
will have a priority right to purchase any such shares exceeding the Maximum
Shares up to an aggregate of 10% of the Common Stock sold in the Offerings. See
"Management - Benefits --Employee Stock Ownership Plan."
Preference Category No. 3: Supplemental Eligible Account Holders. To the
extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the Tax-Qualified Employee Plans,
each Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of Common Stock in an amount equal to the greater of (i)
$500,000 or 50,000 shares of Common Stock, (ii) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Common Stock to be issued by a fraction, of which the numerator is
the amount of the qualifying deposit of the Supplemental Eligible Account Holder
and the denominator of which is the total amount of qualifying deposits of all
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Supplemental Eligible Account Holders in the converting Bank in each case on the
close of business on December 31, 1998 (the "Supplemental Eligibility Record
Date"), subject to the overall purchase limitations. See "-- Limitations on
Stock Holding Company Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of all Supplemental Eligible Account Holders, available shares first will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each such Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No.1) equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders pro rata whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.
Preference Category No. 4: Other Members. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible
Account Holders, each Other Member shall receive, without payment therefor,
fourth priority, nontransferable subscription rights to subscribe for shares of
Stock Holding Company Common Stock, up to the greater of: (i) $500,000 or 50,000
shares of Common Stock or (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock in the Stock Offering, subject to the overall
purchase limitations. See "-- Limitations on Stock Holding Company Common Stock
Purchases."
In the event the Other Members subscribe for a number of shares which, when
added to the shares subscribed for by Eligible Account Holders, the
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in
excess of the total number of shares of Common Stock offered in the Stock
Offering, available shares will be allocated among the subscribing Other Members
pro rata in the same proportion that his number of votes on the close of
business on ___________, 1999, the date for determining voting members entitled
to vote at the special meeting ("Voting Record Date") bears to the total number
of votes on the Voting Record Date of all subscribing Other Members on such
date. Such number of votes shall be determined based on the Bank's mutual
Charter and bylaws in effect on the date of approval by members of the Plan.
Preference Category No. 5 : Directors, Officers and Employees. To the
extent that there are sufficient shares remaining after satisfaction of all
subscriptions by Eligible Account Holders, the Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders and Other Members, then Directors,
Officers and Employees of the Bank as of the date of the commencement of the
Subscription Offering shall be entitled to receive, without payment therefor,
fifth priority, nontransferable subscription rights to purchase shares, in this
Category, an aggregate of up to 15% of Common Stock. The maximum amount of
shares which may be purchased under this Category by any Person is $500,000 of
Common Stock. The ability of Directors, Officers and Employees to purchase
Common Stock under this category is in addition to rights which are otherwise
available to them under the Plan as they may fall within higher priority
categories, and
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the Plan generally allows such persons to purchase in the aggregate up to 25% of
Common Stock sold in the Offering. See "-- Limitations on Stock Holding Company
Common Stock Purchases."
In the event of an oversubscription in this Category, the shares available
shall be allocated pro rata among all of the subscribing Directors, Officers and
Employees in this Category.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at noon, Topeka, Kansas Time, on __________, 1999 (the "Subscription
Expiration Date"), unless extended for up to 45 days or for such additional
periods by the Stock Holding Company and the Bank as may be approved by the OTS.
The Subscription Offering may not be extended beyond _________, 2001.
Subscription rights which have not been exercised prior to the Subscription
Expiration Date (unless extended) will become void.
The Stock Holding Company and the Bank will not execute orders until at
least the minimum number of shares of Common Stock (32,136,106 shares) have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Subscription Expiration Date, unless such period
is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled. If
an extension beyond the 45-day period following the Subscription Expiration Date
is granted, the Stock Holding Company and the Bank will notify subscribers of
the extension of time and of any rights of subscribers to modify or rescind
their subscriptions.
Direct Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and Directors,
Officers and Employees of the Bank, the Stock Holding Company and the Bank
anticipate that they will offer shares pursuant to the Plan to certain members
of the general public, with preference given to natural persons residing in the
State of Kansas, in the counties in which the Bank has offices or in any
contiguous counties (such natural persons referred to as "Preferred
Subscribers"). Such persons, together with an Associate or group of Persons
acting in concert with such persons, may not subscribe for or purchase more than
$500,000 of Common Stock in the Direct Community Offering, if any. Further the
Stock Holding Company and the Bank may limit total subscriptions under this
Section so as to assure that the number of shares available for the public
offering may be up to a specified percentage of the number of shares of Common
Stock. Finally, the Stock Holding Company and the Bank may reserve shares
offered in the Direct Community Offering for sales to institutional investors.
The opportunity to subscribe for shares of Common Stock in any Direct Community
Offering will be subject to the right of the Stock Holding Company and the Bank,
in their sole discretion, to accept or reject any such orders in whole or in
part from any Person either at the time of receipt of an order or as soon as
practicable following the Expiration Date. The Direct Community Offering, if
any, shall be for a period of not less than 20 days nor more than 45 days unless
extended by the Stock Holding Company and the Bank, and shall commence
concurrently with, during or promptly after the Subscription Offering.
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In the event of an oversubscription for shares in the Direct Community
Offering, shares may be allocated, to the extent shares remain available, first
to each Preferred Subscriber whose order is accepted by the Stock Holding
Company. Thereafter, shares may be allocated to cover the orders of any other
person subscribing for shares in the Direct Community Offering so that each such
person subscribing for shares may receive 1,000 shares, if available, and
thereafter on a pro rata basis to such person based on the amount of their
respective subscriptions.
Public Offering
As a final step in the Offerings, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Direct Community
Offerings may be offered for sale to selected members of the general public in a
public offering through the underwriter (the "Public Offering"). It is expected
that the Public Offering will commence as soon as practicable after termination
of the Subscription Offering and the Direct Community Offering, if any. The
Stock Holding Company and the Bank, in their sole discretion, have the right to
reject orders in whole or in part received in the Public Offering. Neither Webb
nor any registered broker-dealer shall have any obligation to take or purchase
any shares of Common Stock in the Public Offering; however, Webb has agreed to
use its best efforts in the sale of shares in the Public Offering.
The price at which Common Stock is sold in the Public Offering will be the
same price at which shares are offered and sold in the Subscription and Direct
Community Offerings. No person, by himself or herself, or with an Associate or
group of Persons acting in concert, may purchase more than $500,000 of Common
Stock in the Public Offering, subject to the maximum purchase limitations. See
"-- Limitations on Stock Holding Company Common Stock Purchases."
Charles Webb & Company may enter into agreements with broker-dealers
("Selected Dealers") to assist in the sale of the shares in the Public Offering,
although no such agreements exist as of the date of this Prospectus. No orders
may be placed or filled by or for a Selected Dealer during the Subscription
Offering. After the close of the Subscription Offering, Webb will instruct
Selected Dealers as to the number of shares to be allocated to each Selected
Dealer. Only after the close of the Subscription Offering and upon allocation of
shares to Selected Dealers may Selected Dealers take orders from their
customers. During the Subscription and Direct Community Offerings, Selected
Dealers may only solicit indications of interest from their customers to place
orders with the Stock Holding Company as of a certain date ("Order Date") for
the purchase of shares of the Stock Holding Company Common Stock. When, and if,
Webb and the Bank believe that enough indications of interest and orders have
not been received in the Subscription and Direct Community Offerings to
consummate the Reorganization, Webb will request, as of the Order Date, Selected
Dealers to submit orders to purchase shares for which they have previously
received indications of interest from their customers. Selected Dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on the "Settlement Date" which date will be three business days from
the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Settlement Date. On the Settlement Date, Selected Dealers
will remit funds to the account established by the Bank for each Selected
Dealer. Each customer's funds so forwarded to
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the Bank, along with all other accounts held in the same title, will be insured
by the FDIC up to $100,000 in accordance with applicable FDIC regulations. After
payment has been received by the Bank from Selected Dealers, funds will earn
interest at the Bank's passbook rate until the consummation or termination of
the Reorganization. Funds will be promptly returned, with interest, in the event
the Reorganization is not consummated as described above.
The Public Offering will be completed within 90 days after the termination
of the Subscription Offering, unless extended by the Bank with the approval of
the OTS. See "-- Stock Pricing and Number of Shares to be Issued" above for a
discussion of rights of subscribers, if any, in the event an extension is
granted.
Persons in Non-qualified States or Foreign Countries
The Bank will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan reside. However, the Bank is not required to offer stock in
the Subscription Offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which:
o the number of persons otherwise eligible to subscribe for shares
under the Plan who reside in such jurisdiction is small;
o the granting of subscription rights or the offer or sale of
shares of Common Stock to such persons would require any of the
Stock Holding Company and the Bank or their officers, directors
or employees, under the laws of such jurisdiction, to register as
a broker, dealer, salesman or selling agent or to register or
otherwise qualify its securities for sale in such jurisdiction or
to qualify as a foreign corporation or file a consent to service
of process in such jurisdiction; and
o such registration, qualification or filing in the judgment of the
Bank would be impracticable or unduly burdensome for reasons of
cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, the Bank will base its decision as to whether or not to offer the Common
Stock in such state on a number of factors, including but not limited to the
size of accounts held by account holders in the state, the cost of registering
or qualifying the shares or the need to register the Bank, its officers,
directors or employees as brokers, dealers or salesmen.
Limitations on Stock Holding Company Common Stock Purchases
The Plan includes the following limitations on the number of shares of the
Stock Holding Company Common Stock which may be purchased in the Stock Offering:
(1) No fewer than 25 shares of Common Stock may be purchased, to the
extent such shares are available;
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(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of (i) $500,000 or
50,000 shares of Common Stock, (ii) one-tenth of one percent
(0.10%) of the total offering of shares of Common Stock or (iii)
15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction, of which the numerator is the
amount of the qualifying deposit of the Eligible Account Holder
and the denominator is the total amount of qualifying deposits of
all Eligible Account Holders in the converting Bank in each case
as of the close of business on the Eligibility Record Date,
subject to the overall limitation in clause (7) below;
(3) The Tax-Qualified Employee Plans, including an ESOP, may purchase
in the aggregate up to 10% of the shares of Common Stock sold in
the Stock Issuance, including any additional shares issued in the
event of an increase in the Estimated Offering Range; although at
this time the ESOP intends to purchase only 8.0% of such shares;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i)
$500,000 or 50,000 shares of Common Stock, (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock
or (iii) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction, of which the numerator
is the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount
of qualifying deposits of all Supplemental Eligible Account
Holders in the Bank in each case as of the close of business on
the Supplemental Eligibility Record Date, subject to the overall
limitation in clause (7) below;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering or Direct Community Offering, as the case
may be, up to the greater of (i) $500,000 or 50,000 shares of
Common Stock or (ii) one-tenth of one percent (0.10%) of the
total offering of shares of Common Stock, subject to the overall
limitation in clause (7) below;
(6) Persons purchasing shares of Common Stock in the Direct Community
Offering or Public Offering may purchase in the Direct Community
Offering or Public Offering up to $500,000 or 50,000 shares of
Common Stock, subject to the overall limitation in clause (7)
below;
(7) Except for the Tax-Qualified Employee Plans and certain Eligible
Account Holders and Supplemental Eligible Account Holders whose
subscription rights are based upon the amount of their deposits,
the maximum number of shares of Stock Holding Company Common
Stock subscribed for or purchased in all categories of the Stock
Offering by any person, together with associates of and groups of
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persons acting in concert with such persons, shall not exceed
$5,000,000 or 500,000 shares of Common Stock offered in the Stock
Offering; and
(8) No more than 15% of the total number of shares offered for sale
in the Subscription Offering may be purchased by directors and
officers of the Bank in the fifth priority category in the
Subscription Offering. No more than 25% of the total number of
shares offered for sale in the Stock Offering may be purchased by
directors and officers of the Bank and their associates in the
aggregate, excluding purchases by the Tax-Qualified Employee
Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, the Boards of Directors of the Stock Holding Company and the Bank may,
in their sole discretion, increase the individual amount permitted to be
subscribed for to a maximum of 9.99% of the number of shares sold in the Stock
Offerings provided that orders for shares exceeding 5% of the shares being
offered in the Stock Offerings shall not exceed, in the aggregate, 10% of the
shares being offered in the Stock Offerings. Requests to purchase additional
shares of Common Stock will be allocated by the Boards of Directors on a pro
rata basis giving priority in accordance with the preference categories set
forth in this Prospectus.
The term "associate" when used to indicate a relationship with any Person
means:
o any corporation or organization (other than the Bank, Stock Holding
Company, MHC or a majority-owned subsidiary of any of them) of which
such Person is a director, officer or partner or is directly or
indirectly the beneficial owner of 10% or more of any class of equity
securities;
o any trust or other estate in which such Person has a substantial
beneficial interest or as to which such Person serves as trustee or in
a similar fiduciary capacity;
o any relative or spouse of such Person, or any relative of such spouse,
who has the same home as such Person or who is a Director or Officer
of the Association, the MHC, the Stock Holding Company or any
subsidiary of the MHC or the Stock Holding Company or any affiliate
thereof; and
o any person acting in concert with any of the person or entities
specified in clauses (i) through (iii) above;
provided, however, that Tax-Qualified or Non-Tax Qualified Employee Plans shall
not be deemed to be an associate of any Director or Officer of the Bank, the
Stock Holding Company or the MHC, to the extent provided in the Plan. When used
to refer to a Person other than an Officer or Director of the Association, the
Association in its sole discretion may determine the Persons that are Associates
of other Persons.
The term "acting in concert" is defined to mean knowing participation in a
joint activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an
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express agreement, or a combination or pooling of voting or other interests in
the securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that the Tax-Qualified Employee Plans will not be deemed to be acting in concert
with its trustee or a person who serves in a similar capacity solely for the
purpose of determining whether stock held by the trustee and stock held by each
plan will be aggregated. The determination of whether a group is acting in
concert shall be made solely by the Board of Directors of the Bank or officers
delegated by such Board of Directors and may be based on any evidence upon which
such board or delegatee chooses to rely.
Marketing Arrangements
Capital Federal Financial and the Bank have retained Webb to consult with
and to advise the Bank, and to assist the Stock Holding Company, on a best
efforts basis, in the distribution of the shares of Common Stock in the
Subscription and Direct Community Offerings. The services that Webb will provide
include, but are not limited to:
o training the employees of the Bank who will perform certain
ministerial functions in the Subscription and Community Offerings
regarding the mechanics and regulatory requirements of the stock
offering process;
o managing the Stock Information Center by assisting interested stock
subscribers and by keeping records of all stock orders;
o preparing marketing materials; and
o assisting in the solicitation of proxies from the Bank's members for
use at the special meeting.
For its services, Webb will receive a management fee of $100,000 and a success
fee of 1.25% of the aggregate Purchase Price of the shares of Stock Holding
Company Common Stock sold in the Subscription Offering and Direct Community
Offering excluding shares purchased by the Tax-Qualified Employee Plans, and
Officers, Directors and Employees of the Bank and members of their immediate
families as well as shares issued to the Foundation. The success fee paid to
Webb will be reduced by the amount of the management fee. In the event that
selected dealers are used to assist in the sale of shares of the Stock Holding
Company Common Stock in the Direct Community Offering, such dealers will be paid
a fee of up to 5.5% of the aggregate Purchase Price of the shares sold by such
dealers. The Bank has agreed to indemnify Webb against certain claims or
liabilities, including certain liabilities under the Securities Act of 1933, as
amended ("Securities Act"), and will contribute to payments Webb may be required
to make in connection with any such claims or liabilities.
Sales of shares of Stock Holding Company Common Stock will be made by
registered representatives affiliated with Webb or by the broker-dealers managed
by Webb. Webb has
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undertaken that the shares of Stock Holding Company Common Stock will be sold in
a manner which will ensure that the distribution standards of the Nasdaq Stock
Market will be met. A Stock Information Center will be established at the main
office of the Bank, in Wichita and in the Kansas City metropolitan area. The
Stock Holding Company will rely on Rule 3a4-1 of the Exchange Act and sales of
Stock Holding Company Common Stock will be conducted within the requirements of
such Rule, so as to permit officers, directors and employees to participate in
the sale of the Stock Holding Company Common Stock in those states where the law
so permits. No officer, director or employee of the Stock Holding Company or the
Bank will be compensated directly or indirectly by the payment of commissions or
other remuneration in connection with his or her participation in the sale of
Common Stock.
Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date (unless extended) in accordance with
Rule 15c2-8 of the Exchange Act, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the Order Form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
Prospectus.
To purchase shares in the Subscription Offering, an executed Order Form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank by __:__ _____, Kansas Time, on the Subscription Expiration Date
(unless extended). In addition, the Stock Holding Company and the Bank will
require a prospective purchaser to execute a certification in the form required
by applicable OTS regulations in connection with any sale of Common Stock. Order
Forms which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank will not accept orders submitted
on photocopied or facsimiled order forms nor order forms unaccompanied by an
executed certification form. The Bank has the right to waive or permit the
correction of incomplete or improperly executed forms, but does not represent
that it will do so. Once received, an executed Order Form may not be modified,
amended or rescinded without the consent of the Bank, unless the Reorganization
has not been completed within 45 days after the end of the Subscription
Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and Directors,
Officers and Employees are properly identified as to their stock purchase
priority, depositors as of the close of business on the Eligibility Record Date
(June 30, 1997) or the Supplemental Eligibility Record Date (December 31, 1998)
and depositors as of the close of business on the Voting Record Date (_________,
1999) must list all accounts on the stock order form giving all names in each
account and the account numbers.
Payment for subscriptions may be made:
o by check or money order ;
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o by authorization of withdrawal from deposit accounts maintained with
the Bank (including a certificate of deposit); or
o in cash, if delivered in person at any full-service banking office of
Capitol Federal Savings, though we request that you change cash for a
check with any of the tellers at Capitol Federal Savings;
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check or money order at the then-current Bank passbook rate of interest
from the date payment is received until consummation of the Stock Offering. If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rate, but may not be used by the subscriber until
all of the Stock Holding Company Common Stock has been sold or the Plan is
terminated, whichever is earlier.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Reorganization. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the passbook rate.
In the event of an unfilled amount of any subscription order, the Bank will
make an appropriate refund or cancel an appropriate portion of the related
withdrawal authorization, after consummation of the Stock Offering. If for any
reason the Stock Offering is not consummated, purchasers will have refunded to
them all payments made and all withdrawal authorizations will be canceled in the
case of subscription payments authorized from accounts at the Bank.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for such shares of Common Stock subscribed for by it at the
Purchase Price upon consummation of the Subscription and Direct Community
Offerings, if all shares are sold, or upon consummation of the Public Offering
if shares remain to be sold in such offering. In the event that, after the
completion of the Subscription Offering, the amount of shares to be issued is
increased above the maximum of the estimated valuation range included in this
Prospectus, the Tax-Qualified and Non-Tax-Qualified Employee Plans will be
entitled to increase their subscriptions by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Stock Holding Company Common Stock in the Subscription and Direct
Community Offerings. ERISA provisions and IRS regulations require that officers,
directors and 10% stockholders who use
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self-directed IRA funds to purchase shares of Common Stock in the Offerings make
such purchases for the exclusive benefit of the IRAs. IRAs maintained at the
Bank are not self-directed IRAs and any interested parties wishing to use IRA
funds for stock purchases are advised to contact the Stock Information Center at
(877) 815-1820 for additional information.
The records of the Bank will be deemed to control with respect to all
matters related to the existence of subscription rights and/or one's ability to
purchase shares of Common Stock in the Subscription Offering.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for such person's account. Each person exercising such subscription rights
will be required to certify that the person is purchasing shares solely for the
person's own account and that such person has no agreement or understanding
regarding the sale or transfer of such shares. Federal regulations also prohibit
any person from offering or making an announcement of an offer or intent to make
an offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Reorganization.
The Bank will refer to the OTS any situations that it believes may involve
a transfer of subscription rights and will not honor orders believed by it to
involve the transfer of such rights.
Delivery of Certificates
Certificates representing Common Stock issued in the Stock Issuance will be
mailed by the Stock Holding Company's transfer agent to the persons entitled
thereto at the addresses of such persons appearing on the stock order form as
soon as practicable following consummation of the Reorganization. Any
certificates returned as undeliverable will be held by the Stock Holding Company
until claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for Common Stock are
available and delivered to subscribers, such subscribers may not be able to sell
the shares of Common Stock for which they have subscribed, even though trading
of the Common Stock may have commenced.
Required Approvals
Various approvals of the OTS are required in order to consummate the
Reorganization. The OTS has approved the Plan, subject to approval by the Bank's
members and other standard conditions. The Stock Holding Company's holding
company application is currently pending.
The Stock Holding Company is required to make certain filings with state
securities regulatory authorities in connection with the issuance of Stock
Holding Company Common Stock in the Offering.
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Judicial Review
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves a plan of reorganization may obtain review of
such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located, or
in the United States Court of Appeals for the District of Columbia, a written
petition praying that the final action of the OTS be modified, terminated or set
aside. Such petition must be filed within 30 days after the publication of
notice of such final action in the Federal Register, or 30 days after the
mailing by the applicant of the notice to members as provided for in 12 C.F.R.
ss.563b.6(c), whichever is later. The further procedure for review is as
follows: A copy of the petition is forthwith transmitted to the OTS by the clerk
of the court and thereupon the OTS files in the court the record in the
proceeding, as provided in Section 2112 of Title 28 of the United States Code.
Upon the filing of the petition, the court has jurisdiction, which upon the
filing of the record is exclusive, to affirm, modify, terminate, or set aside in
whole or in part, the final action of the OTS. Review of such proceedings is as
provided in Chapter 7 of Title 5 of the United States Code. The judgment and
decree of the court is final, except that they are subject to review by the
Supreme Court upon certiorari as provided in Section 1254 of Title 28 of the
United States Code.
Restrictions on Purchase or Transfer of Shares After the Reorganization
All shares of Common Stock purchased in connection with the Reorganization
by a director or an executive officer of the Stock Holding Company and the Bank
will be subject to a restriction that the shares not be sold for a period of one
year following the Reorganization except in the event of the death of such
director or officer or pursuant to a merger or similar transaction approved by
the OTS. Each certificate for restricted shares will bear a legend giving notice
of this restriction on transfer, and instructions will be issued to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date within this one year period as
a stock dividend, stock split or otherwise with respect to such restricted stock
will be subject to the same restrictions.
Purchases of Common Stock of the Stock Holding Company by directors,
executive officers and their associates during the three-year period following
completion of the Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Stock Holding Company's outstanding Common Stock or to certain
purchases of stock pursuant to an employee stock benefit plan.
Pursuant to OTS regulations, the Stock Holding Company will generally be
prohibited from repurchasing any shares of the Common Stock for a period of
three years following the Reorganization other than pursuant to (i) an offer to
all stockholders on a pro rata basis which is approved by the OTS (provided,
however, that the MHC may be excluded with the approval of the OTS) or (ii) the
repurchase of qualifying shares of a director, if any; although the OTS under
its current policies may approve a request to repurchase shares of Common Stock
following the six-month anniversary of the Reorganization. Furthermore, the
Stock Holding Company may not
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repurchase any of its stock (i) if the result would be to reduce the regulatory
capital of the Bank below the amount required for liquidation account to be
established pursuant OTS regulations and (ii) except in compliance with the
policies of the OTS regarding capital distributions.
The above limitations are subject to OTS policies which generally provide
that the Stock Holding Company may repurchase its capital stock provided:
o no repurchases occur within the first six months following the
Reorganization;
o repurchases during the second six months following the Reorganization
do not exceed 5% of its outstanding capital stock (subject to certain
exceptions) and repurchases prior to the third anniversary of the
Reorganization do not exceed 25% of its outstanding capital stock;
o repurchases prior to the third anniversary of the Reorganization are
part of an open-market stock repurchase program;
o if the repurchases do not cause the Bank to become undercapitalized;
and
o the Bank provides to the Regional Director of the OTS no later than 10
days prior to the commencement of a repurchase program written notice
containing a full description of the program to be undertaken and such
program is not disapproved by the Regional Director.
The OTS may permit stock repurchases in excess of such amounts prior to the
third anniversary of the Reorganization if exceptional circumstances are shown
to exist.
RESTRICTIONS ON ACQUISITION
OF THE STOCK HOLDING COMPANY AND THE BANK
The principal federal regulatory restrictions which affect the ability of
any person, firm or entity to acquire the Stock Holding Company, the Bank or
their respective capital stock are described below. Also discussed are certain
provisions in the Stock Holding Company's Charter and Bylaws which may be deemed
to affect the ability of a person, firm or entity to acquire the Stock Holding
Company.
Federal Law
The Change in the Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institutuion unless the OTS has been given 60 days
prior written notice. The HOLA provides that no company may acquire "control" of
a savings institution without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. Pursuant to federal
regulations, control of a savings institution is conclusively deemed to have
been acquired by, among other
133
<PAGE>
things, the acquisition of more than 25% of any class of voting stock of the
institution or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or of more than 25% of any class of stock of a savings
institution, where certain enumerated "control factors" are also present in the
acquisition. The OTS may prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the savings
institution.
For a period of three years following consummation of the Stock Issuance,
OTS regulations generally prohibit, among other things, any person from
acquiring or making an offer to acquire, directly or indirectly, beneficial
ownership of more than 10% of the stock of the Stock Holding Company or the Bank
without OTS approval.
Mutual Holding Company Structure and the Stock Holding Company's Ownership of a
Majority of the Common Stock
For information relating to the mutual holding company form of organization
and the MHC's ownership of a majority of the Common Stock that could discourage
certain transactions which involve an actual or threatened change in control of
the Stock Holding Company or the Bank and perpetuate existing management, see
"Risk Factors - Capitol Federal Savings Bank MHC will own more than half of the
stock of Capitol Federal Financial. This means that Capitol Federal Savings Bank
MHC will have enough votes to control what happens on most matters put to a vote
of stockholders" and "The Reorganization and Stock Issuance."
Charter and Bylaws of Capital Federal Financial
The following discussion is a summary of certain provisions of the Charter
and Bylaws of the Stock Holding Company that relate to corporate governance. The
description is necessarily general and qualified by reference to the Charter and
Bylaws.
Classified Board of Directors. The Board of Directors of the Stock Holding
Company is required by the Charter and Bylaws to be divided into three classes
which are as equal in size as is possible, and one of such classes is required
to be elected annually by stockholders of the
134
<PAGE>
Stock Holding Company for three-year terms. A classified Board of Directors
promotes continuity and stability of management of the Stock Holding Company but
makes it more difficult for stockholders to change a majority of the directors
because it generally takes at least two annual elections of directors for this
to occur.
Authorized but Unissued Shares of Capital Stock. Following the Offerings,
the Stock Holding Company will have authorized but unissued shares of Preferred
Stock and Common Stock. See "Description of Capital Stock of Capitol Federal
Financial." Although such shares could be used by the Board of Directors of the
Stock Holding Company to render more difficult or to discourage an attempt to
obtain control of the Stock Holding Company by means of a merger, tender offer,
proxy contest or otherwise, it is anticipated that such uses will be unlikely
given the MHC's ownership of a majority of the Common Stock.
Special Meetings of Stockholders. The Stock Holding Company's Charter
provides that for a period of five years following consummation of the
Reorganization, special meetings of stockholders may be called only upon
direction of the Stock Holding Company's Board of Directors, for matters
relating to changes in control of the Stock Holding Company or amendments to its
charter.
Absence of Cumulative Voting. The Stock Holding Company's Charter provides
that there shall not be cumulative voting by stockholders for the election of
the Stock Holding Company's directors. The absence of cumulative voting rights
effectively means that the MHC, as the holder of a majority of the shares voted
at a meeting of stockholders, may, if it so chooses, elect all directors of the
Stock Holding Company to be elected at that meeting, thus precluding minority
stockholder representation on the Stock Holding Company's Board of Directors.
Restrictions on Acquisitions of Securities. The Stock Holding Company's
Charter provides that for a period of five years from the effective date of the
Stock Issuance, no person other than the MHC may directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Stock Holding Company. This provision does not apply to
any tax-qualified employee stock benefit plan of the Stock Holding Company or to
an underwriter or member of an underwriting or selling group involving the
public sale or resale of securities of the Stock Holding Company or a subsidiary
thereof; provided, that upon completion of the sale or resale, no such
underwriter or member of the selling group is a beneficial owner of more than
10% of any class of equity securities of the Stock Holding Company. In addition,
during such five-year period, no shares beneficially owned in violation of the
foregoing percentage limitation shall be entitled to vote in connection with any
matter submitted to stockholders for a vote.
Procedures for Stockholder Nominations. The Stock Holding Company's Bylaws
provide that any stockholder desiring to make a nomination for the election of
directors or a proposal for new business at a meeting of stockholders must
submit written notice to the Secretary of the Stock Holding Company at least
five days before the date of the annual meeting. The Bylaws further provide that
if a stockholder seeking to make a nomination or a proposal for new business
fails to follow the prescribed procedures, such proposal shall be laid over for
action
135
<PAGE>
at an adjourned, special, or annual meeting of the shareholders taking place 30
days or more thereafter. Management believes that it is in the best interests of
the Stock Holding Company and its stockholders to provide sufficient time to
enable management to disclose to stockholders information about a dissident
slate of nominations for directors. This advance notice requirement may also
give management time to solicit its own proxies in an attempt to defeat any
dissident slate of nominations should management determine that doing so is in
the best interest of stockholders generally. Similarly, adequate advance notice
of stockholder proposals will give management time to study such proposals and
to determine whether to recommend to the stockholders that such proposals be
adopted.
Benefit Plans
In addition to the provisions of the Stock Holding Company's Charter and
Bylaws described above, certain benefit plans of the Stock Holding Company and
the Bank adopted in connection with the Reorganization and Stock Issuance
contain provisions which also may discourage hostile takeover attempts which the
Boards of Directors of the Bank might conclude are not in the best interests of
the Stock Holding Company, the Stock Holding Company and the Bank or the Stock
Holding Company's stockholders. For a description of the benefit plans and the
provisions of such plans relating to changes in control of the Stock Holding
Company or the Bank, see "Management - Benefits."
DESCRIPTION OF CAPITAL STOCK OF
CAPITAL FEDERAL FINANCIAL
General
The Stock Holding Company is authorized to issue 450 million shares of
Common Stock having a par value of $0.01 per share and 50 million shares of
preferred stock having a par value of $0.01 per share (the "Preferred Stock").
The Stock Holding Company currently expects to issue up to a maximum of
105,239,131 shares (121,025,011 shares in the event that the maximum of the
Estimated Offering Range is increased by 15%) of Common Stock and no shares of
Preferred Stock in the Stock Issuance. Each share of the Stock Holding Company's
Common Stock will have the same relative rights as, and will be identical in all
respects with, each other share of Common Stock. Upon payment of the Purchase
Price for the Common Stock in accordance with the Plan, all such stock will be
duly authorized, fully paid and nonassessable. Presented below is a description
of all aspects of the Stock Holding Company's capital stock which are deemed
material to an investment decision with respect to the Stock Issuance.
The Common Stock of the Stock Holding Company will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Common Stock
Distributions. The Stock Holding Company can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See
136
<PAGE>
"Our Policy Regarding Dividends" and "The MHC Intends to Waive Any Dividends
From Capitol Federal Financial." The holders of Common Stock of the Stock
Holding Company will be entitled to receive and share equally in such dividends
as may be declared by the Board of Directors of the Stock Holding Company out of
funds legally available therefor. If the Stock Holding Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
Voting Rights. Upon the effective date of the Reorganization, the holders
of Common Stock of the Stock Holding Company will possess exclusive voting
rights in the Stock Holding Company. Each holder of Common Stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. Under certain circumstances, shares in excess of 10%
of the issued and outstanding shares of Common Stock may be considered "Excess
Shares" and, accordingly, not be entitled to vote. See "Restrictions on
Acquisition of the Stock Holding Company and the Bank." If the Stock Holding
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Stock Holding Company, as holder of the Bank's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Bank, including all deposit accounts and accrued
interest thereon, and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Reorganization and Stock Issuance - Effects of the
Reorganization -- Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Stock Holding Company, the holders of its Common Stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Stock Holding Company available for
distribution. If Preferred Stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution.
Preemptive Rights. Holders of the Common Stock of the Stock Holding Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Stock Holding Company's authorized Preferred
Stock will be issued in the Stock Issuance. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Stock Holding Company has no present plans to issue Preferred
Stock.
137
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Capital Federal Financial Common Stock
is
- --------.
EXPERTS
The financial statements of the Bank as of September 30, 1998 and 1997 and
for each of the three years in the period ended September 30, 1998 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
registration statement, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Reorganization and its letter with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank by Silver, Freedman & Taff,
L.L.P., Washington, D.C., special counsel to the Bank and the Stock Holding
Company. The Kansas income tax consequences of the Reorganization will be passed
upon for the Bank by Deloitte & Touche LLP. The federal income tax consequences
of the deductibility of a contribution of Stock Holding Company Common Stock to
the private foundation, and applicability of the self-dealing to such
contribution will be passed upon for the Bank by Deloitte & Touche LLP. Certain
legal matters will be passed upon for Charles Webb & Company by Elias, Matz,
Tiernan & Herrick L.L.P., Washington, D.C.
ADDITIONAL INFORMATION
The Stock Holding Company has filed with the SEC a Registration Statement
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the Registration Statement. Such
information, including the Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Stock Holding
Company. The statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof and are not necessarily complete;
each such statement is qualified by
138
<PAGE>
reference to such contract or document. Capitol Federal Savings also maintains a
website (http://www.capfed.com) which contains various information about the
Bank.
The Bank has filed Applications on Form MHC-1 and Form MHC-2 and an
Application H-(e)1 with the OTS with respect to the Reorganization and Stock
Issuance. This Prospectus omits certain information contained in those
applications. The Applications may be examined at the principal office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the Midwest Regional
Office of the OTS located at 122 West John Carpenter Freeway, Suite 600, Irving,
Texas, 75261-9027.
In connection with the Reorganization, the Stock Holding Company will
register its Common Stock with the SEC under Section 12 of the Exchange Act,
and, upon such registration, the Stock Holding Company and the holders of its
stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the Stock
Holding Company has undertaken that it will not terminate such registration for
a period of at least three years following the Reorganization.
A copy of the Plan of Reorganization and Stock Issuance Plan and the
Charter and Bylaws of the Stock Holding Company, the Bank and the MHC are
available without charge from the Bank. Requests for such information should be
directed to: Stockholder Relations, Capitol Federal Savings, 700 Kansas Avenue,
Topeka, Kansas 66603.
139
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997........ F-3-F-4
Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996................................... 36
Consolidated Statements of Equity for the Years Ended
September 30, 1998, 1997 and 1996................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996................................... F-6-F-7
Notes to Consolidated Financial Statements for the Years Ended
September 30, 1998, 1997 and 1996................................... F-8-F-30
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of the Stock Holding Company have been omitted
because the Stock Holding Company has not yet issued any stock, has no assets or
liabilities, and has not conducted any business other than that of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Capitol Federal Savings and Loan Association and Subsidiary
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of Capitol Federal
Savings and Loan Association and Subsidiary (the "Bank") as of September 30,
1998 and 1997, and the related consolidated statements of income, equity and
cash flows for each of the three years in the period ended September 30, 1998.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Bank as of September 30, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
November 17, 1998
Kansas City, Missouri
F-2
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997 (in thousands)
- --------------------------------------------------------------------------------
ASSETS 1998 1997
- ------ ---- ----
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 12,454 $ 15,188
Interest bearing deposits in other banks ........ 12,000 16,000
---------- ----------
Total cash and cash equivalents ........ 24,454 31,188
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL .... 235,000
INVESTMENT SECURITIES, Held-to-maturity
(Market value of $160,712 and $585,979).......... 160,569 585,394
CAPITAL STOCK OF FEDERAL HOME LOAN BANK, At cost .. 43,584 40,398
MORTGAGE-RELATED SECURITIES:
Available-for-sale, At market value
(Amortized cost of $726,104 and $738,216) ...... 747,991 754,179
Held-to-maturity (Market value of $319,128
and $118,956) .................................. 320,379 120,007
LOANS HELD FOR SALE, Net (Market value of
$14,901 and $9,590) .............................. 14,578 9,590
LOANS RECEIVABLE, Net (Less allowance for
loan losses of $4,981 and $1,639) ................ 3,710,252 3,322,102
PREMISES AND EQUIPMENT, Net ....................... 22,785 20,113
REAL ESTATE OWNED, Net (Less allowance for
losses of $139 and $166) ......................... 1,964 2,435
ACCRUED INTEREST RECEIVABLE:
Loans receivable ................................ 18,399 17,192
Mortgage-related securities ..................... 6,823 11,199
Investment securities ........................... 2,776 3,523
OTHER ASSETS ...................................... 5,347 6,337
---------- ----------
TOTAL ASSETS ...................................... $5,314,901 $4,923,657
========== ==========
(Continued)
F-3
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997 (in thousands)
- --------------------------------------------------------------------------------
LIABILITIES AND EQUITY 1998 1997
- ---------------------- ---- ----
LIABILITIES:
Deposits ......................................... $3,894,180 $3,787,123
Advances from Federal Home Loan Bank ............. 500,000 275,000
Securities sold under agreement to repurchase .... 175,000 175,000
Advance payments by borrowers for taxes and
insurance ....................................... 37,426 37,884
Income taxes payable ............................. 227 3,378
Deferred income taxes ............................ 28,995 26,658
Accounts payable and accrued expenses ............ 16,741 13,828
---------- ----------
Total liabilities ....................... 4,652,569 4,318,871
COMMITMENTS AND CONTINGENCIES (NOTE 16)
EQUITY:
Retained earnings ................................ 649,199 595,208
Unrealized gains on mortgage-related
securities available-for-sale (net
of deferred income taxes of $8,755
and $6,385) ..................................... 13,133 9,578
---------- ----------
Total equity ............................ 662,332 604,786
---------- ----------
TOTAL LIABILITIES AND EQUITY ....................... $5,314,901 $4,923,657
========== ==========
See notes to consolidated financial statements. (Concluded)
F-4
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
Unrealized
Gains on
Available-
Retained for-Sale Total
Earnings Securities Equity
-------- ---------- ------
BALANCE, October 1, 1995 ...................... $515,882 $515,882
Net income .................................. 26,622 26,622
Change in accounting resulting from
implementation of Financial Accounting
Standards Board Special Report on SFAS
No. 115, net of deferred income taxes
of $2,333 .................................. $ 3,650 3,650
Change in unrealized gains on mortgage-
related securities available-for-sale,
net of deferred income taxes of $945 ....... 1,268 1,268
-------- -------- --------
BALANCE, September 30, 1996 ................... 542,504 4,918 547,422
Net income .................................. 52,704 52,704
Change in unrealized gains on
mortgage-related securities
available-for-sale, net of
deferred income taxes of $3,107 ............ 4,660 4,660
-------- -------- --------
BALANCE, September 30, 1997 ................... 595,208 9,578 604,786
Net income .................................. 53,991 53,991
Change in unrealized gains on
mortgage-related securities
available-for-sale, net of
deferred income taxes of $2,370 ............ 3,555 3,555
-------- -------- --------
BALANCE, September 30, 1998 ................... $649,199 $ 13,133 $662,332
======== ======== ========
See notes to consolidated financial statements.
F-5
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .......................................................... $ 53,991 $ 52,704 $ 26,622
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends ............................ (3,186) (2,646) (2,337)
Amortization of net deferred loan origination fees ................ (8,115) (7,048) (6,239)
Provision for loan losses ......................................... 3,362 56 865
Provision for losses on real estate owned ......................... 216 424 415
Net loan origination fees capitalized ............................. 8,849 7,266 7,120
Gain on sales of real estate owned, net ........................... (382) (438) (766)
Gain on sale of loans ............................................. (172) (253) (292)
Originations of loans held for sale ............................... (23,760) (3,560) (3,062)
Proceeds from sales of loans held for sale ........................ 18,782 4,251 15,588
Amortization and accretion of premiums and discounts on
mortgage-related securities and investment securities ........... 1,039 (1,770) (2,100)
Depreciation and amortization on premises and equipment ........... 2,960 2,816 2,769
Provision (benefit) for deferred income taxes ..................... (33) 10,637 (5,131)
Changes in:
Accrued interest receivable ..................................... 3,916 334 (4,742)
Other assets .................................................... 990 (297) 1,003
Income taxes payable ............................................ (3,151) 1,972 (1,377)
Accounts payable and accrued expenses ........................... 2,913 (24,682) 22,673
------------ ------------ ------------
Net cash provided by operating activities ................. 58,219 39,766 51,009
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities ................... 850,060 196,992 267,860
Purchases of investment securities .................................. (425,000) (64,992) (313,672)
Purchases of securities under agreement to resell ................... (235,000)
Principal collected on mortgage-related securities available-for-sale 255,352 112,900 171,916
Purchases of mortgage-related securities available-for-sale ......... (244,027) (249,850) (26,519)
Principal collected on mortgage-related securities held-to-maturity . 138,934 10,115 11,259
Purchases of mortgage-related securities held-to-maturity ........... (339,792) (113,117)
Loan originations net of principal collected on loans receivable .... (273,624) (266,024) (164,083)
Purchases of loans receivable ....................................... (124,724) (117,425) (38,085)
Purchases of premises and equipment, net ............................ (5,632) (4,504) (1,926)
Proceeds from sales of real estate owned ............................ 6,901 7,364 5,138
------------ ------------ ------------
Net cash used in investing activities ..................... (396,552) (488,541) (88,112)
------------ ------------ ------------
(Continued)
</TABLE>
F-6
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Deposits, net of payments ................ $ 107,057 $ 46,405 $ 67,088
Proceeds from advances from Federal
Home Loan Bank .......................... 255,000 337,000 116,000
Repayments on advances from Federal
Home Loan Bank .......................... (30,000) (62,000) (116,000)
Proceeds from securities sold under
agreement to repurchase ................. 175,000
Repayments of securities sold under
agreement to repurchase ................. (75,000)
Advance payments by borrowers for
taxes and insurance ..................... (458) 182 (14,692)
----------- ----------- -----------
Net cash provided by
financing activities ........... 331,599 421,587 52,396
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................... (6,734) (27,188) 15,293
CASH AND CASH EQUIVALENTS:
Beginning of year ........................ 31,188 58,376 43,083
----------- ----------- -----------
End of year .............................. $ 24,454 $ 31,188 $ 58,376
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income tax payments, net of refunds of
$24 and $6 in 1997 and 1996,
respectively ........................... $ 37,910 $ 39,987 $ 24,901
=========== =========== ===========
Interest payments, net of interest
credited to deposits of $176,588,
$175,242 and $168,111 .................. $ 58,280 $ 31,510 $ 31,334
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Loans transferred to real estate owned ... $ 5,664 $ 6,425 $ 7,442
=========== =========== ===========
Loans made upon the sale of
real estate owned ....................... $ 600 $ 193 $ 419
=========== =========== ===========
Mortgage-related securities transferred
from held to maturity to available-
for-sale ................................ $ $ $ 720,804
=========== =========== ===========
(Concluded)
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (Amounts in thousands)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES AND PROCEDURES
Nature of Operations - Capitol Federal Savings and Loan Association (the
"Bank") is a federally chartered mutually-held thrift. The Bank has over
twenty branches throughout the State of Kansas. The Bank principally
engages in the origination of single family mortgages and attracting
consumer deposits in the State of Kansas.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Bank, and its wholly owned subsidiary, Capitol
Funds, Inc. Capitol Funds, Inc. has one loan outstanding for the
acquisition and development of land for the construction of single-family
residential homes. Significant intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from banks and interest bearing deposits with an
original maturity of three months or less. The Bank has acknowledged
informal agreements with banks where they maintain deposits. Under these
agreements, service fees charged to the Bank are waived provided certain
average compensating balances are maintained throughout each month.
The Bank is required by regulation to maintain liquid assets in the form
of cash and securities approved by federal regulations, at a quarterly
average of not less than 4% of customer deposits and short-term
borrowings.
Investment Securities, Securities Purchased Under Agreement to Resell and
Mortgage-Related Securities, Held-to-Maturity - Investment securities,
securities purchased under agreement to resell and mortgage-related
securities are held-to-maturity and are stated at cost, adjusted for
amortization of premium and discounts which are recognized as adjustments
to interest income over the life of the securities using the level-yield
method.
To the extent management determines a decline in value in an investment or
mortgage-related security held-to-maturity to be other than temporary, the
Bank will adjust the carrying value and include such expense in the
consolidated statements of income.
Capital Stock of Federal Home Loan Bank - Capital Stock of Federal Home
Loan Bank is carried at cost. Dividends received on such stock are
reflected as interest and dividend income in the consolidated statements
of income.
Mortgage-Related Securities, Available-for-Sale - Mortgage-related
securities available-for-sale are recorded at their current fair value.
Unrealized gains or losses on mortgage-related securities
available-for-sale are included as a separate component of equity, net of
deferred income taxes. Gains or losses on the disposition of
mortgage-related securities available-for-sale, are recognized using the
specific identification method.
F-8
<PAGE>
During 1995, the Financial Accounting Standards Board ("FASB") issued a
report entitled "A Guide to Implementation of Statement No. 115, on
Accounting for Certain Investments in Debt and Equity Securities" (the
"Guide"). The Guide allows a Company a one time reclassification of
securities from held-to-maturity to available-for-sale without adverse
accounting consequences for the remainder of the portfolio. On November
30, 1995, the Bank elected to reclassify mortgage-related securities
held-to-maturity with a carrying value of approximately $720,804 and a
market value of approximately $726,787 to available-for-sale. As a result
of the transfer, equity increased by approximately $3,650 to reflect the
net unrealized gain on the securities.
Loans Held for Sale - The Bank's management designates certain loans as
held for sale as management does not intend to hold such loans to
maturity. Accordingly, such loans are carried at the lower of amortized
cost (outstanding principal adjusted for deferred loan fees) or market
value. Market values for such loans are determined based on sales
commitments or dealer quotations. Gains or losses on such sales are
recognized utilizing the specific identification method. Interest,
including amortization and accretion of deferred loan fees, is included in
interest income on loans receivable.
Loans Receivable, net - Loans are stated at the amount of unpaid principal
less an allowance for loan losses, undisbursed loan funds and unearned
discounts and loan fees, net of certain direct loan origination costs.
Interest on loans is credited to income as earned and accrued only if
deemed collectible. Loans are placed on nonaccrual status when, in the
opinion of management, the full timely collection of principal or interest
is in doubt. As a general rule, the accrual of interest is discontinued
when principal or interest payments become doubtful. When a loan is placed
on nonaccrual status, previously accrued but unpaid interest is reversed
against current income. Subsequent collections of cash may be applied as
reductions to the principal balance, interest in arrears or recorded as
income, depending on management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to accrual
status when principal and interest become current and full payment of
principal and interest is expected.
Net loan origination and commitment fees are amortized as a yield
adjustment to interest income using the level-yield method over the
contractual lives of the related loans.
Provision for Loan Losses - The Bank considers a loan to be impaired when
management believes it is probable that it will be unable to collect all
principal and interest due according to the contractual terms of the loan.
If a loan is impaired, the Bank records a loss valuation equal to the
excess of the loan's carrying value over the present value of the
estimated future cash flows discounted at the loan's effective rate based
on the loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. One-to-four family residential loans
and consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units and loans on
construction and development and commercial properties are evaluated for
impairment on a loan by loan basis. The allowance for loan losses 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.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount
and timing of future cash flows expected to be received on impaired loans,
that may be susceptible to significant change. In the opinion of
management, the allowance when taken as a whole, is adequate to absorb
reasonable estimated loan losses inherent in the Bank's loan portfolios.
F-9
<PAGE>
Premises and Equipment - Land is carried at cost. Buildings and
improvements, furniture, fixtures and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on straight-line or
accelerated methods over the estimated useful lives of the related assets.
The estimated useful lives of the assets are as follows:
Buildings and improvements 20-40 years
Furniture, fixtures and equipment 5-10 years
Real Estate Owned - Real estate owned represents foreclosed assets held
for sale and is recorded at fair value as of the date of foreclosure less
estimated disposal costs (the new basis) and is subsequently carried at
the lower of the new basis or fair value less selling costs on the current
measurement date. Adjustments for estimated losses are charged to
operations when any significant decline reduces the fair value to less
than carrying value. Costs and expenses related to major additions and
improvements are capitalized while maintenance and repairs which do not
improve or extend the lives of the respective assets are expensed
currently. Gains on the sale of real estate owned are recognized upon
disposition of the property to the extent allowable considering the
adequacy of the down payment and other requirements.
Income Taxes - The Bank files a consolidated income tax return using the
accrual basis of accounting.
The Bank provides for income taxes using the asset/liability method of
accounting for income taxes. Deferred income taxes are recognized for the
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
In years prior to September 30, 1997, thrift institutions were permitted
under the Internal Revenue Code to deduct an annual addition to a reserve
for bad debts in determining taxable income, subject to certain
limitations. This addition differs from the bad debt experience used for
financial accounting purposes. Bad debt deductions for income tax purposes
are included in taxable income of later years only if the bad debt reserve
is used subsequently for purposes other than to absorb bad debt losses. A
deferred tax liability is provided only to the extent the tax bad debt
reserve exceeds the base year reserve. The base year reserve is the tax
bad debt reserve as of September 30, 1988. Retained earnings as of
September 30, 1998 includes approximately $97,108 representing such bad
debt reserve as of the base year for which no deferred income taxes have
been provided.
The Small Business Job Protection Act of 1996 (the "Act") repealed the
special bad debt reserve method for thrift institutions. The Act requires
thrifts to recapture any reserves accumulated after 1987 but forgives
taxes owed on reserves accumulated prior to 1988. Thrift institutions will
be given six years to account for the recaptured excess reserves. The Bank
must recapture excess reserves beginning with the year ended September 30,
1997. Thrift institutions will be permitted to delay the timing of this
recapture for up to two years depending upon whether they meet certain
residential loan tests. A deferred tax liability has been provided on the
amount of bad debt reserve that exceeds the base year reserve.
Revenue Recognition - Interest income, loan fees, checking account
transaction fees, insurance commissions, automated teller and debit card
transaction fees, and other ancillary income related to the Bank's
deposits and lending activities are accrued as earned.
F-10
<PAGE>
Estimates - The preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates include the
loan loss reserve and fair values of financial instruments. Actual results
could differ from those estimates.
New Statements of Financial Accounting Standards - In February 1997, the
FASB issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". The Statement establishes standards for computing
and presenting earnings per share ("EPS"). It replaces the presentation of
primary EPS with a presentation of basic EPS. The Statement is effective
for the Bank's financial statements as of September 30, 1999. The Bank
will compute earnings per share under the new standard upon completion of
its proposed stock offering (Note 20).
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". The Statement establishes standards for
disclosing information about an entity's capital structure. The Statement
is effective for the Bank's financial statements as of September 30, 1999.
The Bank is prepared to comply with the additional reporting requirements
of this Statement and does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that the Bank (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. The Statement is
effective for the Bank's financial statements for the fiscal year ending
September 30, 1999. The Bank is prepared to comply with the additional
reporting requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Statement is effective for the Bank's
financial statements for the fiscal year ending September 30, 1999. The
Bank is prepared to comply with the additional reporting requirements of
this Statement and does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
F-11
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers" Disclosures
about Pensions and Other Postretirement Benefits'. The Statement revises
employers' disclosures about pensions and other post-retirement benefit
plans. The Statement does not change the measurement or recognition of
those plans. The Statement is effective for the Bank's financial
statements for the fiscal year ending September 30, 1999. The Bank is
prepared to comply with the additional reporting requirements of this
Statement and does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting
and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and hedging activities. The Statement requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Statement is effective for the Bank's financial statements for
the fiscal year ending September 30, 2000. The adoption of this Statement
is not expected to have a material impact on the Bank's consolidated
financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise". The Statement
changes the way mortgage banking firms account for certain securities and
other interests they retain after securitizing mortgage loans that were
held for sale. The Statement is effective for the Bank's financial
statements as of January 1, 1999. The Bank does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
Reclassifications - Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements in order to conform with the
1998 presentation.
2. INVESTMENT SECURITIES HELD-TO-MATURITY
September 30, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
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
Other securities ................. 100 100
-------- -------- -------- --------
Total ........................ $160,569 $ 143 $ $160,712
======== ======== ======== ========
F-12
<PAGE>
September 30, 1997
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Federal Home Loan Bank notes ..... $230,175 $ 1,402 $ 369 $231,208
U.S. Government agencies:
Federal Home Loan Mortgage
Corporation notes ............ 53,123 88 53,035
Federal National Mortgage
Association notes ............ 301,996 167 527 301,636
Other securities ................. 100 100
-------- -------- -------- --------
Total .................. $585,394 $ 1,569 $ 984 $585,979
======== ======== ======== ========
The amortized cost and estimated fair value of investment securities by
contractual maturity are as follows:
September 30, 1998 September 30, 1997
-------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
One year or less ................... $135,469 $135,596 $ 77,372 $ 77,312
One year through five years ........ 25,100 25,116 209,440 208,863
Five years through ten years ....... 4,996 5,072
Ten years and thereafter ........... 293,586 294,732
-------- -------- -------- --------
$160,569 $160,712 $585,394 $585,979
======== ======== ======== ========
As of September 30, 1998 and 1997, the Bank held callable notes with
aggregate carrying values of $160,469 and $585,294, respectively. As of
September 30, 1998, the notes bear interest at rates ranging from 4.98% to
5.93% with stated maturity dates ranging from 1999 to 2001. The bonds are
callable on specified dates. The maturities stated above reflect the
contractual maturities of the securities and not the call dates.
During 1996, the Bank sold investment securities with carrying values
aggregating $20,000 within three months of maturity. All other
dispositions of investment securities during 1998, 1997 and 1996 were the
result of maturities or calls.
As of September 30, 1998, the Bank has pledged securities as collateral
with amortized cost of $11,000 and estimated market value of $11,017 to
the Federal Reserve for treasury, tax and loan requirements.
F-13
<PAGE>
3. MORTGAGE-RELATED SECURITIES, AVAILABLE-FOR-SALE
September 30, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Pass through certificates:
Federal National Mortgage
Association ................. $260,291 $ 7,753 $ 61 $267,983
Federal Home Loan Mortgage
Corporation ................. 465,813 14,288 93 480,008
-------- -------- -------- --------
$726,104 $ 22,041 $ 154 $747,991
======== ======== ======== ========
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Pass through certificates:
Federal National Mortgage
Association ................ $239,445 $ 4,048 $ $243,493
Federal Home Loan Mortgage
Corporation ................ 498,771 12,492 577 510,686
-------- -------- -------- --------
$738,216 $ 16,540 $ 577 $754,179
======== ======== ======== ========
There were no sales of mortgage-related securities available-for-sale in
fiscal years 1998, 1997 and 1996.
The amortized cost and estimated market value of mortgage-related
securities available-for-sale by contractual maturity are as follows:
September 30, 1998 September 30, 1997
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
One year or less ............. $ 20,825 $ 20,764 $ 10,715 $ 10,665
One year through five years .. 30,981 31,260 57,418 57,360
Five years through ten years . 3,729 3,874 5,821 6,085
Ten years and thereafter ..... 670,569 692,093 664,262 680,069
-------- -------- -------- --------
$726,104 $747,991 $738,216 $754,179
======== ======== ======== ========
Actual maturities of the mortgage-related securities may differ from
scheduled maturities as borrowers have the right to call or prepay certain
obligations, sometimes without penalties. Maturities of mortgage-related
securities depend on the repayment characteristics and experience of the
underlying obligation.
F-14
<PAGE>
As of September 30, 1998, the Bank has pledged securities available for
sale as collateral with amortized cost of $145,658 and estimated market
value of $148,522 to public unit depositors of the Bank, as security for
letters of credit for low income housing projects and as collateral for
securities sold under agreement to repurchase (Note 12).
4. MORTGAGE-RELATED SECURITIES HELD-TO-MATURITY
September 30, 1998
------------------------------------------
Gross Gross Estimated
Amortized Unrealize Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Collateralized mortgage
obligations:
Federal National Mortgage
Association .................. $240,242 $ 396 $ 1,289 $239,349
Federal Home Loan Mortgage
Corporation .................. 80,137 358 79,779
-------- -------- -------- --------
$320,379 $ 396 $ 1,647 $319,128
======== ======== ======== ========
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Collateralized mortgage
obligations:
Federal National Mortgage
Association ................. $113,114 $ $ 1,003 $112,111
Federal Home Loan Mortgage
Corporation ................. 6,893 5 53 6,845
-------- -------- -------- --------
$120,007 $ 5 $ 1,056 $118,956
======== ======== ======== ========
The amortized cost and estimated market value of mortgage-related
securities held-to-maturity by contractual maturity are as follows:
September 30, 1998 September 30, 1997
--------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
One year or less ............... $ 192 $ 192 $ 5,583 $ 5,541
One year through five years .... 1,310 1,304
Ten years and thereafter ....... 320,187 318,936 113,114 112,111
-------- -------- -------- --------
$320,379 $319,128 $120,007 $118,956
======== ======== ======== ========
Actual maturities of the mortgage-related securities may differ from
scheduled maturities as borrowers have the right to call or prepay certain
obligations, sometimes without penalties. Maturities of mortgage-related
securities depend on the repayment characteristics and experience of the
underlying obligation.
F-15
<PAGE>
There were no sales of mortgage-related securities held-to-maturity during
1998, 1997 and 1996.
As of September 30, 1998, the Bank has pledged mortgage-related securities
with amortized cost of $44,224 and estimated market value of $45,002 as
collateral for securities sold under agreement to repurchase (Note 12).
5. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
The Bank purchases investment securities and mortgage-related securities
under agreements to resell substantially identical securities. Securities
purchased under an agreement to resell as of September 30, 1998 consist of
mortgage-related securities.
The amount advanced under the agreement represents short-term loans and is
reflected as an asset in the consolidated balance sheets. Securities are
delivered into the Bank's account maintained at the Federal Reserve Bank
under a written custodial agreement that explicitly recognizes the Bank's
interest in the securities. As of September 30, 1998, the agreement
matured within 90 days and the agreement to resell securities purchased
was outstanding with one dealer.
6. LOANS RECEIVABLE
1998 1997
---- ----
Mortgage loans:
Residential - one-to-four units .............. $3,504,799 $3,145,799
Second mortgages ............................. 97,829 80,640
Residential - five or more units ............. 40,361 26,688
Construction and development ................. 52,086 51,157
Commercial ................................... 9,069 5,924
---------- ----------
3,704,144 3,310,208
Other loans:
Property improvements, auto and other ........ 8,964 7,755
Student loans ................................ 20,120 23,365
Deposits ..................................... 16,446 16,314
---------- ----------
45,530 47,434
---------- ----------
Less:
Undisbursed loan funds ....................... 21,690 21,872
Allowance for loan losses .................... 4,981 1,639
Unearned loan fees and deferred costs ........ 12,751 12,029
---------- ----------
39,422 35,540
---------- ----------
$3,710,252 $3,322,102
========== ==========
During 1997, the Bank was a participating institution in two commercial
real estate loans. As a participating institution, the Bank is not
responsible for the servicing of the loan or disbursement of funds. The
total unpaid principal balance of these participations as of September 30,
1998 and 1997 was $3,449 and $1,283, respectively. There were no other
commercial real estate or business loans purchased or originated during
1998, 1997 or 1996.
F-16
<PAGE>
The Bank originates and purchases both adjustable and fixed rate loans.
The approximate composition of these loans is as follows:
September 30, 1998
- --------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- -------------------------------------- -----------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
-------- ---------- ---------- ----------
1 mo. - 1 yr. $17,780 1 mo. - 1 yr. $149,382
1 yr. - 3 yrs. 20,600 1 yr. - 3 yrs. 1,389,109
3 yrs. - 5 yrs. 22,403 3 yrs. - 5 yrs. 37,762
5 yrs. - 10 yrs. 167,658 5 yrs. - 10 yrs. 70,329
10 yrs. - 20 yrs. 625,921
Over 20 yrs. 1,248,730
---------- ---------
$2,103,092 $1,646,582
========== ==========
September 30, 1997
- -------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- ------------------------------------- -----------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
-------- ---------- ---------- ----------
1 mo. - 1 yr. $11,495 1 mo. - 1 yr. $130,286
1 yr. - 3 yrs. 14,541 1 yr. - 3 yrs. 1,605,717
3 yrs. - 5 yrs. 31,297 3 yrs. - 5 yrs. 53,631
5 yrs. - 10 yrs. 139,680 5 yrs. - 10 yrs. 103,743
10 yrs. - 20 yrs. 387,875
Over 20 yrs. 879,377
---------- ---------
$1,464,265 $1,893,377
========== ==========
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed to the cost of funds for the 11th District of
Federal Home Loan Bank or one year constant maturity treasury note.
The Bank is subject to numerous lending-related regulations. Under FIRREA,
the Bank may not make real estate loans to one borrower in excess of the
greater of 15% of its unimpaired capital and surplus or $500,000,
whichever is greater. As of September 30, 1998, the Bank is in compliance
with this limitation.
A summary of the activity in the allowance for loan losses is as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year ................. $ 1,639 $ 1,583 $ 1,359
Provision charged to expense ............. 3,362 56 865
Losses charged against the allowance ..... (20) (641)
------- ------- -------
Balance, end of year ....................... $ 4,981 $ 1,639 $ 1,583
======= ======= =======
F-17
<PAGE>
The Bank did not engage in any troubled debt restructurings during the
years ended September 30, 1998, 1997 and 1996. No loans were considered
impaired during the years ended September 30, 1998, 1997 and 1996.
Aggregate loans to executive officers, directors and their associates,
including companies in which they have partial ownership interest did not
exceed 5% of equity as of September 30, 1998 and 1997. Management believes
such loans were made under terms and conditions substantially the same as
loans made to parties not affiliated with the Bank.
As of September 30, 1998 and 1997, loans totaling approximately $6,229 and
$6,109, respectively, were on nonaccrual status. Gross interest income
would have increased by $227 and $223 for the years ended September 30,
1998 and 1997, respectively, for nonaccrual status loans.
As of September 30, 1998, 1997 and 1996, the Bank was servicing loans for
others aggregating approximately $520,595, $640,618 and $735,709,
respectively. Such loans are not included in the accompanying consolidated
balance sheets. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts, disbursing
payments to investors and foreclosure processing. Loan servicing income
includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. The Bank held borrowers' escrow
balances on loans serviced for others of $8,662, $10,524 and $11,544 as of
September 30, 1998, 1997 and 1996, respectively.
7. LOANS HELD FOR SALE
1998 1997
---- ----
Loans held for sale .............................. $14,595 $ 9,547
Deferred net discounts, premiums and
other related costs ............................ (17) 43
------- -------
Loans held for sale, net ......................... $14,578 $ 9,590
======= =======
Gross realized gains on sales of loans held for sale were $172, $253 and
$292, respectively, for the years ended September 30, 1998, 1997 and 1996.
There were no realized losses for the years ended September 30, 1998, 1997
and 1996.
8. PREMISES AND EQUIPMENT
1998 1997
---- ----
Land ........................................... $ 6,462 $ 6,060
Building and improvements ...................... 24,532 22,458
Furniture, fixtures and equipment .............. 19,210 16,530
------- -------
50,204 45,048
Less accumulated depreciation .................. 27,419 24,935
------- -------
$22,785 $20,113
======= =======
F-18
<PAGE>
Depreciation and amortization expense for the years ended September 30,
1998, 1997 and 1996 was $2,960, $2,816 and $2,769, respectively.
Certain Bank facilities and equipment are leased under various operating
leases. Rental expense was $329, $219 and $206, respectively, for years
ended September 30, 1998, 1997 and 1996.
Future minimum rental commitments under noncancellable leases are:
1999 $597
2000 517
2001 215
------
$1,329
======
9. REAL ESTATE OWNED
1998 1997
---- ----
Real estate owned (acquired by foreclosure or
by deed in lieu of foreclosure) ...................... $2,103 $2,601
Less allowance for losses .............................. 139 166
------ ------
$1,964 $2,435
====== ======
A summary of the activity in the allowance for losses on real estate owned
is as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year ................. $ 166 $ 210 $ 110
Provision charged to expense ............. 216 424 415
Losses charged against the allowance ..... (243) (468) (315)
------- ------- -------
Balance, end of year ....................... $ 139 $ 166 $ 210
======= ======= =======
F-19
<PAGE>
10. DEPOSITS
1998 1997
------------------ -----------------
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Passbook and demand deposits:
Demand .................... $ 260,440 1.50% $ 249,585 1.89%
Passbook and Passcard ..... 129,180 2.22% 131,854 2.22%
Money Market Select ....... 213,181 5.09% 30,405 5.34%
Cash Fund ................. 225,356 3.08% 293,108 3.17%
---------- ---------
828,157 704,952
Certificates of deposit:
3.00% to 3.99%.............. 5,900 3.88% 7,866 3.92%
4.00% to 4.99%.............. 429,108 4.51% 25,822 4.79%
5.00% to 5.99%.............. 1,684,996 5.63% 2,224,325 5.68%
6.00% to 6.99%.............. 715,234 6.16% 598,005 6.19%
7.00% to 7.99%.............. 227,695 7.68% 220,048 7.68%
8.00% to 8.99%.............. 2,405 8.47% 5,398 8.38%
9.00% to 9.99%.............. 685 9.00% 707 9.06%
---------- ---------
3,066,023 3,082,171
---------- ----------
$3,894,180 $3,787,123
========== ==========
Weighted average interest
rate on deposits during year 5.15% 5.34%
===== =====
As of September 30, 1998 and 1997, certificates of deposit mature as
follows:
1998 1997
---- ----
Within one year ................................ $1,551,042 $1,560,161
Beyond one year but within two years ........... 1,065,832 730,336
Beyond two years but within three years ........ 224,416 646,427
Beyond three years ............................. 224,733 145,247
---------- ----------
Total ................................ $3,066,023 $3,082,171
========== ==========
A summary of interest expense by deposit type is as follows:
1998 1997 1996
---- ---- ----
Passbook savings deposits ............ $ 2,918 $ 2,931 $ 2,985
NOW accounts and money market
demand deposits .................... 19,861 15,141 15,879
Certificates of deposit .............. 180,647 184,357 176,901
-------- -------- --------
$203,426 $202,429 $195,765
======== ======== ========
F-20
<PAGE>
The amount of non-interest bearing deposits was $23,168 and $15,690 as of
September 30, 1998 and 1997, respectively. The aggregate amount of deposit
accounts with a balance of $100 or greater was approximately $402,781 and
$351,118 as of September 30, 1998 and 1997, respectively, of which jumbo
certificates of deposits with a minimum denomination of $100 was $299,476
and $287,828 as of September 30, 1998 and 1997, respectively. Deposits in
excess of $100 are not insured by the Federal Deposit Insurance
Corporation.
11. ADVANCES FROM FEDERAL HOME LOAN BANK
1998 1997
------------------------------------ ------------------------------------
Fiscal Fiscal
Year Interest Year Interest
Maturity Amount Rate Maturity Amount Rate
-------- ------ ---- -------- ------ ----
2004 $250,000 5.78% 2004 $250,000 5.78%
2005 25,000 5.58% 2005 25,000 5.58%
2008 225,000 5.68%
-------- -------
$500,000 5.73% $275,000 5.76%
======== ==== ======== ====
Actual maturities of the advances may differ from scheduled maturities as
the Federal Home Loan Bank has the right to call the advances. The call
dates range from years 2000 to 2003. The Bank may refinance or reprice the
advance at the two week advance rate at each respective call date. The
advances are collateralized by a blanket pledge agreement, including all
capital stock of Federal Home Loan Bank and qualifying first mortgage
loans.
The Bank has a line-of-credit agreement with the Federal Home Loan Bank
wherein the Bank can borrow up to $300,000. As of September 30, 1998 and
1997, there were no outstanding borrowings on this agreement. The
agreement expires December 11, 1998.
12. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The Bank sells securities under agreements to repurchase ("repurchase
agreements"). Fixed-coupon repurchase agreements are treated as
financings, and the obligations to repurchase the identical securities
sold are reflected as liabilities in the consolidated balance sheets. The
dollar amount of securities underlying the agreements remains in the asset
accounts. The Bank sold certain mortgage-related securities under
agreements to repurchase with book values of $181,024 and $188,796 and
market values of $189,265 and $191,746 as of September 30, 1998 and 1997,
respectively.
The securities underlying these agreements are delivered to a designated
safekeeping agent at the inception of the agreement.
F-21
<PAGE>
The following provides information regarding the repurchase agreements as
of and for the years ended September 30, 1998, 1997 and 1996.
1998 1997 1996
---- ---- ----
Weighted average interest rate during
and at the end of the period ............ 5.73% 5.73% 5.78%
========= ========= =======
Maximum amount outstanding at any
month-end during the period ............. $ 175,000 $ 175,000 $75,000
========= ========= =======
Average amount outstanding during
the period .............................. $ 175,000 $ 82,692 $75,000
========= ========= =======
The repurchase agreements have a scheduled maturity date of 2004. Actual
maturities of the repurchase agreements may differ from scheduled
maturities due to a call date of 2000. The Bank would refinance at the
call date.
13. INCOME TAXES
1998 1997 1996
---- ---- ----
Current ..................... $34,814 $25,054 $23,524
Deferred .................... (33) 10,637 (5,131)
------- ------- -------
$34,781 $35,691 $18,393
======= ======= =======
Income tax expense has been provided at effective rates of 39.2%, 40.4%
and 40.9% for the years ended September 30, 1998, 1997 and 1996,
respectively. The differences between such effective rates and the
statutory Federal income tax rate computed on income before income tax
expense result from the following:
1998 1997 1996
-------------- -------------- -------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Federal income tax expense
computed at statutory rate $31,070 35.0% $30,938 35.0% $15,755 35.0%
Increases (decreases) in
taxes resulting from:
State taxes, net of Federal
income tax benefit 3,849 4.4 4,705 5.3 1,617 3.6
Other (138) (0.2) 48 0.1 1,021 2.3
------- ----- ------- ---- ------- ----
$34,781 39.2% $35,691 40.4% $18,393 40.9%
======= ===== ======= ==== ======= ====
F-22
<PAGE>
Deferred tax expense (benefit) results from timing differences in the
recognition of revenue and expense for tax and financial statement
purposes. The sources of these differences and the tax effect of each were
as follows:
1998 1997 1996
---- ---- ----
BIF/SAIF Premium ........................... $ 9,421 $(9,421)
Deferred loan fees and costs ............... $ 342 270 246
Accrued interest on savings ................ 352 352 373
Increase in allowance for loan losses ...... (1,310) (337)
Salaries and employee benefits ............. (99) (84) (221)
Federal Home Loan Bank stock dividends ..... 1,242 1,032 911
Bad debts reserve .......................... (27) 1,830
Other ...................................... (560) (327) 1,488
------- ------- -------
$ (33) $10,637 $(5,131)
======= ======= =======
The components of net deferred tax liabilities as of September 30, 1998
and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Deferred loan fees and costs ................... $ 495 $ 736
Accrued interest on savings .................... 1,405 1,757
Allowance for loan losses ...................... 1,950 868
Salaries and employee benefits ................. 1,305 1,273
Allowance for losses on real
estate owned .................................. 5 213
Other .......................................... 314 169
-------- --------
$ 5,474 $ 5,016
======== ========
Deferred tax liabilities:
Unrealized gain on mortgage-related
securities available-for-sale ................. $ (8,755) $ (6,385)
Federal Home Loan Bank stock dividends ......... (8,906) (7,664)
Bad debt reserves .............................. (13,203) (13,203)
Prepaid expenses ............................... (291) (335)
Fixed assets - depreciation .................... (263) (326)
Pension fund ................................... (328) (327)
Other .......................................... (2,723) (3,434)
-------- --------
(34,469) (31,674)
-------- --------
Net deferred tax liabilities ..................... ($28,995) ($26,658)
======== ========
F-23
<PAGE>
14. EMPLOYEE BENEFITS
The Bank sponsors a defined benefit pension plan (the "Plan") covering
substantially all employees completing one year of employment (1,000 hours
of service) and attainment of age 21. Normal retirement benefits are
calculated under the Plan using various formulas based upon years of
service and compensation. The Bank's funding policy is to contribute
annually an amount intended to at least meet the minimum funding
requirements of applicable regulations.
The following table sets forth the Plan's funded status as of September
30:
1998 1997
---- ----
Actuarial present value of benefit obligations -
Accumulated benefit obligation, including
vested benefits of $7,888 and $8,074 ................ $ 8,074 $ 8,238
======= =======
Plan assets at fair value .............................. 10,523 10,367
Less projected benefit obligation for service
rendered to date ...................................... 10,290 11,023
------- -------
Projected benefit obligation deficiency in
(excess of) plan assets ............................... 233 (656)
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions ............................. 1,685 2,283
Unrecognized prior service cost ........................ 92 130
Unrecognized net obligation at October 1,
1987 being recognized over 15 years ................... 460 575
------- -------
Prepaid pension expense ................................ $ 2,470 $ 2,332
======= =======
As of September 30, 1998 and 1997, plan assets consist of debt and equity
securities and life insurance policies.
Net periodic pension costs for the years ended September 30:
1998 1997 1996
---- ---- ----
Service cost benefits earned
during the period ...................... $ 516 $ 454 $ 687
Interest cost on projected
benefit obligation ..................... 666 644 654
Actual return on plan assets ............ (748) (1,192) (785)
Net amortization ........................ 247 856 589
------- ------- -------
Net periodic pension cost ............... $ 681 $ 762 $ 1,145
======= ======= =======
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 5.9%, 6.5% and 6.5%
for the years ended September 30, 1998, 1997 and 1996. The weighted
average increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 4.0% for
the years ended September 30, 1998, 1997 and 1996. The expected long-term
rate of return on assets was 7.8% for the years ended September 30, 1998,
1997 and 1996.
F-24
<PAGE>
The Bank intends to terminate the Plan effective May 31, 1999 and to cease
the accrual of any further benefits and the contribution of any further
amounts under the Plan. Following the approval of the Plan's termination
by the IRS and the Pension Benefit Guaranty Corporation, the Bank intends
to distribute the Plan's assets to participants in accordance with their
accrued benefits and the requirements of applicable law.
The Bank has a profit sharing trust which covers all employees with a
minimum of two years of service. This plan allows discretionary employer
contributions between 1% and 15% and requires employee contributions equal
to 50% of the Bank's contributions, not to exceed 5% of the employee's
annual compensation, and permits additional contributions, per formula, up
to an additional 10% of the employee's annual compensation. Total profit
sharing expense amounted to $669, $571 and $288 for the years ended
September 30, 1998, 1997 and 1996, respectively.
15. DEFERRED COMPENSATION
The Bank has deferred compensation agreements with certain officers and
retired officers whereby stipulated amounts will be paid to them over a
period of 20 years upon their retirement or termination. Amounts accrued
under these agreements aggregate $1,299 and $1,361 as of September 30,
1998 and 1997, respectively, and are accrued over the period of active
employment and will be funded by life insurance contracts.
16. COMMITMENTS AND CONTINGENCIES
The Bank had approximate commitments outstanding to originate first
mortgage loans as of September 30, 1998 and 1997 as follows:
1998 1997
---- ----
Fixed rate (interest rates ranging from
4.25% to 9.5% and 4.25% to 8.625%, respectibely,
at September 30, 1998 and 1997) .................. $ 76,800 $ 87,800
Variable rate ..................................... 63,900 65,900
-------- --------
$140,700 $153,700
======== ========
As of September 30, 1998, the Bank had commitments to originate
non-mortgage loans approximating $8,750 of which approximately $418 were
fixed-rate (interest ranging from 8.75% to 10.50%) and $8,332 were
floating rate commitments. As of September 30, 1997, the Bank had
commitments to originate non-mortgage loans approximating $8,500 of which
approximately $520 were fixed rate (interest ranging from 8.25% to 10.50%)
and $7,980 were floating rate commitments.
The commitments to originate mortgage and non-mortgage loans are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require the payment
of a fee. Certain of the commitments are expected to expire without being
fully drawn upon. The total commitments amount disclosed above does not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if considered necessary by the Bank, upon extension
of credit is based on management's credit evaluation of the counterparty.
F-25
<PAGE>
The Bank has approved, but unused, home equity lines of credit of
approximately $123,000 at September 30, 1998. Approval of lines of credit
is based upon underwriting standards that generally do not allow total
borrowings, including existing mortgages and lines of credit, to exceed
100% of the estimated market value of the customer's home. The Bank has
outstanding letters of credit of $4,000 at September 30, 1998.
17. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory
agency, the Office of Thrift Supervision ("OTS"), requires that the Bank
maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 3%, and total
risk-based capital (as defined) of 8%. The Bank is also subject to prompt
corrective action capital requirement regulations set forth by the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC requires the Bank to
maintain a minimum of Tier 1 total and core capital (as defined in the
regulations) to risk-weighted assets (as defined), and of core capital (as
defined) to adjusted tangible assets (as defined). Management believes, as
of September 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1998 and 1997, the most recent notification from the
OTS categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Bank's category.
F-26
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ----------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $650,584 27.3% $191,168 8.0% $238,960 10.0%
Core capital (to adjusted tangible assets) 649,199 12.2% 159,447 3.0% 266,865 5.0%
Tangible capital (to tangible assets) 649,199 12.2% 79,724 1.5% N/A N/A
Tier I capital (to risk weighted assets) 649,199 27.2% N/A N/A 143,376 6.0%
As of September 30, 1997:
Total capital (to risk weighted assets) 594,794 27.1% 174,760 8.0% 218,450 10.0%
Core capital (to adjusted tangible assets) 595,208 12.0% 147,710 3.0% 247,415 5.0%
Tangible capital (to tangible assets) 595,208 12.0% 73,855 1.5% N/A N/A
Tier I capital (to risk weighted assets) 595,208 27.3% N/A N/A 131,070 6.0%
</TABLE>
A reconciliation of the Bank's equity under generally accepted accounting
principles ("GAAP") to regulatory capital amounts as of September 30, 1998
is as follows:
Total equity as reported under GAAP ............... $662,332
Adjustments for regulatory capital--
Unrealized gains on securities .................. (13,133)
--------
Total tangible and core capital ................... 649,199
Allocated loan loss reserve ..................... 1,716
Other ........................................... (331)
--------
Total risk based capital .......................... $650,584
========
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Bank using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amount the
Bank could realize in a current market exchange. The use of different
market assumptions and estimation methodologies may have a material effect
on the estimated fair value amounts.
F-27
<PAGE>
The estimated fair value of the Bank's financial instruments as of
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ........................ $ 24,454 $ 24,454 $ 31,188 $ 31,188
Investment securities ............................ 160,569 160,712 585,394 585,979
Securities purchased under
agreement to resell ............................ 235,000 235,000
Capital Stock of Federal Home
Loan Bank ...................................... 43,584 43,584 40,398 40,398
Mortgage-related securities:
Available-for-sale ............................. 747,991 747,991 754,179 754,179
Held-to-maturity ............................... 320,379 319,128 120,007 118,956
Loans held for sale .............................. 14,578 14,901 9,590 9,590
Loans receivable ................................. 3,710,252 3,953,942 3,322,102 3,927,775
Liabilities:
Deposits ......................................... 3,894,180 3,917,423 3,787,123 3,738,861
Advances from Federal Home
Loan Bank ...................................... 500,000 529,217 275,000 278,129
Securities sold under agreement
to repurchase .................................. 175,000 186,954 175,000 173,582
</TABLE>
1998 1997
------------------- -------------------
Contract Estimated Contract Estimated
or Unrealized or Unrealized
Notional Gain Notional Gain
Amount (Loss) Amount (Loss)
------ ------ ------ ------
Off-balance sheet financial
instruments:
Commitments to originate
mortgage loans .............. $140,700 $ (2,867) $153,700 $ 177
Commitments to originate
non-mortgage loans ......... 8,750 (402) 8,500 (68)
The following methods and assumptions were used to estimate the fair value
of the financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and cash
equivalents are reasonable estimates of their fair value.
Investment Securities, Mortgage-Related Securities, Securities Purchased
Under Agreement to Resell and Loans Held for Sale - Estimated fair values
of investment securities, mortgage-related securities, securities
purchased under agreement to resell and loans held for sale are based on
quoted market prices where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for
similar instruments.
F-28
<PAGE>
Capital Stock of Federal Home Loan Bank - The carrying value of capital
stock of Federal Home Loan Bank approximates its fair value.
Loans Receivable - Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as single
family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans. Each loan category is further
segmented into fixed and variable interest rate categories. Future cash
flows of these loans are discounted using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposits - The estimated fair value of demand deposits and savings
accounts is the amount payable on demand at the reporting date. The
estimated fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank - The estimated fair value of
advances from Federal Home Loan Bank is determined by discounting the
future cash flows of existing advances using rates currently available on
advances from Federal Home Loan Bank having similar characteristics.
Securities Sold Under Agreement to Repurchase - The estimated fair value
of securities sold under agreement to repurchase is estimated by
discounting the future cash flows based on rates currently offered for
contracts of similar terms.
Off-Balance Sheet Items - The estimated fair value of commitments to
originate, purchase or sell loans is based on the fees currently charged
to enter into similar agreements and the difference between current levels
of interest rates and the committed rates.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1998 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date. Therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
19. FEDERAL LEGISLATION
In September 1996, legislation was enacted which included a comprehensive
reform of the banking and thrift industries. The legislation imposed a
one-time assessment on qualifying thrift deposits to recapitalize the
Savings Bank Insurance Fund ("SAIF"), the fund which insures thrift
deposits, and ultimately merged the Bank Insurance Fund ("BIF") and the
SAIF, at which time banks and thrifts now pay the same deposit insurance
premiums. The amount of the one-time assessment was .657% on qualifying
thrift deposits as of March 31, 1995. This one-time assessment of $24,158
was expensed during 1996.
F-29
<PAGE>
20. PLAN OF REORGANIZATION AND STOCK ISSUANCE
On August 25, 1998, the Board of Directors of the Bank adopted the Amended
Plan of Reorganization and Stock Issuance (the "Plan") whereby the Bank
would convert from the mutual to stock form and offer shares of common
stock in a subscription and community offering. As part of the conversion,
newly authorized shares of the new stock holding company (the "Stock
Holding Company"), will be offered to the Bank's depositors and employee
benefit plans in accordance with applicable state and federal regulations.
The amount and pricing of the proposed stock offering will be based upon
an independent appraisal of the Bank. The Plan must be approved by certain
depositors of the Bank and the OTS. In connection with the conversion, the
costs of issuing the common stock will be deferred and deducted from the
sale proceeds. As of September 30, 1998, $77 of conversion costs had been
recorded. In the event that consummation of the conversion does not occur,
any recorded costs will be expensed.
Pursuant to the Plan, the Bank intends to establish a private charitable
foundation (the "Foundation"), in connection with the conversion. The Plan
provides that the Bank and the Stock Holding Company will create the
Foundation immediately following the conversion by contributing cash and
Stock Holding Company common stock in an amount equal to 8% of the total
value of common stock shares to be sold in the conversion. The Foundation
is being formed as a complement to the Bank's existing community
activities and will be dedicated to community activities and the promotion
of charitable causes.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization. A contribution of common stock to
the Foundation by the Stock Holding Company would be tax deductible,
subject to certain limitations. The Stock Holding Company, however, would
be able to carry forward any unused portion of the deduction for five
years following the contribution. Upon funding the Foundation, the Stock
Holding Company will recognize an expense in the full amount of the
contribution, offset in part by the corresponding tax benefits, during the
quarter in which the contribution is made.
The Stock Holding Company plans to set up an employee stock ownership plan
("ESOP"), a tax-qualified benefit plan for officers and employees of the
Stock Holding Company and the Bank. It is assumed that 8% of the shares of
common stock sold in the conversion will be purchased by the ESOP with
funds loaned by the Stock Holding Company. The Stock Holding Company and
the Bank intend to make annual contributions to the ESOP in an amount
equal to the principal and interest requirement of the debt.
Following consummation of the conversion, the Stock Holding Company
intends to adopt a Stock Option Plan and a Recognition and Award Plan,
pursuant to which the Stock Holding Company intends to reserve a number of
shares of common stock equal to an aggregate of 10% and 4%, respectively,
of the common stock issued in the conversion for issuance pursuant to
stock options and stock grants.
******
F-30
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No person has been authorized to give any
information or to make any representation
other than as contained in this Prospectus in UP TO
connection with the offering made hereby,
and, if given or made, such other information 50,000,000 SHARES
or representation must not be relied upon as
having been authorized by the Stock Holding
Company, the Bank or Webb. This Prospectus
does not constitute an offer to sell or a
solicitation of an offer to buy any of the
securities offered hereby to any person in
any jurisdiction in which such offer or
solicitation is not authorized or in which CAPITOL FEDERAL
the person making such offer or solicitation FINANCIAL
is not qualified to do so, or to any person (Proposed Holding Company for
to whom it is unlawful to make such offer or Capitol Federal Savings Bank)
solicitation in such jurisdiction. Neither
the delivery of this Prospectus nor any sale
hereunder shall under any circumstances
create any implication that there has been no
change in the affairs of the Stock Holding
Company or the Bank since any of the dates as
of which information is furnished herein or
since the date hereof.
-------------- COMMON STOCK
TABLE OF CONTENTS
Page
Summary.................................. 3
--------------
Selected Financial and Other Data........ 9
Risk Factors............................. 11 PROSPECTUS
Summary of Recent Developments........... 14 --------------
Management's Discussion and Analysis
of Recent Financial Information........ 16
Capitol Federal Financial................ 17
Capitol Federal Savings Bank............. 18
Capitol Federal Savings Bank MHC......... 18
How We Intend to Use the Proceeds........ 19
Our Policy Regarding Dividends........... 21 CHARLES WEBB & COMPANY, a
The MHC Intends to Waive Any Dividends Division of Keefe, Bruyette &
From Capitol Federal Financial......... 22 Woods, Inc.
The MHC May Consider Converting to
Stock Form in the Future............... 24
Market for the Common Stock.............. 26 ____________, 1999
The Bank Exceeds All Regulatory Capital
Requirements........................... 26
Capitalization........................... 28
Pro Forma Data........................... 29
Comparison of Valuation and Pro
Forma Information With No Foundation... 34
Management's Discussion and Analysis
of Financial Condition and
Results of Operations.................. 37
Business of the Stock Holding Company.... 56
Business of the Bank..................... 56
Regulation............................... 83
Taxation................................. 93
Management .............................. 94
Proposed Purchases By Management......... 103
The Reorganization and Stock Issuance ... 104
Restrictions on Acquisition
of the Stock Holding Company
and the Bank.......................... 133
Description of Capital Stock of
Capitol Federal Financial............. 136
Transfer Agent and Registrar............. 137
Experts.................................. 138
Legal and Tax Opinions .................. 138
Additional Information................... 138
Index to Consolidated Financial
Statements............................ F-1
Until __________, 1999 (25 days after the
date of this Prospectus), all dealers
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a prospectus. This is in addition
to the obligation of dealers to deliver
a prospectus when acting as underwriters
and with respect to their unsold
allotments or subscriptions.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution1
SEC filing fees..........................................$ 144,560
OTS filing fees.......................................... 14,400
Printing, postage and mailing............................ 125,000
Legal fees............................................... 950,000
Blue Sky filing fees and expenses........................ 5,000
Accounting fees.......................................... 450,000
Appraiser's fees......................................... 100,000
Miscellaneous............................................ 6,102
Total....................................................$ 1,795,062
- -----------------------------
Item 14. Indemnification of Directors and Officers
Federal Regulations define areas for indemnity coverage by Capitol
Federal Savings Bank (the "Bank") as follows:
(a) Any person against whom any action is brought or threatened because
that person is or was a director or officer of the Bank shall be indemnified by
the Bank, as the case may be, for:
(i) Any amount for which such person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred by such person in
defending or settling such action, or in enforcing his or her
rights to indemnification if the person attains a favorable
judgment in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director
- --------
1 In addition to the foregoing expenses, Charles Webb & Company, a
Division of Keefe, Bruyette & Woods, Inc. will receive fees based on the number
of shares of Common Stock sold in the Reorganization and Stock Issuance, plus
expenses. Based upon the assumptions and the information set forth under "Pro
Forma Data" and "The Reorganization and Stock Issuance - Marketing Arrangements"
in the Prospectus, it is estimated that such fees will amount to $3,650,590,
$4,302,764, $4,954,938 and $5,704,938 in the event that 32,136,106 shares,
37,807,183 shares, 43,478,261 shares and 50,000,000 shares of Common Stock are
sold in the Reorganization and Stock Issuance, respectively.
1
<PAGE>
only if the requirements of this subparagraph are met:
(i) The Bank shall make the indemnification provided by
subparagraph (a) in connection with any such action which
results in a final judgment on the merits in favor of such
officer or director.
(ii) The Bank shall make the indemnification provided by
subparagraph (a) in case of (1) settlement of such action, (2)
final judgment against such director or officer or (3) final
judgment in favor of such director or officer other than on
the merits, if a majority of the disinterested directors of
the Bank determines that such a director or officer was acting
in good faith within the scope of his or her employment or
authority as he or she could reasonably have perceived it
under the circumstances and for a purpose which he or she
could reasonably have believed under the circumstances was in
the best interest of the Bank or its members.
(c) As used in this Item 14:
(i) "action" means any judicial or administrative proceeding,
or threatened proceeding, whether civil, criminal, or
otherwise, including any appeal or other proceeding for
review;
(ii) "final judgment" means a judgment, decree, or order which
is not appealable or as to which the period for appeal has
expired with no appeal taken;
(iii) "settlement" includes the entry of a judgment by consent
or by confession or a plea of guilty or nolo contendere.
The Bank has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of the
Bank while serving in their capacities as such.
Item 15. Recent Sales of Unregistered Securities
Not applicable.
Item 16. Exhibits and Financial Statements Schedules
(a) See the Exhibit Index filed as part of this Registration Statement.
(b) Financial Statement Schedules.
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
2
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Form S-1 Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Topeka,
State of Kansas on February 1, 1999.
CAPITOL FEDERAL FINANCIAL
(In organization)
By: /s/ John C. Dicus
-----------------------
JOHN C. DICUS
Chairman and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
Each person whose signature appears below hereby makes, constitutes and
appoints John C. Dicus his true and lawful attorney, with full power to sign for
each person and in such person's name and capacity indicated below, and with
full power of substitution, any and all amendments to this Registration
Statement, hereby ratifying and confirming such person's signature as it may be
signed by said attorney to any and all amendments. Pursuant to the requirements
of the Securities Act of 1933, this Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ John C. Dicus Chairman and February 1, 1999
- ----------------- Chief Executive Officer
JOHN C. DICUS (Principal Executive Officer)
/s/ John B. Dicus President, Chief Operating February 1, 1999
- ----------------- Officer and Director
JOHN B. DICUS
/s/ Neil F.M. McKay Executive Vice President February 1, 1999
- ------------------- and Chief Financial Officer
NEIL F.M. MCKAY (Principal Financial Officer)
<PAGE>
Name Title Date
---- ----- ----
/s/ Kent G. Townsend First Vice President February 1, 1999
- -------------------- and Controller
KENT G. TOWNSEND (Principal Accounting Officer)
/s/ B.B. Andersen Director February 1, 1999
- -----------------
B.B. ANDERSEN
/s/ Robert B. Maupin Director February 1, 1999
- --------------------
ROBERT B. MAUPIN
/s/ Frederick P. Reynolds Director February 1, 1999
- -------------------------
FREDERICK P. REYNOLDS
/s/ Carl W. Quarnstrom Director February 1, 1999
- ----------------------
CARL W. QUARNSTROM
/s/ Marilyn S. Ward Director February 1, 1999
- -------------------
MARILYN S. WARD
<PAGE>
EXHIBIT INDEX
Exhibits:
1.1 Engagement Letter with Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc.*
1.2 Form of Agency Agreement with Charles Webb & Company, a Division of
Keefe, Bruyette & Woods, Inc.*
2.0 Second Amended and RestatedPlan of Reorganization and Stock
Issuance Plan
3.1 Federal MHC Subsidiary Holding Company Charter for Capitol Federal
Financial*
3.2 Bylaws of Capitol Federal Financial*
4.0 Form of Stock Certificate of Capitol Federal Financial*
5.0 Opinion of Silver, Freedman & Taff L.L.P. Re: Legality*
8.1 Opinion of Silver, Freedman & Taff L.L.P. Re: Federal Tax Matters
8.2 Form of Opinion of Deloitte & Touche L.L.P.
8.3 Letter of RP Financial, LC. Re: Subscription Rights*
10.1 Letter Agreement regarding Appraisal Services*
10.2 Letter Agreement regarding Business Plan*
10.3 Letter Agreement regarding the Charitable Foundation*
21.0 Subsidiaries of the Registrant*
23.1 Consent of Silver, Freedman & Taff L.L.P. (included in Exhibit 5.0)*
23.2 Consent of Deloitte & Touche L.L.P.
23.3 Consent of RP Financial, LC.*
23.4 Consent of Silver, Freedman & Taff L.L.P. Re: Federal Tax Matters
23.5 Consent of Deloitte & Touche L.L.P. Re: State Tax Matters (included
in Exhibit 8.2)
24.0 Power of Attorney, included in signature pages.*
27.0 Financial Data Schedule*
99.1 Appraisal Report of RP Financial, LC. (P)
99.2 Subscription Order Form and Instructions
99.3 Additional Solicitation Material
- -------------
* Previously filed.
(P) Previously filed in paper format pursuant to continuing hardship exemption.
Exhibit 2
SECOND AMENDED AND RESTATED
PLAN OF REORGANIZATION
AND STOCK ISSUANCE PLAN
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
TOPEKA, KANSAS
as adopted on:
January 29, 1999
<PAGE>
SECOND AMENDED AND RESTATED
PLAN OF REORGANIZATION
AND STOCK ISSUANCE PLAN OF
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
I. Introduction...........................................................................1
II. Definitions......................................................................... 2
III. Plan of Reorganization.............................................................. 6
A. Certain Effects of Reorganization.......................................... 6
B. Conditions to Implementation of Reorganization............................. 9
C. Special Meeting of Members................................................. 9
D. Rights of Members of the MHC............................................... 10
E. Conversion of MHC to Stock Form............................................ 10
F. Timing of the Reorganization and Sale of Capital Stock..................... 11
G. Number of Shares to Be Offered............................................. 11
H. Independent Valuation and Purchase Price of Shares......................... 12
I. Stock Issuance Procedure................................................... 13
J. Subscription Rights........................................................ 13
K. Public Offering and Direct Community Offering.............................. 15
L. Additional Limitations Upon Purchases of Shares of Stock Holding
Company Common Stock..................................................... 16
M. Restrictions and Other Characteristics of Stock Holding Company
Common Stock Being Sold.................................................. 17
N. Exercise of Subscription Rights; Order Forms............................... 18
O. Method of Payment.......................................................... 19
P. Undelivered Defective or Late Order Form; Insufficient Payment............. 20
Q. Payment of Dividends and Repurchase of Stock............................... 20
R. Completion of the Stock Offering........................................... 20
S. Securities Registration and Market Making.................................. 20
T. Stock Purchases by Directors and Officers After the Offering............... 21
U. Establishment and Funding of Charitable Foundation......................... 21
V. Stock Benefit Plans........................................................ 21
W. Employment and Other Severance Agreements.................................. 22
X. Expenses of Reorganization................................................. 22
Y. Interpretation............................................................. 22
Z. Amendment or Termination of the Plan....................................... 22
</TABLE>
<PAGE>
I. Introduction
On January 29, 1999, the Board of Directors of Capitol Federal Savings
and Loan Association, Topeka, Kansas, (the "Association") unanimously adopted
this Second Amended and Restated Plan of Reorganization and Stock Issuance Plan
(the "Plan") pursuant to which the Association proposes to reorganize from a
federally-chartered mutual savings and loan association into a
federally-chartered mutual holding company structure (the "Reorganization")
pursuant to the laws of the United States of America and the rules and
regulations of the Office of Thrift Supervision ("OTS"). The Mutual Holding
Company ("MHC") will be owned by, and exclusive voting rights will be vested in,
the members of the Association. As part of the Reorganization and the Plan, the
Association will convert to a federal stock savings and loan association (the
"Stock Association") and will establish a federal stock holding company (the
"Stock Holding Company") which will be a majority-owned subsidiary of the MHC at
all times so long as the MHC structure is maintained. As part of the
Reorganization and concurrently with it, the Stock Holding Company intends to
undertake a stock issuance through the offering of up to 49.9% of its to be
outstanding common stock (the "Stock Offering"). The remaining common stock to
be outstanding will be issued to the MHC. The corporate name of the Stock
Association and the Stock Holding Company will be determined by the Board of
Directors of the Association and the principal office of each will be located in
Topeka, Kansas.
The Offering provides that non-transferable subscription rights to
purchase Stock Holding Company Common Stock will be offered first to Eligible
Account Holders of record as of the Eligibility Record Date, then to the
Association's Tax-Qualified Employee Plans, then to Supplemental Eligible
Account Holders of record as of the Supplemental Eligibility Record Date, then
to Other Members, and then to directors, officers and employees of the
Association. Concurrently with, at any time during, or promptly after the
Subscription Offering, and on a lowest priority basis, an opportunity to
subscribe may also be offered to the general public in a Direct Community
Offering or a Public Offering. The price of the Stock Holding Company Common
Stock will be based upon an independent appraisal of the Association. The
primary purpose of the Reorganization is to establish a holding company and
stock savings association charter which will enable the Association to expand
and compete more effectively in the financial services industry.
The Reorganization will structure the Association in the stock form
used by commercial banks, most major business corporations and a majority of
savings institutions. In addition, the use of the holding company structure will
provide greater organizational and operating flexibility to the Association.
Moreover, the formation of a mutual holding company will allow the MHC and/or
the Stock Holding Company to borrow funds, on a secured or unsecured basis, and
to issue debt to the public or in a private placement. The proceeds of such
borrowings or debt offering could be contributed to the Stock Association to
increase its capital or could be used by the MHC and/or the Stock Holding
Company for other purposes. There are currently no plans to issue debt or borrow
funds by the MHC or the Stock Holding Company. The Reorganization will also ease
any transition to a uniform charter should such a charter be required in the
future.
The Association is also expected to benefit from its management and
other personnel having a stock ownership in its business, since stock ownership
is viewed as an effective performance incentive and a means of attracting,
retaining and compensating management and other personnel. No change will be
made in the Board of Directors or management as a result of the Reorganization.
In furtherance of the Association's long term commitment to its
community, the Stock Association and the Stock Holding Company will make a
donation to a charitable foundation established by the Association, in cash and
common stock, in an amount equal to up to 8% of the aggregate value of the
Common Stock issued in the Subscription Offering. Under the terms of the
Reorganization, this donation will be subject to the approval of the voting
members of the Association. In the event that the donation is not approved, the
Association may determine to complete the Reorganization without the donation.
<PAGE>
The Reorganization is subject to the approval of the OTS and the
affirmative vote of a majority of the total votes eligible to be cast by Voting
Members of the Association.
II. Definitions
As used in this Plan, the terms set forth below have the following
meanings:
Account(s): Withdrawable deposit(s) in the Association, including
certificates of deposit.
Acting in Concert: The term "acting in concert" shall have the same
meaning given it in ss.574.2(c) of the Regulations of the OTS. The determination
of whether a group is acting in concert shall be made solely by the Board of
Directors of the Association or officers delegated by such Board of Directors
and may be based on any evidence upon which such board or delegatee chooses to
rely.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a
specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Associate: The term "associate," when used to indicate a relationship
with any Person, means: (i) any corporation or organization (other than the
Association, the Stock Holding Company, the MHC or a majority-owned subsidiary
of any of them) of which such Person is a director, officer or partner or is,
directly or indirectly, the beneficial owner of ten percent or more of any class
of equity securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, (iii) any relative or spouse of such Person, or
any relative of such spouse, who has the same home as such Person or who is a
Director or Officer of the Association, the MHC, the Stock Holding Company or
any subsidiary of the MHC or the Stock Holding Company or any affiliate thereof;
and (iv) any person acting in concert with any of the persons or entities
specified in clauses (i) through (iii) above; provided, however, that any
Tax-Qualified or Non-Tax-Qualified Employee Plan shall not be deemed to be an
associate of any Director or Officer of the Association, the MHC or the Stock
Holding Company, to the extent provided herein. When used to refer to a Person
other than an Officer or Director of the Association, the Association in its
sole discretion may determine the Persons that are Associates of other Persons.
Association: Capitol Federal Savings and Loan Association, in its
current mutual form of organization.
Capital Stock: Any and all authorized stock of the Stock Holding
Company or the Stock Association.
Common Stock: Common stock, par value $.01 per share, issued by the
Stock Holding Company simultaneously with the Reorganization, pursuant to its
stock charter.
Deposit Account: Any withdrawable or repurchasable account or deposit
in the Association including Savings Accounts and demand accounts.
Depositor: Any person holding an Account in the Association.
Direct Community Offering: The offering to the general public of any
unsubscribed shares which may be effected as provided in Section III hereof.
Director: A member of the Board of Directors of the Association and,
where applicable, a member of the Board of Directors of the MHC and the Stock
Holding Company.
2
<PAGE>
Effective Date: The effective date of the Reorganization which shall be
the date of consummation of the Reorganization and Stock Offering in accordance
with this Plan and all applicable approvals.
Eligible Account Holder: Any Person holding a Qualifying Deposit in the
Association on the Eligibility Record Date.
Eligibility Record Date: The close of business on June 30, 1997.
Employee: A person who is employed by the Association on the Effective
Date.
ESOP: The Association's employee stock ownership plan.
Exchange Act: The Securities Exchange Act of 1934, as amended.
FDIC: The Federal Deposit Insurance Corporation.
Foundation: Capitol Federal Foundation.
HOLA: The Home Owner's Loan Act, as amended.
Holding Company Application: The Application to be submitted by the
Stock Holding Company to the OTS to have the Stock Holding Company acquire the
common stock of the Stock Association.
Independent Appraiser: The appraiser retained by the Association to
prepare an appraisal of the pro forma market value of the Association and the
Stock Holding Company.
Market Maker: A dealer (i.e., any Person who engages directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
Marketing Agent: The broker-dealer responsible for organizing and
managing the Stock Offering and sale of the Common Stock.
Members: Any person or entity that is entitled under the Charter of the
Association to vote on matters affecting the Association.
MHC: Capitol Federal Savings Bank MHC, the mutual holding company
established by the Association incident to the Reorganization.
Minority Ownership Interest: The shares of the Stock Holding Company's
Common Stock owned by persons other than the MHC, expressed as a percentage of
the total shares of Stock Holding Company Common Stock outstanding.
Minority Stock Offering: One or more offerings of less than 50% in the
aggregate of the outstanding Common Stock of the Stock Holding Company to
persons other than the MHC.
Minority Stockholder: Any owner of the Stock Holding Company's Common
Stock, other than the MHC.
3
<PAGE>
Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of the Association or the Stock Holding Company, such as an
employee stock ownership plan, stock bonus plan, profit-sharing plan or other
plan, which with its related trust does not meet the requirements to be
"qualified" under Section 401 of the Internal Revenue Code.
Non-Voting Stock: Any Capital Stock other than Voting Stock.
Notice of Reorganization: The Notice of MHC Reorganization to be
submitted by the Association to the OTS to notify the OTS of the Reorganization.
OTS: Office of Thrift Supervision, Department of the Treasury, and its
successors.
Officer: An executive officer of the Association which includes the
Chairman, Chief Executive Officer, President, Executive Vice Presidents and
Senior Vice Presidents in charge of principal business functions, and any other
person participating in major policy making functions of the Association.
Order Form: Form to be used in the Subscription Offering to exercise
subscription rights.
Other Members: Members of the Association, other than Eligible Account
Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders,
as of the Voting Record Date.
Parent: A company that controls another company, either directly or
indirectly through one or more subsidiaries.
Person: Any individual, a corporation, a partnership, an association, a
joint-stock company, a trust (including Individual Retirement Accounts and KEOGH
Accounts), any unincorporated organization, a government or political
subdivision thereof or any other entity.
Plan: This Amended Plan of Reorganization and Stock Offering of the
Association as it exists on the date hereof and as it may hereafter be amended
in accordance with its terms.
Public Offering: The offering for sale through the Underwriters to
selected members of the general public of any shares of Stock Holding Company
Common Stock not subscribed for in the Subscription Offering or the Direct
Community Offering, if any.
Public Offering Price: The price per share at which any unsubscribed
shares of Stock Holding Company Common Stock are initially offered for sale in
the Public Offering.
Qualifying Deposit: The aggregate balance of $50 or more of each
Deposit Account of an Eligible Account Holder or of a Supplemental Eligible
Account Holder.
Regulations: The regulations of the OTS regarding mutual holding
companies.
Reorganization: Collectively, all steps necessary for the Association
to reorganize into the mutual holding company form of organization in accordance
with the Plan and the provisions of the HOLA and Part 575 of the OTS Regulations
for Savings Associations.
Residence: The terms "residence," "reside," "resided" or "residing" as
used herein with respect to any person shall mean any person who occupied a
dwelling in the communities in which the Association does business, has an
intent to remain with such communities for a period of time, and manifests the
genuineness of that intent by establishing an ongoing physical presence within
such communities together with an indication that such presence within such
communities is something other than merely transitory in
4
<PAGE>
nature. To the extent the Person is a corporation or other business entity, the
principal place of business or headquarters shall be in these communities. To
the extent a person is a personal benefit plan, the circumstances of the
beneficiary shall apply with respect to this definition. In the case of all
other benefit plans, the circumstances of the trustee shall be examined for
purposes of this definition. The Association may utilize deposit or loan records
or such other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
the sole discretion of the Association.
SAIF: The Savings Association Insurance Fund, which is administered by
the FDIC.
Savings Account: The term "Savings Account" means any withdrawable
account in the Association except a demand account.
SEC: United States Securities and Exchange Commission.
Special Meeting of Members: The special meeting and any adjournments
thereof held to consider and vote upon this Plan.
Stock Holding Company: The federal stock corporation, majority-owned by
the MHC, which is being formed for the purpose of initially owning 100% of the
common stock of the Stock Association.
Stock Offering: The offering of Common Stock of the Stock Holding
Company to Persons other than the MHC, in a Subscription Offering and, to the
extent shares remain available, in a Direct Community Offering or otherwise.
Stock Association: The newly organized federally-chartered stock
association subsidiary of the Stock Holding Company resulting from the
Reorganization.
Subscription Offering: The offering of Common Stock of the Stock
Holding Company for subscription and purchase pursuant to this Plan.
Subsidiary: Any company, a majority of whose voting stock is indirectly
or directly owned, controlled or held with power to vote by another company.
Tax-Qualified Employee Plans: Any defined benefit plan or defined
contribution plan of the Association or the Stock Holding Company, such as an
employee stock ownership plan stock bonus plan, profit-sharing plan or other
plan, which with its related trust meets the requirements to be "qualified"
under Section 401 of the Internal Revenue Code, as amended.
Underwriters: The investment banking firm or firms agreeing to offer
and sell Stock Holding Company Common Stock in the Public Offering.
Voting Members: Those persons eligible to vote at meetings of Members
of the Association pursuant to the Association's Charter and Bylaws.
Voting Record Date: The date established by the Board of Directors of
the Association in accordance with OTS regulations for determining eligibility
to vote at the Special Meeting of Members.
Voting Stock: 1. Common or preferred stock, or similar interests if the
shares by statute, charter or in any manner, entitle the holder to: (i) vote for
or to select directors of the Association or the Stock Holding Company; and (ii)
vote on or direct the conduct of the operations or other significant policies of
the Association or the Stock Holding Company.
5
<PAGE>
2. Notwithstanding anything in paragraph (1) above, preferred stock is
not "Voting Stock" if: (i) voting rights associated with the preferred stock are
limited solely to the type customarily provided by statute with regard to
matters that would significantly and adversely affect the rights or preferences
of the preferred stock, such as the issuance of additional amounts or classes of
senior securities, the modification of the terms of the preferred stock, the
dissolution of the Association, or the payment of dividends by the Association
when preferred dividends are in arrears; (ii) the preferred stock represents an
essentially passive investment or financing device and does not otherwise
provide the holder with control over the issuer; and (iii) the preferred stock
does not at the time entitle the holder, by statute, charter, or otherwise, to
select or to vote for the selection of directors of the Association or the Stock
Holding Company.
3. Notwithstanding anything in paragraphs (1) and (2) above, "Voting
Stock" shall be deemed to include preferred stock and other securities that,
upon transfer or otherwise, are convertible into Voting Stock or exercisable to
acquire Voting Stock where the holder of the stock, convertible security or
right to acquire Voting Stock has the preponderant economic risk in the
underlying Voting Stock. Securities immediately convertible into Voting Stock at
the option of the holder without payment of additional consideration shall be
deemed to constitute the Voting Stock into which they are convertible; other
convertible securities and rights to acquire Voting Stock shall not be deemed to
vest the holder with the preponderant economic risk in the underlying Voting
Stock if the holder has paid less than 50% of the consideration required to
directly acquire the Voting Stock and has no other economic interest in the
underlying Voting Stock.
III. Plan of Reorganization
Pursuant to Section 10(o) of the HOLA and 12 C.F.R. Part 575 of the OTS
Regulations, the Reorganization will be accomplished in accordance with the
procedures set forth in this Plan, applicable regulations of the OTS, and as
otherwise may be required by the OTS.
A. Certain Effects of Reorganization
1. Organization of the MHC, the Stock Holding Company and the Stock
Association
A principal part of the Reorganization will be the formation of a
federally-chartered capital stock association subsidiary. As a result
of the Reorganization, the Stock Holding Company will own 100% of the
Stock Association's Voting Stock. The MHC will own a majority interest
in the Stock Holding Company and the Stock Association at all times as
long as the MHC remains in the mutual form of organization.
The Reorganization will be effected as follows, or in any manner
approved by the Board of Directors of the Association and the OTS that
is consistent with the purposes of this Plan and applicable laws and
regulations:
(i) the Association will organize an interim stock association as
a wholly-owned subsidiary ("Interim One"); (ii) Interim One will
organize an interim stock association as a wholly-owned subsidiary
("Interim Two"); (iii) Interim One will organize the Stock Holding
Company as a wholly-owned subsidiary; (iv) the Association will
exchange its charter for a federal stock association charter to become
the Stock Association and Interim One will exchange its charter for a
federal mutual holding company charter to become the MHC; (v)
simultaneously with step (iv), Interim Two will merge with and into
Stock Association with the Stock Association as the resulting
institution; (vi) all of the initially issued stock of the Stock
Association will be transferred to the MHC in exchange for membership
interests in the MHC; and (vii) the MHC will contribute the capital
stock of the Stock Association to the Stock Holding Company, and the
Stock Association will become a wholly-owned subsidiary of the Stock
Holding Company. Contemporaneously with the
6
<PAGE>
Reorganization, the Stock Holding Company will offer for sale in the
Stock Offering shares of Common Stock based on the pro forma market
value of the Stock Holding Company and the Association.
Upon consummation of the Reorganization, the legal existence of
the Association will not terminate, but the converted Stock
Association will be a continuation of the Association, and all
property of the Association, including its right, title and interest
in and to all property of whatsoever kind and nature, interest and
asset of every conceivable value or benefit then existing or
pertaining to the Association, or which would inure to the Association
immediately by operation of law and without the necessity of any
conveyance or transfer and without any further act or deed, will vest
in the Stock Association. The Stock Association will have, hold and
enjoy the same in its right and fully to the same extent as the same
was possessed, held and enjoyed by the Association. The Stock
Association will continue to have, succeed to, and be responsible for
all rights, liabilities and obligations of the Association and will
maintain its headquarters operations at the Association's present
location.
In connection with the Reorganization, the Association will apply
to the OTS to have the Stock Holding Company retain up to 50% of the
net proceeds of the Stock Offering, or such other amount as may be
determined by the board of the Association. The Stock Association may
distribute additional capital to the Stock Holding Company following
the Reorganization, subject to the OTS regulations governing capital
distributions. The Stock Holding Company will have the power to issue
shares of Capital Stock to persons other than the MHC. However, so
long as the MHC is in existence, the MHC will be required to own at
least a majority of the Voting Stock of the Stock Holding Company. The
Stock Holding Company may issue any amount of Non-Voting Stock to
persons other than the MHC. The Stock Holding Company will be
authorized to undertake one or more Minority Stock Offerings of less
than 50% in the aggregate of the total outstanding Common Stock of the
Stock Holding Company, and the Stock Holding Company intends to offer
for sale up to 49.9% of its Common Stock in the Stock Offering. The
Association believes that capitalization of the MHC and the Stock
Holding Company will provide the MHC and the Stock Holding Company
with economic strength separate and apart from the Stock Association
and could facilitate future activities by the MHC and the Stock
Holding Company.
2. Effect on Deposit Accounts and Borrowings
Each Deposit Account in the Association on the Effective Date
will remain a Deposit Account in the Stock Association in the same
amount and upon the same terms and conditions, and will continue to be
federally insured up to the legal maximum by the FDIC in the same
manner as the Deposit Account existed in the Association immediately
prior to the Reorganization. Upon consummation of the Reorganization,
all loans and other borrowings from the Association shall retain the
same status with the Stock Association after the Reorganization as
they had with the Association immediately prior to the Reorganization.
3. The Stock Association
Upon completion of the Reorganization the Stock Association will
be authorized to exercise any and all powers, rights and privileges
of, and will be subject to all limitations applicable to, capital
stock savings associations under federal law. A copy of the proposed
Charter and Bylaws of the Stock Association is attached hereto as
Exhibit A and made a part of this Plan. The Reorganization will not
result in any reduction of the amount of retained earnings (other than
the assets of the Association retained by or distributed to the Stock
Holding Company or the MHC), undivided profits, and general loss
reserves that the Association had prior to the Reorganization. Such
retained earnings and general loss reserves will be accounted for by
the MHC, the Stock
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Holding Company and the Stock Association on a consolidated basis in
accordance with generally accepted accounting principles.
The initial members of the Board of Directors of the Stock
Association will be the members of the existing Board of Directors of
the Association. The Stock Association will be wholly-owned by the
Stock Holding Company. The Stock Holding Company will be wholly-owned
by its stockholders, who will consist of the MHC and the Persons who
purchase Common Stock in the Stock Offering and any subsequent
Minority Stock Offering. Upon the Effective Date of the
Reorganization, the voting and membership rights of Members will be
transferred to the MHC, subject to the conditions specified below.
4. The Stock Holding Company
The Stock Holding Company will be authorized to exercise any and
all powers, rights and privileges, and will be subject to all
limitations applicable to savings and loan holding companies and
mutual holding companies under federal law and regulations. The
initial members of the Board of Directors of the Stock Holding Company
will be the existing Board of Directors of the Association.
Thereafter, the voting stockholders of the Stock Holding Company will
elect approximately one-third of the Stock Holding Company's directors
annually. A copy of the proposed Charter and Bylaws of the Stock
Holding Company is attached as Exhibit B and made part of this Plan.
The Stock Holding Company will have the power to issue shares of
Capital Stock to Persons other than the MHC. However, so long as the
MHC is in existence, the MHC will be required to own at least a
majority of the Voting Stock of the Stock Holding Company. The Stock
Holding Company may issue any amount of Non-Voting Stock to Persons
other than the MHC. The Stock Holding Company will be authorized to
undertake one or more Minority Stock Offerings of less than 50% in the
aggregate of the total outstanding Common Stock of the Stock Holding
Company, and the Stock Holding Company intends to offer for sale up to
49.9% of its Common Stock in the Stock Offering.
5. The MHC
As a mutual corporation, the MHC will have no stockholders. The
members of the MHC will have exclusive voting authority as to all
matters requiring a vote of members under the Charter of the MHC.
Persons who have membership rights with respect to the Association
under its existing Charter immediately prior to the Reorganization
shall continue to have such rights solely with respect to the MHC
after the Reorganization so long as such Persons remain depositors or
borrowers, as the case may be, of the Association after the
Reorganization. In addition, all Persons who become Depositors of the
Stock Association following the Reorganization will have membership
rights with respect to the MHC. The rights and powers of the MHC will
be defined by the MHC's Charter and Bylaws, a copy of which is
attached to this Plan as Exhibit C and made a part hereof, and by the
statutory and regulatory provisions applicable to savings and loan
holding companies and mutual holding companies. In particular, the MHC
shall be subject to the limitations and restrictions imposed on
savings and loan holding companies by Section 10(o)(5) of the HOLA.
The initial members of the Board of Directors of the MHC will be
the existing Board of Directors of the Association. Thereafter,
approximately one-third of the directors of the MHC will be elected
annually by the members of the MHC who will consist of certain of the
former Members of the Association and all persons who become
Depositors of the Stock Association after the Reorganization.
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B. Conditions to Implementation of Reorganization
Consummation of the Reorganization is expressly conditioned upon the
following:
1. Approval of the Plan by a majority of the Board of Directors of
the Association;
2. The filing of a Notice of Reorganization, including the Plan,
with the OTS and either: (a) the OTS has given written notice of
its intent not to disapprove the Reorganization; or (b) sixty
days have passed since the OTS received the Notice of
Reorganization and deemed it sufficient under Section 516.2(c) of
the OTS regulations, and the OTS has not given written notice
that the Reorganization is disapproved or extended for an
additional 30 days the period during which disapproval may be
issued;
3. The filing of the Holding Company Application with and approval
by the OTS pursuant to the HOLA for the Stock Holding Company and
MHC to become savings and loan holding companies by owning or
acquiring 100% of the common stock of the Stock Association and
at least more than 50% of the Stock Holding Company,
respectively, to be issued in connection with the Reorganization;
4. All necessary approvals have been obtained from the OTS in
connection with the adoption of the charter and bylaws of the
MHC, the Stock Holding Company and the Stock Association, the
conversion of the Association to a stock charter, and any
transfer of assets and liabilities of the Association to the
Stock Association pursuant to the Plan;
5. Approval of the Plan by a majority of the total votes of Voting
Members of the Association eligible to be cast at the Special
Meeting of Members;
6. Satisfaction of all conditions specified or otherwise imposed by
the OTS in connection with approval of the Notice of
Reorganization and all transactions related thereto;
7. Receipt by the Association of a favorable ruling of the Internal
Revenue Service ("IRS") or an opinion of the Association's tax
advisor with respect to federal taxation to the effect that
consummation of the Reorganization will not be a taxable event to
the MHC, the Stock Holding Company, the Stock Association, the
Association or the Association's Depositors; and
8. Receipt by the Association of either a private letter ruling of
the Kansas taxation authorities or an opinion of the
Association's tax advisor with respect to Kansas taxation to the
effect that consummation of the Reorganization will not be a
taxable event to the MHC, the Stock Holding Company, the Stock
Association, the Association or the Association's Depositors.
C. Special Meeting of Members
Subsequent to the approval of the Plan by the OTS, the Special Meeting
of Members shall be scheduled in accordance with the Association's Bylaws.
Promptly after receipt of approval and at least 20 days but not more than 45
days prior to the Special Meeting of Members, the Association shall distribute
proxy solicitation materials to all Voting Members as of the Voting Record Date.
The proxy solicitation materials shall include a proxy statement (the "Proxy
Statement"), other documents authorized for use by
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the regulatory authorities, and may also include a copy of the Plan. The proxy
materials shall contain the information that is relevant to the action to be
taken by the Voting Members.
Pursuant to the Regulations of the OTS, an affirmative vote of not less
than a majority of the total outstanding votes of the Voting Members eligible to
be cast is required for approval of the Plan. Voting may be in person or by
proxy in accordance with the Charter and Bylaws of the Association. The OTS
shall be notified promptly of the actions of the Voting Members.
D. Rights of Members of the MHC
Following the Reorganization, all persons who had membership rights
with respect to the Association as of the date of the Reorganization will
continue to have such rights solely with respect to the MHC. All existing
proxies granted by Members of the Association to the Board of Directors of the
Association shall automatically become proxies granted to the Board of Directors
of the MHC. In addition, all persons who become depositors of the Stock
Association subsequent to the Reorganization also will have membership rights
with respect to the MHC. In each case, no person who ceases to be the holder of
a deposit account in the Stock Association after the Reorganization shall have
any membership or rights with respect to the MHC. Borrowers of the Stock
Association who were borrower members of the Association at the time of the
Reorganization, if applicable, will have the same membership rights in the MHC
as they had in the Association immediately prior to the Reorganization for so
long as their pre-Reorganization borrowings remain outstanding. Borrowers will
not receive membership rights in connection with any new borrowings made after
the Reorganization.
E. Conversion of MHC to Stock Form
Following the completion of the Reorganization, the MHC may elect to
convert to stock form in accordance with applicable law (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur.
In a Conversion Transaction, the MHC would merge with and into the
Stock Association or the Stock Holding Company, with the Stock Association or
the Stock Holding Company as the resulting entity, and the depositors of the
Stock Association would receive the right to subscribe for a number of shares of
common stock of the Stock Holding Company, as determined by the formula set
forth below. The additional shares of common stock of the Stock Holding Company
issued in the Conversion Transaction would be sold at their aggregate pro forma
market value as determined by an independent appraisal.
Any Conversion Transaction shall be fair and equitable to Minority
Stockholders. In any Conversion Transaction, Minority Stockholders, if any, will
be entitled without additional consideration to maintain the same percentage
ownership interest in the Stock Holding Company after the Conversion Transaction
as their percentage ownership interest in the Stock Holding Company immediately
prior to the Conversion Transaction (i.e., the "Minority Ownership Interest"),
subject only to the following adjustments (if required by federal or state law,
regulation, or regulatory policy) to reflect: (i) the cumulative effect of the
aggregate amount of dividends waived by the MHC; and (ii) the market value of
assets of the MHC (other than common stock of the Stock Holding Company).
The adjustment referred to in clause (i) of the preceding paragraph
above would require that the Minority Ownership Interest (expressed as a
percentage) be adjusted by multiplying the Minority Ownership Interest by the
following fraction:
(Stock Holding Company stockholders' equity immediately prior to
Conversion Transaction) - (aggregate amount
of dividends waived by MHC)
-------------------------------------------------------
Stock Holding Company stockholders' equity immediately
prior to Conversion Transaction
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The Minority Ownership Interest shall also be adjusted to reflect any
assets of the MHC (other than Common Stock of the Stock Holding Company) by
multiplying it by the following fraction:
(pro forma market value of Stock Holding Company) (market value
of assets of MHC other than
Stock Holding Company Common Stock)
---------------------------------------------------
pro forma market value of Stock Holding Company
At the sole discretion of the Board of Directors of the MHC and the
Stock Holding Company, a Conversion Transaction may be effected in any other
manner necessary to qualify the Conversion Transaction as a tax-free
reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders as set forth in the preceding paragraphs. If a Conversion
Transaction does not occur, the MHC will always own a majority of the voting
stock of the Stock Holding Company. Management of the Association has no current
intention to conduct a Conversion Transaction.
A Conversion Transaction would require the approval of applicable
federal regulators, and would be presented to a vote of the members of the MHC.
Federal regulatory policy requires that in any Conversion Transaction the
members of the MHC will be accorded the same stock purchase priorities as if the
MHC were a mutual savings association converting to stock form.
F. Timing of the Reorganization and Sale of Capital Stock
The Association intends to consummate the Reorganization as soon as
feasible following the receipt of all approvals referred to in the Plan. Subject
to the approval of the OTS, the Stock Holding Company intends to commence the
Stock Offering concurrently with the proxy solicitation of Members. The Stock
Holding Company may close the Stock Offering before the Special Meeting of
Members, provided that the offer and sale of the Common Stock shall be
conditioned upon approval of the Plan by the Members at the Special Meeting of
Members. The Association's proxy solicitation materials may permit certain
Members to return to the Association by a reasonable date certain a postage paid
card or other written communication requesting receipt of the prospectus
describing the Stock Offering if the prospectus is not mailed concurrently with
the proxy solicitation materials. The Stock Offering shall be conducted in
compliance with the securities offering regulations of the SEC. The Association
will not finance or loan funds to any person to purchase Common Stock.
G. Number of Shares to Be Offered
The total number of shares (or range thereof) of Common Stock to
be issued and offered for sale pursuant to the Plan shall be
determined initially by the Board of Directors of the Association and
the Stock Holding Company in conjunction with the determination of the
Independent Appraiser. The number of shares to be offered may be
adjusted prior to completion of the Stock Offering. The total number
of shares of Common Stock that may be issued to persons other than the
MHC at the close of the Stock Offering must be less than 50% of the
issued and outstanding shares of Common Stock of the Stock Holding
Company.
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H. Independent Valuation and Purchase Price of Shares
All shares of Common Stock sold in the Stock Offering shall be sold at
a uniform price per share. The purchase price and number of shares to be
outstanding shall be determined by the Board of Directors of the Stock Holding
Company on the basis of the estimated pro forma market value of the Stock
Holding Company and the Association. The aggregate purchase price for the Common
Stock will not be inconsistent with such market value of the Stock Holding
Company and the Association. The pro forma market value of the Stock Holding
Company and the Association will be determined for such purposes by the
Independent Appraiser.
Prior to the commencement of the Stock Offering, an estimated valuation
range will be established, which range may vary within 15% above to 15% below
the midpoint of such range, and up to 15% greater than the maximum of such
range, as determined by the Board of Directors at the time of the Stock Offering
and consistent with OTS regulations. The Stock Holding Company intends to issue
up to 49.9% of its common stock in the Stock Offering. The number of shares of
Common Stock to be issued and the ownership interest of the MHC may be increased
or decreased by the Stock Holding Company, taking into consideration any change
in the independent valuation and other factors, at the discretion of the Board
of Directors of the Association and the Stock Holding Company.
Based upon the independent valuation as updated prior to the
commencement of the Stock Offering, the Board of Directors may establish the
minimum and maximum ownership percentage applicable to the Stock Offering, may
fix the ownership percentage of the Minority Stockholders, or may establish the
minimum and maximum aggregate dollar amount of shares to be sold. In the event
the ownership percentage of the Minority Stockholders is not fixed in the Stock
Offering, the minority ownership percentage (the "Minority Ownership
Percentage") will be determined as follows: (a) the product of (x) the total
number of shares of Common Stock issued by the Stock Holding Company and (y) the
purchase price per share divided by (b) the estimated aggregate pro forma market
value of the Association and the Stock Holding Company immediately after the
Stock Offering as determined by the Independent Appraiser, expressed in terms of
a specific aggregate dollar amount rather than as a range, upon the closing of
the Stock Offering or sale of all the Common Stock.
Notwithstanding the foregoing, no sale of Common Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Stock Holding Company, the Association and to the OTS that, to
the best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Common Stock
to be issued is incompatible with its estimate of the aggregate consolidated pro
forma market value of the Stock Holding Company and the Association. If such
confirmation is not received, the Stock Holding Company may cancel the Stock
Offering, extend the Stock Offering and establish a new estimated valuation
range and/or estimated price range, extend, reopen or hold a new Stock Offering
or take such other action as the OTS may permit.
The estimated market value of the Stock Holding Company and the
Association shall be determined for such purpose by an Independent Appraiser on
the basis of such appropriate factors as are not inconsistent
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<PAGE>
with OTS regulations. The Common Stock to be issued in the Stock Offering shall
be fully paid and nonassessable.
If there is a Direct Community Offering or Public Offering of shares of
Common Stock not subscribed for in the Subscription Offering, the price per
share at which the Common Stock is sold in such Direct Community Offering or
Public Offering shall be equal to the purchase price per share at which the
Common Stock is sold to Persons in the Subscription Offering. Shares sold in the
Direct Community Offering or Public Offering will be subject to the same
limitations as shares sold in the Subscription Offering.
I. Stock Issuance Procedure
The Stock Holding Company Common Stock will be offered for sale in the
Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, Other Members and Directors, Officers and
employees of the Association, prior to or within 45 days after the date of the
Special Meeting of Members. However, the Stock Holding Company and the
Association may delay commencing the Subscription Offering beyond such 45-day
period in the event there exist unforeseen material adverse market or financial
conditions. The Association may, either concurrently with, at any time during,
or promptly after the Subscription Offering, also offer the Stock Holding
Company Common Stock to and accept subscriptions from other Persons in a Direct
Community Offering or a Public Offering; provided that the Association's
Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible
Account Holders, Other Members and Directors, Officers and employees shall have
the priority rights to subscribe for Stock Holding Company Common Stock set
forth in Section III of this Plan.
The period for the Subscription Offering and Direct Community Offering
will be not less than 20 days nor more than 45 days unless extended by the
Association. Upon completion of the Subscription Offering and the Direct
Community Offering, if any, any unsubscribed shares of Stock Holding Company
Common Stock may be sold through the Underwriters to selected members of the
general public in the Public Offering. If for any reason all of the shares are
not sold in the Subscription Offering, the Direct Community Offering, if any,
and the Public Offering, if any, the Stock Holding Company and the Association
will use their best efforts to obtain other purchasers, subject to OTS approval.
Completion of the sale of all shares of Stock Holding Company Common Stock not
sold in the Subscription Offering is required within 45 days after termination
of the Subscription Offering, subject to extension of such 45-day period by the
Stock Holding Company and the Association with the approval of the OTS. The
Stock Holding Company and the Association may jointly seek one or more
extensions of such 45-day period if necessary to complete the sale of all shares
of Stock Holding Company Common Stock. In connection with such extensions,
subscribers and other purchasers will be permitted to increase, decrease or
rescind their subscriptions or purchase orders to the extent required by the OTS
in approving the extensions. Completion of the sale of all shares of Stock
Holding Company Common Stock is required within 24 months after the date of the
Special Meeting of Members.
J. Subscription Rights
Non-transferable subscription rights to purchase shares will be issued
without payment therefor to Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and Directors,
Officers and employees of the Association as set forth below.
1. Preference Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive non-transferable
subscription rights to subscribe for shares of Stock Holding Company
Common Stock in an amount equal to the greater of $500,000, or
one-tenth of one percent (.10%) of the total offering of shares, or 15
times the product (rounded
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down to the next whole number) obtained by multiplying the total
number of shares of common stock to be issued by a fraction of which
the numerator is the amount of the Qualifying Deposit of the Eligible
Account Holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders in the converting Association
in each case on the Eligibility Record Date.
If sufficient shares are not available, shares shall be allocated
first to permit each subscribing Eligible Account Holder to purchase
to the extent possible 100 shares, and thereafter among each
subscribing Eligible Account Holder pro rata in the same proportion
that his Qualifying Deposit bears to the total Qualifying Deposits of
all subscribing Eligible Account Holders whose subscriptions remain
unsatisfied.
Non-transferable subscription rights to purchase Stock Holding
Company Common Stock received by Directors and Officers of the
Association and their Associates, based on their increased deposits in
the Association in the one-year period preceding the Eligibility
Record Date, shall be subordinated to all other subscriptions
involving the exercise of non-transferable subscription rights of
Eligible Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
Each Tax-Qualified Employee Plan shall be entitled to receive
non-transferable subscription rights to purchase up to 10% of the
shares of Stock Holding Company Common Stock, provided that singly or
in the aggregate such plans (other than that portion of such plans
which is self-directed) shall not purchase more than 10% of the shares
of the Stock Holding Company Common Stock. Subscription rights
received pursuant to this Category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares pursuant to
Category No. 1; provided, however, that notwithstanding any other
provision of this Plan to the contrary, the Tax-Qualified Employee
Plans shall have a first priority subscription right to the extent
that the total number of shares of Stock Holding Company Common Stock
sold in the Stock Offering exceeds the maximum of the estimated
valuation range as set forth in the subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account
Holders
Each Supplemental Eligible Account Holder shall receive
non-transferable subscription rights to subscribe for shares of Stock
Holding Company Common Stock in an amount equal to the greater of
$500,000, or one-tenth of one percent (.10%) of the total offering of
shares, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of common
stock to be issued by a fraction of which the numerator is the amount
of the Qualifying Deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders in the converting Association in
each case on the Supplemental Eligibility Record Date.
Subscription rights received pursuant to this category shall be
subordinated to all subscription rights received by Eligible Account
Holders and Tax-Qualified Employee Plans pursuant to Category Nos. 1
and 2 above.
Any non-transferable subscription rights to purchase shares
received by an Eligible Account Holder in accordance with Category No.
1 shall reduce to the extent thereof the subscription rights to be
distributed to such person pursuant to this Category.
In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall be
allocated first to permit each subscribing Supplemental Eligible
Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation
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(including the number of shares, if any, allocated in accordance with
Category No. 1) equal to 100 shares, and thereafter among each
subscribing Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders
whose subscriptions remain unsatisfied.
4. Preference Category No. 4: Other Members
Each Other Member shall receive non-transferable subscription
rights to subscribe for shares of Stock Holding Company Common Stock
remaining after satisfying the subscriptions provided for under
Category Nos. 1 through 3 above, subject to the following conditions:
i. Each Other Member shall be entitled to subscribe for an
amount of shares equal to the greater of $500,000, or
one-tenth of one percent (.10%) of the total offering of
shares of common stock in the Stock Offering, to the extent
that Stock Holding Company Common Stock is available.
ii. In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall
be allocated among the subscribing Other Members pro rata in
the same proportion that his number of votes on the Voting
Record Date bears to the total number of votes on the Voting
Record Date of all subscribing Other Members on such date.
Such number of votes shall be determined based on the
Association's mutual charter and bylaws in effect on the
date of approval by members of this Plan.
5. Preference Category No. 5: Directors, Officers and Employees
Each Director, Officer and employee of the Association as of the
date of the commencement of the Subscription Offering shall be
entitled to receive non-transferable subscription rights to purchase
shares of the Stock Holding Company Common Stock to the extent that
shares are available after satisfying subscriptions under Category
Nos. 1 through 4 above. The shares which may be purchased under this
Category are subject to the following conditions:
i. The total number of shares which may be purchased under this
Category may not exceed 15% of the number of shares of Stock
Holding Company Common Stock.
ii. The maximum amount of shares which may be purchased under
this Category by any Person is $500,000 of Stock Holding
Company Common Stock. In the event of an oversubscription
for shares under the provisions of this subparagraph, the
shares available shall be allocated pro rata among all
subscribers in this Category.
K. Public Offering and Direct Community Offering
1. Any shares of Stock Holding Company Common Stock not
subscribed for in the Subscription Offering may be offered for sale in
a Direct Community Offering. This may involve an offering of all
unsubscribed shares directly to the general public with a preference
to those natural persons residing in the state of Kansas, in any
county in which the Association has an office or in any county
contiguous thereto. The Direct Community Offering, if any, shall be
for a period of not less than 20 days nor more than 45 days unless
extended by the Stock Holding Company and the Association, and shall
commence concurrently with, during or promptly after the Subscription
Offering. The purchase price per share to the general public in a
Direct Community Offering shall be the same as the subscription price.
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The Stock Holding Company and the Association may use an investment
banking firm or firms on a best efforts basis to sell the unsubscribed
shares in the Direct Community Offering. The Stock Holding Company and
the Association may pay a commission or other fee to such investment
banking firm or firms as to the shares sold by such firm or firms in
the Direct Community Offering and may also reimburse such firm or
firms for expenses incurred in connection with the sale. The Stock
Holding Company Common Stock will be offered and sold in the Direct
Community Offering, if any, in accordance with OTS regulations, so as
to achieve the widest distribution of the Stock Holding Company Common
Stock. No person, by himself or herself, or with an Associate or group
of Persons acting in concert, may subscribe for or purchase more than
$500,000 of Stock Holding Company Common Stock in the Direct Community
Offering, if any. Further, the Association may limit total
subscriptions under this Section so as to assure that the number of
shares available for the Public Offering may be up to a specified
percentage of the number of shares of Stock Holding Company Common
Stock. Finally, the Association may reserve shares offered in the
Direct Community Offering for sales to institutional investors.
In the event of an oversubscription for shares in the Direct
Community Offering, shares may be allocated (to the extent shares
remain available) first to cover orders of natural persons residing in
the local community, then to cover the orders of any other person
subscribing for shares in the Direct Community Offering so that each
such person may receive 1,000 shares, and thereafter, on a pro rata
basis to such persons based on the amount of their respective
subscriptions.
The Association and the Stock Holding Company, in their sole
discretion, may reject subscriptions, in whole or in part, received
from any Person under this Section. Further, the Association and the
Stock Holding Company may, at their sole discretion, elect to forego a
Direct Community Offering and instead effect a Public Offering as
described below.
2. Any shares of Stock Holding Company Common Stock not sold in
the Subscription Offering or in the Direct Community Offering, if any,
may then be sold through the Underwriters to selected members of the
general public in the Public Offering. It is expected that the Public
Offering will commence as soon as practicable after termination of the
Subscription Offering and the Direct Community Offering, if any. The
Association and the Stock Holding Company, in their sole discretion,
may reject any subscription, in whole or in part, received in the
Public Offering. The Public Offering shall be completed within 90 days
after the termination of the Subscription Offering, unless such period
is extended as provided herein. No person, by himself or herself, or
with an Associate or group of Persons acting in concert, may purchase
more than $500,000 of Common Stock in the Public Offering, if any.
3. If for any reason any shares remain unsold after the
Subscription Offering, the Public Offering, if any, and the Direct
Community Offering, if any, the Boards of Directors of the Stock
Holding Company and the Association will seek to make other
arrangements for the sale of the remaining shares. Such other
arrangements will be subject to the approval of the OTS and to
compliance with applicable securities laws.
L. Additional Limitations Upon Purchases of Shares of Stock Holding
Company Common Stock
The following additional limitations shall be imposed on all purchases
of Stock Holding Company Common Stock in the Stock Offering:
1. No Person, by himself or herself, or with an Associate or
group of Persons acting in concert, may subscribe for or purchase in
the Stock Offering a number of shares of Stock Holding Company Common
Stock equal to the greater of $5,000,000 or 1% of the Common Stock
offered
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in the Stock Offering. For purposes of this paragraph, an Associate of
a Person does not include a Tax-Qualified or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity.
Moreover, for purposes of this paragraph, shares held by one or more
Tax-Qualified or Non-Tax Qualified Employee Plans attributed to a
Person shall not be aggregated with shares purchased directly by or
otherwise attributable to that Person.
2. Directors and Officers and their Associates may not purchase
in all categories in the Stock Offering an aggregate of more than 25%
of the Stock Holding Company Common Stock. For purposes of this
paragraph, an Associate of a Person does not include any Tax-Qualified
Employee Plan. Moreover, any shares attributable to the Officers and
Directors and their Associates, but held by one or more Tax-Qualified
Employee Plans shall not be included in calculating the number of
shares which may be purchased under the limitation in this paragraph.
3. The minimum number of shares of Stock Holding Company Common
Stock that may be purchased by any Person in the Stock Offering is 25
shares, provided sufficient shares are available.
4. The Boards of Directors of the Stock Holding Company and the
Association may, in their sole discretion, increase the maximum
purchase limitation referred to herein up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offered in the
Stock Offering shall not exceed, in the aggregate, 10% of the shares
being offered in the Stock Offering. Requests to purchase additional
shares of Stock Holding Company Common Stock under this provision will
be allocated by the Boards of Directors on a pro rata basis giving
priority in accordance with the priority rights set forth herein.
Depending upon market and financial conditions, the Boards of
Directors of the Stock Holding Company and the Association, with the
approval of the OTS and without further approval of the Members, may
increase or decrease any of the above purchase limitations.
For purposes of this Section, the Directors of the Stock Holding
Company and the Association shall not be deemed to be Associates or a
group acting in concert solely as a result of their serving in such
capacities.
Each Person purchasing Common Stock in the Stock Offering shall
be deemed to confirm that such purchase does not conflict with the
above purchase limitations. All questions concerning whether any
Persons are Associates or a group acting in concert or whether any
purchase conflicts with the purchase limitations in this Plan or
otherwise violates any provision of this Plan shall be determined by
the Association in its sole discretion. Such determination shall be
conclusive and binding on all Persons and the Association may take any
remedial action, including without limitation rejecting the purchase
or referring the matter to the OTS for action, as in its sole
discretion the Association may deem appropriate.
M. Restrictions and Other Characteristics of Stock Holding Company
Common Stock Being Sold
Stock Holding Company Common Stock purchased by Persons other than
Directors and Officers of the Stock Holding Company or the Association will be
transferable without restriction. Shares purchased by Directors or Officers
shall not be sold or otherwise disposed of for value for a period of one year
from the date of the Stock Offering, except for any disposition of such shares
(i) following the death of the original purchaser, or (ii) resulting from an
exchange of securities in a merger or acquisition approved by the applicable
regulatory authorities. Any transfers that could result in a change of control
of the Stock
17
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Association or the Stock Holding Company or result in the ownership by any
Person or group acting in concert of more than 10% of any class of the Stock
Association's or the Stock Holding Company's equity securities are subject to
the prior approval of the OTS.
The certificates representing shares of Stock Holding Company Common
Stock issued to Directors and Officers shall bear a legend giving appropriate
notice of the one-year holding period restriction. Appropriate instructions
shall be given to the transfer agent for such stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any shares
of common stock of the Stock Holding Company subsequently issued as a stock
dividend, stock split, or otherwise, with respect to any such restricted stock,
shall be subject to the same holding period restrictions for Stock Holding
Company or Association Directors and Officers as may be then applicable to such
restricted stock.
N. Exercise of Subscription Rights; Order Forms
1. If the Subscription Offering occurs concurrently with the
solicitation of proxies for the Special Meeting of Members, the
prospectus and Order Form may be sent to each Eligible Account Holder,
Tax-Qualified Employee Plan, Supplemental Eligible Account Holder,
Other Member, and Director, Officer and employee at their last known
address as shown on the records of the Association. However, the
Association may, and if the Subscription Offering commences after the
Special Meeting of Members the Association shall, furnish a prospectus
and Order Form only to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, Other Members,
and Directors, Officers and employees who have returned to the
Association by a specified date prior to the commencement of the
Subscription Offering a post card or other written communication
requesting a prospectus and Order Form. In such event, the Association
shall provide a postage-paid post card for this purpose and make
appropriate disclosure in its proxy statement for the solicitation of
proxies to be voted at the Special Meeting and/or letter sent in lieu
of the proxy statement to those Eligible Account Holders,
Tax-Qualified Employee Plans or Supplemental Eligible Account Holders
who are not Members on the Voting Record Date.
2. Each Order Form will be preceded or accompanied by a
prospectus describing the Stock Holding Company and the Stock
Association and the shares of Stock Holding Company Common Stock being
offered for subscription and containing all other information required
by the OTS or the SEC or necessary to enable Persons to make informed
investment decisions regarding the purchase of Stock Holding Company
Common Stock.
3. The Order Form (or accompanying instructions) used for the
Subscription Offering will contain, among other things, the following:
i. A clear and intelligible explanation of the subscription
rights granted under the Plan to Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members, and Directors, Officers and
employees;
ii. A specified expiration date by which the Order Form must be
returned to and actually received by the Association or its
representative for purposes of exercising subscription
rights, which date will be not less than 20 days after the
Order Forms are mailed by the Association;
iii. The subscription price to be paid for each share subscribed
for when the Order Form is returned;
18
<PAGE>
iv. A statement that 25 shares is the minimum number of shares
of Stock Holding Company Common Stock that may be subscribed
for under the Plan;
v. A specifically designated blank space for indicating the
number of shares being subscribed for;
vi. A set of detailed instructions as to how to complete the
Order Form including a statement as to the available
alternative methods of payment for the shares being
subscribed for;
vii. Specifically designated blank spaces for dating and signing
the Order Form;
viii. An acknowledgement that the subscriber has received the
prospectus;
ix. A statement of the consequences of failing to properly
complete and return the Order Form, including a statement
that the subscription rights will expire on the expiration
date specified on the Order Form unless such expiration date
is extended by the Stock Holding Company and the
Association, and that the subscription rights may be
exercised only by delivering the Order Form, properly
completed and executed, to the Association or its
representative by the expiration date, together with
required payment of the subscription price for all shares of
Stock Holding Company Common Stock subscribed for;
x. A statement that the subscription rights are
non-transferable and that all shares of Stock Holding
Company Common Stock subscribed for upon exercise of
subscription rights must be purchased on behalf of the
Person exercising the subscription rights for his own
account; and
xi. A statement that, after receipt by the Association or its
representative, a subscription may not be modified,
withdrawn or canceled without the consent of the
Association.
O. Method of Payment
Payment for all shares of Stock Holding Company Common Stock subscribed
for must accompany all completed Order Forms. Payment may be made in cash (if
presented in Person), by check, money order or, if the subscriber has a Deposit
Account in the Association (including a certificate of deposit), the subscriber
may authorize the Association to charge the subscriber's account.
If a subscriber authorizes the Association to charge his or her
account, the funds will continue to earn interest, but may not be used by the
subscriber until all Stock Holding Company Common Stock has been sold or the
Plan is terminated, whichever is earlier. The Association will allow subscribers
to purchase shares by withdrawing funds from certificate accounts without the
assessment of early withdrawal penalties with the exception of prepaid interest
in the form of promotional gifts. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
canceled if the remaining balance of the account is less than the applicable
minimum balance requirement, in which event the remaining balance will earn
interest at the passbook rate. This waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of Stock
Holding Company Common Stock under the Plan. Interest will also be paid, at not
less than the then-current passbook rate, on all orders
19
<PAGE>
paid in cash, by check or money order, from the date payment is received until
consummation of the Stock Offering. Payments made in cash, by check or money
order will be placed by the Association in an escrow or other account
established specifically for this purpose.
In the event of an unfilled amount of any subscription order, the Stock
Association will make an appropriate refund or cancel an appropriate portion of
the related withdrawal authorization, after consummation of the Stock Offering.
If for any reason the Stock Offering is not consummated, purchasers will have
refunded to them all payments made and all withdrawal authorizations will be
canceled in the case of subscription payments authorized from accounts at the
Association.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
may pay for such shares of Stock Holding Company Common Stock subscribed for
upon consummation of the Stock Offering. In the event that, after the completion
of the Subscription Offering, the amount of shares to be issued is increased
above the maximum of the estimated valuation range included in the prospectus,
the Tax Qualified and Non-Tax Qualified Employee Plans shall be entitled to
increase their subscriptions by a percentage equal to the percentage increase in
the amount of shares to be issued above the maximum of the estimated valuation
range provided that such subscriptions shall continue to be subject to
applicable purchase limits and stock allocation procedures.
P. Undelivered Defective or Late Order Form; Insufficient Payment
In the event Order Forms (a) are not delivered and are returned to the
Association by the United States Postal Service or the Association is unable to
locate the addressee, (b) are not received back by the Association or are
received by the Association after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment for the shares of Common Stock subscribed for (including cases in which
Deposit Accounts from which withdrawals are authorized are insufficient to cover
the amount of the required payment), or (e) are not mailed pursuant to a "no
mail" order placed in effect by the account holder, the subscription rights of
the Person to whom such rights have been granted will lapse as though such
Person failed to return the contemplated Order Form within the time period
specified thereon; provided, that the Association may, but will not be required
to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Association may specify. The
interpretation by the Association of terms and conditions of this Plan and of
the Order Forms will be final, subject to the authority of the OTS.
Q. Payment of Dividends and Repurchase of Stock
The Stock Association shall not declare or pay a cash dividend on, or
repurchase any of, its Capital Stock if the effect thereof would cause its
regulatory capital to be reduced below (i) the amount required for any required
liquidation account or (ii) the federal regulatory capital requirement set forth
in Section 567.2 of the Regulations of the OTS. Otherwise, the Stock Association
may declare dividends, make capital distributions or repurchase its capital
stock in accordance with applicable law and regulations. Subject to the approval
of the OTS, the MHC may waive its right to receive dividends declared by the
Stock Association or the Stock Holding Company.
R. Completion of the Stock Offering
The Stock Offering will be terminated if not completed within 90 days
from the date of approval by the OTS, unless an extension is approved by the
OTS.
20
<PAGE>
S. Securities Registration and Market Making
Promptly following the Stock Offering, the Stock Holding Company will
register its stock with the SEC pursuant to the Exchange Act. In connection with
the registration, the Stock Holding Company will undertake not to deregister
such stock, without the approval of the OTS, for a period of three years
thereafter. At the close of the Stock Offering the Stock Holding Company shall
use its best efforts to:
1. encourage and assist three market markers to establish and
maintain a market for the Common Stock; and
2. list the Common Stock on a national or regional securities
exchange, or on the Nasdaq System.
T. Stock Purchases by Directors and Officers After the Offering
For a period of three years after the proposed Stock Offering, no
Director or Officer of the Stock Association or its Affiliates, or an Associate
of such Person may purchase, without the prior written approval of the OTS, any
Common Stock of the Stock Holding Company, except from a broker-dealer
registered with the SEC, except that the foregoing shall not apply to:
1. Negotiated transactions involving more than 1% of the
outstanding stock in that class of stock; or
2. Purchases of stock made by and held by any Tax-Qualified or
Non-Tax Qualified Employee Plan of the Stock Association or the Stock
Holding Company even if such stock is attributed to Directors,
Officers or their Associates.
U. Establishment and Funding of Charitable Foundation
As part of the Reorganization, the Stock Holding Company and the
Association intend to establish the Foundation which will qualify as an exempt
organization under Section 501(c)(3) of the Internal Revenue Code and donate to
the Foundation cash and/or Common Stock in an amount up to 8% of the aggregate
value of shares of Common Stock sold in the Stock Offering. The Foundation would
be formed to complement the Association's existing community reinvestment
activities and to share with the Association's local community a part of the
Association's financial success as a community-oriented financial services
institution. The Foundation will be dedicated to the promotion of charitable
purposes including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations or
civic-minded projects. It is expected that the Foundation will annually
distribute total grants to assist charitable organizations or to fund projects
within its local community of not less than 5% of the average fair value of
Foundation assets each year. In order to serve the purposes for which it was
formed and maintain its Section 501(c)(3) qualification, the Foundation may
sell, on an annual basis, a limited portion of any securities contributed to it
by the Stock Holding Company.
The board of directors of the Foundation will be comprised of
individuals who are employees or Directors of the Association, or other persons
with a business or other relationship with the communities in which the
Association does business. The board of directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations, consistent with the stated purposes of the Foundation. The
establishment and funding of the Foundation as part of the Reorganization is
subject to the approval of the OTS.
V. Stock Benefit Plans
The Board of Directors of the Association and/or the Stock Holding
Company intend to adopt one or more stock benefit plans for its employees,
officers and directors, including an ESOP, stock award plans
21
<PAGE>
and stock option plans, which will be authorized to purchase Common Stock and
grant options for Common Stock. However, only the Tax-Qualified Employee Plans
will be permitted to purchase Common Stock in the Stock Offering subject to the
purchase priorities set forth in this Plan. The Board of Directors of the
Association intends to establish the ESOP and authorize the ESOP and any other
Tax-Qualified Employee Plans to purchase in the aggregate up to 10% of the
shares issued, excluding shares issued to the MHC. The Stock Association or the
Stock Holding Company may make scheduled discretionary contributions to one or
more Tax-Qualified Employee Plans to purchase Common Stock issued in the Stock
Offering or to purchase issued and outstanding shares of Common Stock or
authorized but unissued shares of Common Stock subsequent to the completion of
the Stock Offering, provided such contributions do not cause the Stock
Association to fail to meet any of its regulatory capital requirements. This
Plan specifically authorizes the grant and issuance by the Stock Holding Company
of (i) awards of Common Stock after the Stock Offering pursuant to one or more
stock recognition and award plans (the "Recognition Plans") in an amount equal
to up to 4% of the number of shares of Common Stock issued in the Stock
Offering, (ii) options to purchase a number of shares of the Stock Holding
Company's Common Stock in an amount equal to up to 10% of the number of shares
of Common Stock issued in the Stock Offering and shares of Common Stock issuable
upon exercise of such options, and (iii) Common Stock to one or more Tax
Qualified Employee Plans, including the ESOP, at the closing of the Stock
Offering or at any time thereafter, in an amount equal to up to 8% of the shares
issued. Shares awarded to the Tax Qualified Employee Plans or pursuant to the
Recognition Plans, and shares issued upon exercise of options may be authorized
but unissued shares of the Stock Holding Company's Common Stock, or shares of
Common Stock purchased by the Stock Holding Company or such plans on the open
market. Any awards of Common Stock under the Recognition Plans and the stock
option plans will be subject to prior stockholder approval.
W. Employment and Other Severance Agreements
Following or contemporaneously with the Reorganization, the Association
and/or the Stock Holding Company may enter into employment and/or severance
arrangements with one or more executive officers of the Association and/or the
Stock Holding Company. It is anticipated that any employment contracts entered
into by the Association and/or the Stock Holding Company will be for terms not
exceeding three years and that such contracts will provide for annual renewals
of the term of the contracts, subject to approval by the Board of Directors. The
Association and/or the Stock Holding Company also may enter into severance
arrangements with one or more executive officers which provide for the payment
of severance compensation in the event of a change in control of the Stock
Association and/or the Stock Holding Company. The terms of such employment and
severance arrangements have not been determined as of this time, but will be
described in any prospectus circulated in connection with the Stock Offering and
will be subject to and comply with all regulations of the OTS.
X. Expenses of Reorganization
The Association shall use its best efforts to assure that expenses
incurred by it in connection with the Reorganization shall be reasonable.
Y. Interpretation
All interpretations of this Plan and application of its provisions to
particular circumstances shall be made by the Board of Directors of the
Association and all such interpretations shall be final, subject to the
authority of the OTS.
Z. Amendment or Termination of the Plan
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to solicitation of proxies from Voting Members to vote on the
Plan by a majority vote of the Association's
22
<PAGE>
Board of Directors, and at any time thereafter by a majority vote of the Board
of Directors with the concurrence of the OTS. Any amendment to the Plan made
after approval by the Voting Members, with the approval of the OTS, shall not
necessitate further approval by the Members unless otherwise required by the
OTS. The Plan may be terminated by a majority vote of the Association's Board of
Directors at any time prior to the Special Meeting of Members to vote on the
Plan, and at any time thereafter by a majority vote of the Board of Directors
with the concurrence of the OTS. The Plan shall terminate automatically if the
Reorganization is not completed within 24 months of the date Voting Members
approve the Plan at the Special Meeting of Members, which time period may not be
extended by the Association's Board of Directors.
By adoption of the Plan, the Members of the Association authorize the
Board of Directors to amend or terminate the Plan under the circumstances set
forth in this Section.
Attachments A-1 and A-2 Charter and Bylaws of the MHC
Attachments B-1 and B-2 Charter and Bylaws of the Stock Holding Company
Attachments C-1 and C-2 Charter and Bylaws of Stock Association
23
[SILVER, FREEDMAN & TAFF LETTERHEAD]
January 14, 1999
Board of Directors
Capitol Federal Savings and Loan Association
700 Kansas Avenue
Topeka, Kansas 66603-3809
Re: Proposed Reorganization to Mutual Holding Company Structure (the
"Reorganization")
----------------------------------------------------------------
Board Members:
In connection with the Reorganization, we render the following opinion
of counsel. Capitalized terms used herein which are not expressly defined herein
shall have the meaning ascribed to them in the Amended Plan of Reorganization
and Stock Issuance Plan adopted August 25, 1998 (the "Plan").
FACTS
-----
Association is a federally chartered mutual savings and loan
association engaged in thrift and thrift related businesses. As a mutual entity,
Association does not have any authorized capital stock. Instead, holders of
Association deposit accounts have liquidation and voting rights in Association.
The Board of Directors of Association believes that a mutual holding
company structure will provide for increased flexibility in future operations,
borrowings and the public or private offering of debt securities. In addition,
the mutual holding company form provides a vehicle to acquire additional
financial institutions which can maintain their independent and separate
existence.
The Reorganization will be implemented pursuant to the Plan as follows:
(i) the Association will organize Interim One, an interim federal
stock association as a wholly-owned subsidiary;
<PAGE>
January 14, 1999
Page 2
(ii) Interim One will organize Interim Two, an interim federal stock
association as a wholly-owned transitory subsidiary of Interim
One;
(iii) Interim One will also organize the Stock Holding Company as a
wholly-owned subsidiary of Interim One;
(iv) The following events will then occur simultaneously:
(a) Association will exchange its federal mutual charter for a
federal stock savings and loan association charter, thereby
converting to a federal stock savings and loan association
("Stock Association");
(b) Members of Association will constructively receive shares of
common stock in Stock Association in exchange for their
mutual ownership interests in Association;
(c) Interim One will cancel its outstanding stock and exchange
its federal stock charter for a federal mutual holding
company charter, thereby converting to a mutual holding
company ("MHC");
(d) Interim Two will merge with and into Stock Association with
Stock Association surviving; in connection with such merger,
the shares of Interim Two common stock owned by MHC
immediately prior thereto shall be converted into and become
shares of Stock Association common stock and the former
Members of Association who constructively received the
initially issued common stock in Stock Association will be
deemed to have transferred all of their stock interest in
Stock Association to MHC in exchange for membership/mutual
interests in MHC.
(e) MHC will contribute all of the outstanding shares of common
stock of Stock Association to Stock Holding Company.
(v) Immediately after completion of the events set forth in subpart
(iv) above, Stock Holding Company will, subject to and in accordance
with the provisions of the Plan, sell up to 49.9% of its Common Stock
in the Stock Offering.
The following assumptions have been made in connection with our
opinions relating to the proposed transaction:
(a) The Reorganization will be implemented in accordance with the
Plan.
<PAGE>
January 14, 1999
Page 3
(b) The fair market value of the stock interest in Stock Association
constructively received by each of the Members of Association will be
approximately equal, in each instance, to the fair market value of such
Member's equity interest in Association surrendered in the exchange.
(c) The fair market value of the membership/mutual interest in MHC
received by each of the former Members of Association will be approximately
equal, in each instance, to the fair market value of such Member's
constructive stock interest in Stock Association surrendered in the
exchange.
(d) All holders of savings and deposit accounts in Stock Association,
including Depositors of Association who continue their accounts with Stock
Association, will have voting and liquidation rights in MHC.
(e) No cash or property will be given to any Member of Association in
lieu of (i) subscription rights to acquire Common Stock of Stock Holding
Company in the Subscription Offering or (iii) membership/mutual interests
in MHC.
(f) Stock Association has no plan or intention to issue additional
shares of its common stock that would result in Stock Holding Company
losing control of Stock Association within the meaning of Section 368(c) of
the Code.
(g) Stock Holding Company has no plan or intention to liquidate Stock
Association, merge Stock Association with or into another corporation, sell
or otherwise dispose of any outstanding common stock of Stock Association,
or cause Stock Association to sell or otherwise dispose of any of its
assets or any of the assets acquired from Interim Two, except for
dispositions made in the ordinary course of business or transfers of assets
to a corporation controlled by Stock Association.
(h) MHC has no plan or intention to liquidate Stock Holding Company or
Stock Association, merge Stock Holding Company or Stock Association with or
into another corporation, sell or otherwise dispose of any outstanding
Common Stock of Stock Holding Company or common stock of Stock Association,
or cause Stock Holding Company or Stock Association to sell or otherwise
dispose of any of its assets or any of the assets acquired by Stock
Association from Interim Two, except for dispositions made in the ordinary
course of business or transfers of assets to a corporation controlled by
Stock Association.
(i) Except for shares of Common Stock of Stock Holding Company to be
issued in the Stock Offering, there is no plan or intention to issue
additional shares of common stock of Stock Holding Company, other than
shares that may be issued to employees and/or directors of Stock Holding
Company and its subsidiaries pursuant to certain stock option and stock
incentive plans or that may be issued to employee benefit plans.
<PAGE>
January 14, 1999
Page 4
(j) Interim Two will have no liabilities assumed by Stock Association
and will not transfer to Stock Association any assets subject to
liabilities in the transaction.
(k) Following the Reorganization, Stock Association will continue the
historic business of Association or use a significant portion of the
historic business assets of Association in a business.
(l) There is no intercorporate indebtedness existing between any of
the parties to the Reorganization that was issued, acquired or will be
settled at a discount.
(m) In the Reorganization, membership/mutual interests of Association
representing control of Association, as defined in Section 368(c) of the
Code, will be exchanged solely for constructive ownership interests (i.e.
shares) of Stock Association which interests will be exchanged solely for
membership/mutual interests in MHC.
(n) None of the parties to the Reorganization is under the
jurisdiction of a court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code.
(o) On the date of the Reorganization, the fair market value of the
assets of Association will exceed the sum of its liabilities plus the
amount of the liabilities, if any, to which the assets are subject.
(p) Depositors will pay the expenses of the Reorganization
attributable to them, if any.
(q) There will be no purchase price advantage to Depositors who
purchase Common Stock of Stock Holding Company in the Stock Offering.
(r) On a per share basis, the purchase price of Stock Holding Company
Common Stock will be equal to the fair market value of such stock at the
time of the completion of the Stock Offering.
(s) Association has received or will receive an opinion from RP
Financial, Inc. ("Appraiser's Opinion"), which concludes that the
subscription rights to be received by Eligible Account Holders and other
eligible subscribers do not have any ascertainable fair market value, since
they are acquired by the recipients without cost, are non-transferable and
of short duration, and afford the recipients a right only to purchase Stock
Holding Company Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Public Offering Price for
unsubscribed shares of Stock Holding Company Common Stock.
<PAGE>
January 14, 1999
Page 5
OPINION
-------
Based solely on the information contained herein, including the
assumptions set forth hereinabove, we are of the following opinion:
(1) The conversion of Association from mutual to stock form (the
"Conversion") in the Reorganization will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code.
(2) Continuity of ownership interest will be satisfied by the Members
of Association constructively exchanging their membership/mutual interests in
Association for ownership interests in Stock Association, notwithstanding that
such Members will immediately thereafter exchange their constructive ownership
interests in Stock Association for membership/mutual interests in MHC.
(3) No gain or loss will be recognized to Mutual or Stock Association
in the Conversion.
(4) No gain or loss will be recognized by Members on the transfer of
their ownership interests in Association solely for a constructive stock
interest in the Stock Association followed by an exchange of their constructive
stock interests in the Stock Association solely for membership/mutual interests
in the MHC. (Code Section 351(a)).
(5) The exchange of constructive ownership interests in Stock
Association by the Members of Association for membership/mutual interests in MHC
will constitute a tax-free exchange of property solely for voting "stock"
pursuant to Section 351 of the Code. Membership/mutual interests in MHC will be
treated as "stock" within the meaning of Section 351(a) of the Code.
(6) The transfer by MHC of the common stock of Stock Association to
Stock Holding Company will constitute a tax-free exchange of property solely for
voting stock pursuant to Section 351 of the Code.
(7) MHC will not recognize any gain or loss upon the transfer of Stock
Association common stock to Stock Holding Company (Code Section 351(a)).
(8) Stock Holding Company will not recognize any gain or loss on its
receipt of Stock Association common stock from MHC (Code Section 1032(a)).
(9) No gain or loss will be recognized by the Stock Holding Company
upon its receipt of money in exchange for shares of its Common Stock issued
pursuant to the Stock Offering (Code Section 1032(a)).
(10) No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members of Association upon the
issuance to them of deposit
<PAGE>
January 14, 1999
Page 6
accounts in Stock Association in the same dollar amounts and on the same terms
and conditions in exchange for their deposit accounts in Association held
immediately prior to the Conversion. (Code Section 1001(a); Treas. Reg. Section
1.1001-1(a)).
(11) Depositors of Association will realize gain, if any, upon the
receipt of subscription rights to acquire Common Stock of Stock Holding Company
in the Stock Offering. Any gain resulting therefrom will be recognized, but only
in an amount not in excess of the fair market value of the subscription rights
received. Based solely on the accuracy of the conclusion reached in the
Appraiser's Opinion and our reliance on such opinion that the subscription
rights have no value at the time of distribution or exercise, no gain or loss
will be required to be recognized by Depositors of Association upon the receipt
or distribution of subscription rights. (Section 1001 of the Code.) See Paulsen
v. Commissioner, 469 U.S. 131,139 (1985). Likewise, based solely on the accuracy
of the aforesaid conclusion reached in the Appraiser's Opinion, and our reliance
thereon, we give the following opinions: (a) no taxable income will be
recognized by Members of Association upon the distribution to them of
subscription rights or upon the exercise or lapse of the subscription rights to
acquire Stock Holding Company Common Stock at fair market value; (b) no taxable
income will be realized by Depositors of Association as a result of the exercise
or lapse of the subscription rights to purchase Stock Holding Company Common
Stock at fair market value. Rev. Rul. 56-572, 1956- 2 C.B. 182; and (c) no
taxable income will be realized by Association, Stock Association or Stock
Holding Company on the issuance or distribution of subscription rights to
Depositors of Association to purchase shares of Stock Holding Company Common
Stock at fair market value. (Section 311 of the Code).
Notwithstanding the Appraiser's Opinion, if the subscription rights are
subsequently found to have a fair market value, income may be recognized by
various recipients of the subscription rights (in certain cases, whether or not
the rights are exercised) and Stock Holding Company and/or Stock Association may
be taxable on the distribution of the subscription rights. (Section 311 of the
Code.) In this regard, the subscription rights may be taxed partially or
entirely at ordinary income tax rates.
No opinion is expressed as to the tax treatment of the Reorganization
under other provisions of the Code and Income Tax Regulations or about the tax
treatment of any conditions existing at the time of or effects resulting from
the Reorganization that are not specifically covered in our opinions
hereinabove, including but not limited to, the establishment or funding of the
Foundation.
<PAGE>
January 14, 1999
Page 7
We hereby consent to the filing of this opinion as an exhibit to
Association's regulatory filings and applications seeking approval of the
Reorganization from the OTS and to Stock Holding Company's Registration
Statement on Form S-1 as filed with the SEC.
Sincerely,
SILVER, FREEDMAN & TAFF, L.L.P.
BY: /s/Barry P. Taff, P.C.
------------------------------
BARRY P. TAFF, P.C., a partner
[Letterhead of Deloitte & Touche LLP]
January 30, 1999
Board of Directors
Capitol Federal Savings and Loan Association
700 South Kansas Avenue
Topeka, Kansas 66603
Dear Board Members:
You have requested an opinion on the state income tax consequences that may
result from the proposed conversion of Capitol Federal Savings and Loan
Association ("Association") from a federally chartered mutual savings and loan
association into a federally chartered mutual holding company structure (the
"Reorganization") pursuant to the Amended Plan of Reorganization and Stock
Issuance Plan adopted August 25, 1998 (the "Plan").
FACTS
A summary of our understanding of the facts surrounding the conversion follows
the facts and information provided in the federal tax opinion provided by
Silver, Freedman & Taff, L.L.P. in a letter dated January 16, 1999 ("Federal Tax
Opinion"). The Reorganization will be implemented pursuant to the Plan as
follows:
(i) The Association will organize Interim One, an interim federal stock
association as a wholly-owned subsidiary,
(ii) Interim One will organize Interim Two, an interim federal stock
association as a wholly-owned transitory subsidiary of Interim One,
(iii) Interim One will also organize the Stock Holding Company as a
wholly-owned subsidiary of Interim One,
(iv) The following events will then occur simultaneously:
(a) Association will exchange its federal mutual charter for a
federal stock savings and loan association charter, thereby
converting to a federal stock savings and loan association
("Stock Association"):
(b) Members of the Association will receive shares of common stock in
Stock Association in exchange for their mutual ownership
interests in Association:
(c) Interim One will cancel its outstanding stock and exchange its
federal stock charter for a federal mutual holding company
charter, thereby converting to a mutual holding company ("MHC"):
<PAGE>
Capitol Federal Savings & Loan Association
January 30, 1999
Page 2 of 6
(d) Interim Two will merge with and into Stock Association with Stock
Association surviving, in connection with such merger, the shares
of Interim Two common stock owned by MHC immediately prior
thereto shall be converted into and become shares of Stock
Association common stock and the former members of Association
who constructively received the initially issued common stock in
Stock Association will be deemed to have transferred all of their
stock interests in Stock Association to MHC in exchange for
membership/mutual interests in MHC:
(e) MHC will then contribute all of the outstanding shares of common
stock of Stock Association to Stock Holding Company,
(v) Immediately after the completion of the events set forth in subpart
(iv) above, Stock Holding Company will, subject to and in accordance
with the provisions of the Plan, sell up to 49.97% of its Common Stock
in the Stock Offering.
All entities which are expected to be created as part of the reorganization, and
all corporations which presently exist prior to the reorganization, will be or
have been organized, operated, and domiciled in the state of Kansas. Therefore,
our analysis with respect to the impact of the reorganization on Association,
Stock Association, MHC, and Stock Holding Company is limited to the state of
Kansas.
ANALYSIS
The Association (and the Stock Holding Company, Stock Association, and MHC
subsequent to the Conversion) files a privilege tax return with the state of
Kansas. The MHC will be subject to the Kansas income tax. The Kansas Privilege
Tax Code, in K.S.A. 79-1109, adopts federal taxable income as a starting point
for determination of Kansas taxable income by reference to K.S.A. 79-32,138, the
corporation income tax statute. K.S.A. 79-32,138 defines Kansas taxable income
to be "the corporation's federal taxable income....with modifications specified
in this section." K.S.A. 79-32,109(a) adopts the Internal Revenue Code of 1986,
and amendments thereto ("the Internal Revenue Code"). Accordingly, the starting
point for determination of the income and privilege taxes is federal taxable
income and the state privilege and income taxes conform with the Internal
Revenue Code. As a conforming state, the income tax treatment of any
reorganization transaction is the same for Kansas tax purposes as it is for
federal purposes, absent a specific modifying provision in the Kansas Income or
Privilege Tax Code, which alters the income/privilege tax treatment. No specific
provisions or case law are currently provided in the Kansas Income or Privilege
Tax Codes relative to this transaction which would cause the Kansas income tax
treatment to be different than the federal tax treatment.
The starting point for determination of individual state income taxes is federal
adjusted gross income under K.S.A. 79-32,117. Conformity with the Internal
Revenue Code as discussed in the preceding paragraph, also applies to individual
income taxation. (See K.S.A. 79-32,109). As a conforming state, the individual
income tax treatment related to any reorganization transaction is the same for
Kansas tax purposes as it is for federal purposes unless there is a specific
variation in the Kansas Income Tax Code which alters
<PAGE>
Capitol Federal Savings & Loan Association
January 30, 1999
Page 3 of 6
the income tax treatment. No specific provisions are currently provided in the
Kansas Income Tax Code relative to the transactions, as described herein, which
would cause the Kansas income tax treatment to be different than the federal tax
treatment.
OPINION
Based on the facts set forth herein or incorporated by reference and the
opinions rendered in the Silver, Freedman & Taff, L.L.P. Federal Tax Opinion,
and our review of the Kansas Income and Privilege Tax Statutes in K.S.A.
79-32,138 and K.S.A. 79-1109, it is our opinion that if the transaction is
undertaken in accordance with the Plan, Kansas income and privilege tax
consequences are as follows:
1. Because the conversion of Association from mutual to stock form in the
Reorganization will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code, the conversion will
constitute a reorganization for Kansas income and privilege tax
purposes.
2. Because continuity of ownership interest will be satisfied for federal
income tax purposes by the Members of Association constructively
exchanging their membership/mutual interest in Association for
ownership interests in Stock Association, notwithstanding that such
Members will immediately thereafter exchange their contraceptive
ownership interest in Stock Association for membership/mutual interest
in MHC, continuity of interest will be met for Kansas income and
privilege tax purposes.
3. Because no gain or loss will be recognized to Mutual or Stock
Association in the Conversion for federal tax purposes, neither Mutual
or Stock Association will recognize any gain or loss for Kansas income
and privilege tax purposes.
4. Because no gain or loss will be recognized for federal income tax
purposes by Members on the transfer of their ownership interests in
Association solely for a constructive stock interest in the Stock
Association followed by an exchange of their constructive stock
interest in the Stock Association solely for membership/mutual
interest in the MHC, no gain or loss will be recognized for Kansas
income and privilege tax purposes.
5. Because the exchange of constructive ownership interest in Stock
Association by the Members of Association for membership/mutual
interest in MHC will constitute a tax-free exchange of property solely
for voting "stock" pursuant to Section 351 of the Internal Revenue
Code, the Kansas Income Tax Code will likewise treat the exchange as a
tax-free exchange.
6. Because the transfer by MHC of the common stock of Stock Association
to Stock Holding Company will constitute a tax-free exchange of
property solely for voting stock under Section 351 of the Internal
Revenue Code, the transaction will also constitute a tax-free exchange
for Kansas income and privilege tax purposes.
<PAGE>
Capitol Federal Savings & Loan Association
January 30, 1999
Page 4 of 6
7. Because MHC will not recognize any gain or loss, under Section 351(a)
of the Internal Revenue Code, upon the transfer of Stock Association
common stock to Stock Holding Company, then no gain or loss will be
recognized for Kansas income and privilege tax purposes.
8. Because Stock Holding Company will not recognize any gain or loss on
its receipt of Stock Association common stock from MHC under Section
1032(a) of the Internal Revenue Code, no gain or loss will be
recognized for Kansas income and privilege tax purposes.
9. Because no gain or loss will be recognized by the Stock Holding
Company upon its receipt of money in exchange for shares of its Common
Stock issued pursuant to the Stock Offering under Section 1032(a) of
the Internal Revenue Code, no gain or loss will be recognized for
Kansas income and privilege tax purposes.
10. Because no gain or loss will be recognized, under Section 1001(a) of
the Internal Revenue Code, by Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members of Association upon the
issuance to them of deposit accounts in Stock Association in the same
dollar amounts and on the same terms and conditions in exchange for
their deposit accounts in Association held immediately prior to the
Conversion, no gain or loss will be recognized for Kansas income and
privilege tax purposes.
11. Because Depositors of Association will realize gain for federal tax
purposes, if any, upon the constructive issuance to them of
subscription rights to acquire Common Stock of Stock Holding Company
in the Stock Offering, gain will be realized for Kansas income tax
purposes. Any gain resulting therefrom will be recognized, but only in
an amount representing the fair market value of the subscription
rights received. Based solely on the accuracy of the conclusion
reached in the Appraiser's Opinion and our reliance on such opinion
that the subscription rights have no value at the time of distribution
or exercise, and because no gain or loss will be required to be
recognized by Depositors upon the receipt or distribution of
subscription rights for federal tax purposes, no gain or loss will be
required to be recognized by Depositors upon receipt or distribution
of subscription rights for Kansas income tax purposes. Likewise, based
solely on the accuracy of the aforesaid conclusion reached in the
Appraiser's Opinion, and our reliance thereon, we give the following
opinions:
(a) Because no taxable income will be recognized by Members for
federal tax purposes upon the distribution to them of
subscription rights or upon the exercise or lapse of the
subscription rights to acquire Stock Holding Company Common Stock
at fair market value, no taxable income will be recognized for
Kansas income tax purposes;
(b) Because no taxable income will be realized for federal tax
purposes by Depositors of Association as a result of the exercise
or lapse of the subscription rights to purchase Stock Holding
Company Common
<PAGE>
Capitol Federal Savings & Loan Association
January 30, 1999
Page 5 of 6
Stock at fair market value, no taxable income will be realized
for Kansas income tax purposes; and
(c) Because no taxable income will be realized for federal tax
purposes by Association, Stock Association or Stock Holding
Company on the issuance or distribution of subscription rights to
Depositors of Association to purchase shares of Stock Holding
Company Common Stock at fair market value, no taxable income will
be realized for Kansas income and privilege tax purposes.
Notwithstanding the Appraiser's Opinion, because for federal tax purposes if the
subscription rights are subsequently found to have a fair market value, income
may be recognized by various recipients of the subscription rights (in certain
cases, whether or not the rights are exercised) and Stock Holding Company and/or
Stock Association may be taxable on the distribution of the subscription rights,
then income may be recognized by various recipients of the of the subscription
rights and Stock Holding Company and/or Stock Association may be taxable on the
distribution of the subscription rights for Kansas income/privilege tax
purposes. In this regard, for federal tax purposes the subscription rights may
be taxed partially or entirely at ordinary income tax rates; therefore, the
subscription rights may be taxed partially or entirely at ordinary income tax
rates for Kansas income tax purposes.
Our opinion is based solely upon:
i. the opinions as provided by Silver, Freedman & Taff, LLP
concerning the federal income tax consequences of the
Reorganization;
ii. the information, documents, and facts ("facts") referred to
in this letter;
iii. our assumption (without independent verification or review)
that all of the facts and all of the original, copies, and
signatures of documents are accurate, true and authentic;
iv. our assumption (without independent verification or review)
that there will be timely execution and delivery of, and
performance as required by the documents.
Our opinion is limited to those expressed above and we express no opinion with
regard to any sections of the Kansas Income and Privilege Tax Acts other than
those referred to above. We express no opinion with regard to the taxation of
the proposed transaction described herein with regard to the federal income tax
consequences or under the laws of any local, foreign or other state
jurisdiction. We express the opinions contained herein as of the date of this
letter only.
Our opinion is also based on, and is conditioned on the continued applicability
of, the provisions of the Kansas Income and Privilege Tax Codes, case law
precedent and State of Kansas pronouncements at the date hereof. If there are
any significant changes to the income tax authorities cited above (changes for
which we have no responsibility to advise you), our opinion may become invalid
and/or necessitate (upon your request) reconsideration. Our opinion is not
binding on the Kansas Department of Revenue.
<PAGE>
Capitol Federal Savings & Loan Association
January 30, 1999
Page 6 of 6
We hereby consent to the filing of this opinion as an exhibit to the Application
for Conversion or similar filings of the Association filed with the Office of
Thrift Supervision (OTS) and the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission.
Very truly yours,
Deloitte & Touche LLP
INDEPENDENT AUDITORS' CONSENT
Capitol Federal Savings and Loan Association
Topeka, Kansas
We consent to the use in this Amendment No. 1 to the Registration Statement on
Form S-1 for Capitol Federal Financial and in Amendment No. 1 to the Forms
MHC-1, and MHC-2 for Capitol Federal Savings and Loan Association, of our report
of Capitol Federal Savings and Loan Association dated November 17, 1998,
appearing in the Prospectus, which is part of this Registration Statement, and
to the reference to us under the heading of "Experts" in such Prospectus.
/s/Deloitte & Touche LLP
Kansas City, Missouri
January 29, 1999
[SILVER FREEDMAN AND TAFF, L.L.P. LETTERHEAD]
CONSENT OF COUNSEL
We consent to the use of our opinion, to the incorporation by reference
of such opinion as an exhibit to the Pre-Effective Amendment No. 1 to the Form
S-1 and to the reference to our firm under the headings "The Reorganization and
Stock Issuance - Effects of the Reorganization -- Tax Effects" and "Legal and
Tax Opinions" in the Prospectus included in this Pre-Effective Amendment No. 1
to the Form S-1. In giving this consent, we do not admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ Silver, Freedman & Taff, L.L.P.
------------------------------------
SILVER, FREEDMAN & TAFF, L.L.P.
Washington, D.C.
January 29, 1999
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CAPITOL FEDERAL
SAVINGS AND LOAN ("CAPITOL FEDERAL SAVINGS" OR THE "BANK") FOR USE ONLY AT A
SPECIAL MEETING OF MEMBERS TO BE HELD ON MARCH 26, 1999 AND ANY ADJOURNMENT
THEREOF ("SPECIAL MEETING").
The undersigned being a member of Capitol Federal Savings, hereby authorizes the
Board of Directors of the Bank or any successors in their respective positions,
as proxy, with full powers of substitution, to represent the undersigned at the
Special Meeting of Members of Capitol Federal Savings to be held at the (name of
location) on March 26, 1999, at (Time), Topeka, Kansas time, and at any
adjournment of said meeting, to act with respect to all votes that the
undersigned would be entitled to cast, if then personally present, as set forth
below:
(1) To vote "FOR" or "AGAINST" a Plan of Reorganization and Stock
Issuance Plan, as amended (the "Plan") pursuant to which Capitol Federal Savings
would be converted from a federally chartered mutual savings association to a
federally chartered stock savings bank as a wholly owned subsidiary of Capitol
Federal Financial (the "Stock Holding Company"), and the Stock Holding Company
would become a majority-owned subsidiary of Capitol Federal Savings Bank MHC, a
federally chartered mutual holding company, and the transactions provided for in
such Plan.
FOR [ ] AGAINST [ ]
(2) To approve the creation of the Capitol Federal Foundation (the
"Foundation") and the Stock Holding Company's contribution to the Foundation of
cash and shares of Stock Holding Company common stock pursuant to the Plan.
FOR [ ] AGAINST [ ]
(3) To vote, in its discretion, upon such other business as may
properly come before the Special Meeting or any adjournment thereof. Management
is not aware of any other such business.
This Proxy, if executed, will be voted "FOR" adoption of the Plan and "FOR" the
creation of the Foundation and for adjournment of the Special Meeting if
necessary if no choice is made herein. Please date and sign this proxy on the
reverse side and return it in the enclosed envelope.
- --------------------------------------------------------------------------------
CAPITOL FEDERAL SAVINGS AND LOAN ASSOCIATION REVOCABLE PROXY
Any Member giving a proxy may revoke it at any time before it is voted by
delivering to the Corporate Secretary of Capitol Federal Savings either a
written revocation of the proxy, or a duly executed proxy bearing a later date,
or by voting in person at the Special Meeting.
The undersigned hereby acknowledges receipt of a Notice of Special Meeting of
the Members of Capitol Federal Savings called for the 26th day of March, 1999
and a proxy statement for the Special Meeting prior to the signing of this
Proxy.
-------------------------------------------
Signature Date
-------------------------------------------
Signature Date
NOTE: Please sign exactly as your name
appears on this Proxy. Only one signature
is required in the case of a joint account.
When signing in a representative capacity,
please give title.
IMPORTANT: Please Detach, Sign and Return "ALL" proxies from "ALL"
packets received in the enclosed blue envelope.
FAILURE TO VOTE IS EFFECTIVELY THE SAME AS A "NO" VOTE
- --------------------------------------------------------------------------------
<PAGE>
CAPITOL FEDERAL FINANCIAL
Stock Information Center
9500 Nall Avenue
Overland Park, KS 66207
Toll free: (877) 815-1820
STOCK ORDER FORM
- --------------------------------------------------------------------------------
Deadline: The Subscription Offering ends at 12:00 noon, Central Time, on March
xx, 1999. Your original Stock Order and Certification Form, properly executed
and with the correct payment, must be received (not postmarked) at the address
on the top of this form, or at any Capitol Federal Savings branch office, by the
deadline, or it will be considered void. Faxes or copies of this form will not
be accepted.
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount Due
- -------------------- --------------------
X $10.00 = $
- -------------------- --------------------
Minimum -- 25 Shares
Maximum -- See the Stock Ownership Guide and Stock Order Form Instructions and
the Prospectus
- --------------------------------------------------------------------------------
Method of Payment
(3) [ ] Enclosed is a check, bank draft or money order payable to Capitol
Federal Financial for $___________.
(4) [ ] I authorize Capitol Federal Savings to make withdrawals from my
Capitol Federal Savings certificate or savings account(s) shown
below, and understand that the amounts will not otherwise be available
for withdrawal:
Account Number(s) Amount(s)
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
Total Withdrawal
---------
There is NO penalty for early withdrawal.
- --------------------------------------------------------------------------------
(5) Purchaser Information (check one)
a. [ ] Eligible Account Holder - Check here if you were a depositor with $50.00
or more on deposit with Capitol Federal Savings as of June 30, 1997.
Enter information in section 8 for all deposit accounts that you had at
Capitol Federal Savings on June 30, 1997.
b. [ ] Supplemental Eligible Account Holder - Check here if you were a depositor
with $50.00 or more on deposit with Capitol Federal Savings as of
December 31, 1998 but are not an Eligible Account Holder. Enter
information in section 8 for all deposit accounts that you had at
Capitol Federal Savings on December 31, 1998.
c. [ ] Other Member - Check here if you were a depositor of Capitol Federal
Savings as of January 31, 1999 or a borrower whose loan was outstanding
as of January 6, 1993 which continued to be outstanding at January 31,
1999, but are not an Eligible Account Holder or a Supplemental Eligible
Account Holder. Enter information in section 8 for all accounts that you
had at Capitol Federal Savings on January 31, 1999.
d. [ ] Directors, Officers and Employees - Check here if you are a Director,
Officer or Employee of Capitol Federal Savings and a, b or c do not
apply.
- --------------------------------------------------------------------------------
(6) [ ] Check here if you are a director, officer or employee of Capitol Federal
Savings or a member of such person's immediate family (same household).
- --------------------------------------------------------------------------------
(7) [ ] NASD Affiliation - see description on reverse side of this form.
- --------------------------------------------------------------------------------
<PAGE>
(8) Please review the preprinted account information listed below. The accounts
printed below may not be all of your qualifying accounts or even your
accounts as of the earliest of the three dates if you have changed names on
the accounts. You should list any other accounts that you may have or had
with Capitol Federal Savings in the blue box below. SEE THE STOCK ORDER FORM
INSTRUCTIONS SHEET TO FURTHER INFORMATION (blue sheet). All Subscription
orders are subject to the provisions of the Plan of Reorganization and the
related Plan of Stock Issuance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Additional Qualifying Accounts
Account Title (Names on Accounts) Account Number
__________________________________________________|___________________________
__________________________________________________|___________________________
__________________________________________________|___________________________
__________________________________________________|___________________________
__________________________________________________|___________________________
__________________________________________________|___________________________
Please Note: Failure to list all of your accounts may result in the loss of
part or all of your subscription rights. (additional space on back of form)
- --------------------------------------------------------------------------------
(9) Stock Registration - Please Print Legibly and Fill Our Completely
(Note: The Stock Certificate and all correspondence related to this stock
order will be mailed to the address provided below)
[ ] Individual [ ] Corporation
[ ] Joint Tenants [ ] Partnership
[ ] Tenants in Common [ ] Individual Retirement Account
[ ] Uniform Transfer to Minors Act [ ] Fiduciary/Trust (Under
[ ] Uniform Gift to Minors Act Agreement Dated_______________)
- --------------------------------------------------------------------------------
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Mailing Daytime
Address Telephone
- --------------------------------------------------------------------------------
Zip Evening
City State Code County Telephone
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acknowledgment: By signing below, I acknowledge receipt of the Prospectus dated
February XX, 1999 and understand I may not change or revoke my order once it is
received by Capitol Federal Financial. I also certify that this stock order is
for my account and there is no agreement or understanding regarding any further
sale or transfer of these shares. Applicable regulations prohibit any persons
from transferring, or entering into any agreement directly or indirectly to
transfer, the legal or beneficial ownership of subscription rights or the
underlying securities to the account of another person. Capitol Federal
Financial will pursue any and all legal and equitable remedies in the event it
becomes aware of the transfer of subscription rights and will not honor orders
known by it to involve such transfer. Under penalties of perjury, I further
certify that: (1) the social security number or taxpayer identification number
given above is correct and (2) I am not subject to backup withholding. You must
cross out this item (2) above if you have been notified by the Internal Revenue
Service that you are subject to backup withholding because of under-reporting
interest or dividends on your tax return. By signing below, I also acknowledge
that I have not waived any rights under the Securities Act of 1933 and the
Securities Exchange Act of 1934, both as amended.
Signature: THIS FORM MUST BE SIGNED AND DATED BELOW AND ON THE BACK OF THIS
FORM: This order is not valid if the Stock Order and Certification Form and are
not both signed and properly completed. Your order will be filled in accordance
with the provisions of the Plan of Reorganization and Plan of Stock Issuance
Plan as described in the Prospectus. An additional signature is required only if
payment is by withdrawal from an account that requires more than one signature
to withdraw funds.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
OFFICE USE Check # _____________ ______________________
Date Rec'd ____/____/____ Ck. Amt. $______________ ______________________
Batch # ___________ - Order # _________________ Category ______________________
- --------------------------------------------------------------------------------
<PAGE>
CAPITOL FEDERAL FINANCIAL
- --------------------------------------------------------------------------------
Item (7) continued - NASD Affiliation (This section only applies to those
individuals who meet the delineated criteria)
Check box if your a member of the National Association of Securities Dealers,
Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a
period of three months following the issuance and (2) to report this
subscription in writing to the applicable NASD member within one day of the
payment therefor.
- --------------------------------------------------------------------------------
Item (8) continued; Purchaser Information
Account Title (Names on Accounts) Account Number
_______________________________________________|________________________________
_______________________________________________|________________________________
_______________________________________________|________________________________
_______________________________________________|________________________________
_______________________________________________|________________________________
_______________________________________________|________________________________
- --------------------------------------------------------------------------------
CERTIFICATION FORM
(This Certification Form Must Be Signed In Addition to the Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF
CAPITOL FEDERAL FINANCIAL ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT FEDERALLY
INSURED OR GUARANTEED BY CAPITOL FEDERAL SAVINGS OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Office of
Thrift Supervision Midwest Regional Director, Frederick R. Casteel, at (972)
281-2000.
I further certify that, before purchasing the Common Stock of Capitol Federal
Financial I received a copy of the Prospectus dated February XX, 1999 which
discloses the nature of the Common Stock being offered thereby and describes the
following risks involved in an investment in the Common Stock under the heading
"Risk Factors" beginning on page 11 of the Prospectus:
1. Increasing interest rates may hurt our profits.
2. Our use of proceeds from this offering to buy mortgage-related securities
could increase our risk that changes in market interest rates will result in
lower income.
3. Capitol Federal Savings Bank MHC will own more than half of the stock of
Capitol Federal Financial. This means that Capitol Federal Savings Bank MHC
will have enough votes to control what happens on most matters put to a
vote of stockholders.
4. After the change in structure and stock offering, our net income-to-equity
ratio will be low compared to other companies and our compensation expenses
will increase. This could negatively impact the price of our stock
5. The establishment of the Capitol Federal Foundation will hurt our earnings.
6. The contribution to the Capitol Federal Foundation means that your total
ownership will be 1.65% less after we make the contribution.
7. We intend to grant stock options and restricted stock to the board and
management following the change in structure and stock offering which could
further reduce your voting interest.
8. If our computer systems do not properly work on January 1, 2000, our
business operations will be disrupted.
9. We intend to waive cash dividends which would otherwise be paid by Capitol
Federal Financial to Capitol Federal Savings Bank MHC. This could reduce the
number of shares you receive if we ever do a full conversion and eliminate
the mutual holding company.
- ------------------------------------ ------------------------------------
Signature Date Signature Date
- ------------------------------------ ------------------------------------
(Note: If shares are to be held jointly; BOTH parties must sign)
EXECUTION OF THIS CERTIFICATION FORM WILL NOT CONSTITUTE A WAIVER OF ANY RIGHTS
THAT A PURCHASER MAY HAVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
Capitol
Federal Stock Ownership Guide and Stock Order Form Instructions
Financial
- --------------------------------------------------------------------------------
Stock Order Form Instructions - All subscription orders are subject to the
provisions of the Plan of Reorganization and the Stock Issuance Plan.
- --------------------------------------------------------------------------------
Item 1 and 2 - Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares ordered by the subscription price of $10.00 per share. The minimum
purchase is 25 shares. Generally, the maximum purchase for any person is 50,000
shares. No person, together with associates, as defined in the Prospectus, and
no person acting in concert may purchase more than 500,000 shares. For
additional information, see "The Reorganization and Stock Issuance - Limitations
on Stock Holding Company Common Stock Purchases" in the Prospectus.
Item 3 - Payment for shares may be made in cash (only if delivered by you in
person; though we request you exchange the cash for a check with any of the
tellers at Capitol Federal Savings Bank (the "Bank"), by check, bank draft or
money order payable to CAPITOL FEDERAL FINANCIAL. DO NOT MAIL CASH. Your funds
will earn interest at the Bank's passbook annual yield, currently 2.25%.
Item 4 - To pay by withdrawal from a savings account or certificate at the Bank,
insert the account number(s) and the amount(s) you wish to withdraw from each
account. If more than one signature is required for a withdrawal, all
signatories must sign in the signature box on the front of this form. To
withdraw from an account with checking privileges, please write a check. The
Bank will waive any applicable penalties for early withdrawal from certificate
accounts. A hold will be placed on the account(s) for the amount(s) you indicate
to be withdrawn. Payments will remain in account(s) until the stock offering
closes. If a partial withdrawal reduces the balance of a certificate account to
less than the applicable minimum, the remaining balance will thereafter earn
interest at the passbook rate.
Item 5 - Please check the appropriate box to tell us the earliest of the three
dates that applies to you. Borrowers, having a loan as of January 6, 1993 that
was active on January 31, 1999, are Other Members.
Item 6 - Please check this box if you are a director, officer or employee of the
Bank, or a member of such person's household.
Item 7 - Please check this box if you have a National Association of Securities
Dealers, Inc. ("NASD") affiliation (as defined on the reverse side of the Stock
Order Form.
Item 8 - Please review the preprinted Qualifying Account Information. The
accounts listed may not be all of your qualifying accounts or even your accounts
as of the earliest of the three dates if you have changed their ownership. You
should list any other qualifying accounts that you may have or had with Capitol
Federal Savings in the blue box located under the heading "Additional Qualifying
Accounts". These may appear on other stock order forms you have received. For
example, if you are ordering stock in just your name, you should list all of
your accounts as of the earliest of the three dates that you were a depositor.
This may include accounts on which you were a joint owner, your own regular
individual accounts or your IRA accounts. Similarly, if you are ordering stock
jointly with another depositor, you should list all accounts on which either of
you are owners, i.e. individual accounts, joint accounts, etc. If you are
ordering stock in your minor child's or grandchild's name under the Uniform
Transfer to Minors ownership, the minor must have had an account as one of the
three dates and you should list only their accounts. If you are ordering stock
corporately, you need to list just that corporation's accounts, as your
individual accounts do not qualify. Failure to list all of your qualifying
accounts may result in the loss of part or all of your subscription rights.
Item 9 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Capitol Federal
Financial common stock. Please complete this section as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number(s)
and your daytime and evening phone numbers. We will need to call you if we
cannot execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Subscription
rights are not transferable. If you are an eligible or supplemental eligible
account holder or other member, to protect your priority over other purchasers
as described in the Prospectus, you must take ownership in at least one of the
account holder's names.
(See Reverse for Stock Ownership Guide)
<PAGE>
Capitol
Federal Stock Ownership Guide and Stock Order Form Instructions
Financial
- --------------------------------------------------------------------------------
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual - The stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with rights of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Uniform Transfer / Gift to Minors Act - For residents of Kansas and many states,
stock may by held in the name of a custodian for the benefit of a minor under
the Uniform Transfer to Minors Act. For residents in other states, stock may be
held in a similar type of ownership under the Uniform Gift to Minors Act of the
individual state. For either ownership, the minor is the actual owner of the
stock with the adult custodian being responsible for the investment until the
child reaches legal age. Only one custodian and one minor may be designated.
Instructions: On the first name line, print the first name, middle initial and
last name of the custodian, with the abbreviation "CUST" after the name. Print
the first name, middle initial and last name of the minor on the second name
line followed by the notation UTMA-KS or UGMA-Other State. List only the minor's
social security number.
Corporation/Partnership - Corporation/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
Please contact the Stock Information Center if you have any questions about your
IRA account and please do not delay in exploring this option. Registration for
IRA's:
On Name Line 1 - list the name of the broker or trust department
followed by CUST or TRUSTEE.
On Name Line 2 - FBO (for benefit of) YOUR NAME IRA a/c #______.
Address will be that of the broker / trust department to where
the stock certificate will be sent.
The Social Security / Tax I.D. number(s) will be either yours or
your trustees, as they direct.
Please list your phone numbers.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first name line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first name line. Following the
name, print the fiduciary title such as trustee, executor, personal
representative, etc. On the second name line, print the name of the maker, donor
or testator or the name of the beneficiary. Following the name, indicate the
type of legal document establishing the fiduciary relationship (agreement, court
order, etc.). In the blank after "Under Agreement Dated", fill in the date of
the document governing the relationship. The date of the document need not be
provided for a trust created by a will.
(See reverse for Stock Order Form Instructions)
CAPITOL FEDERAL FINANCIAL
the holding company for
CAPITAL
[LOGO] FEDERAL
SAVINGS
True Blue for over 100 years
Become a Shareholder!
<PAGE>
Edgar Tables for Capital Requirements, Asset Composition
and Efficiency Ratio (included in Marketing Materials)
Capital Requirements
Tangible Capital Core Capital Risk-Based Capital
---------------- ------------- ------------------
Required 1.50% 3.00% 8.00%
9/30/98 12.13% 12.13% 27.32%
As of September 30, 1998, Capitol Federal Savings Bank (the "Bank") exceeded all
regulatory capital requirements.
================================================================================
Asset Composition
The Bank's asset base consists primarily of mortgage loans. And to a lesser
extent, mortgage-related securities, cash and investments, and other loans and
assets.
At 9/30/98
% of Total
----------
Mortgage Loans 67%
Mortgage-related Securities 20%
Cash and Investments 9%
Other Loans & Assets 4%
----
100%
----
================================================================================
Efficiency Ratio
The Bank's low Efficiency Ratio reflects management's ongoing commitment to
overhead cost containment. The Efficiency Ratio represents the ratio of
non-interest expense divided by the sum of net interest income and non-interest
income.
For the years ended September 30,
---------------------------------------------------
1998 1997 1996* 1995 1994
----- ----- ----- ----- -----
Efficiency Ratio 35.80% 34.63% 41.39% 47.43% 41.74%
*1996 is adjusted to exclude the one-time SAIF recapitalization assessment.
<PAGE>
[LOGO]
True Blue
<PAGE>
CAPITOL
[LOGO] FEDERAL
FINANCIAL
Stock Information Centers
-------------------------
Toll Free (877) 815-1820 - 9:00 am to 5:00 pm
Stock Center Locations & Hours:
-------------------------------
Nall Hills Office 9500 Nall Avenue Overland Park
9:00 am - 4:00 pm Monday - Friday
Main Office 700 Kansas Avenue Topeka
9:00 am - 4:00 pm Monday - Friday
Wichita Branch 8040 E. Douglas Avenue
Noon - 4:00 pm Monday
9:00 am - 4:00 pm Tuesday - Thursday
9:00 am - 3:00 pm Friday
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION FUND, OR ANY GOVERNMENT AGENCY.
<PAGE>
FACTS ABOUT THE REORGANIZATION
The Board of Directors of Capitol Federal Savings and Loan Association (the
"Association") unanimously adopted a Plan of Reorganization (the
"Reorganization") to reorganize into a federally chartered, three-tier mutual
holding company structure. The Association is converting into a federally
chartered stock savings bank and will change its name to Capitol Federal Savings
Bank (the "Bank"). The Bank will become a subsidiary of Capitol Federal
Financial (the "Company") which has been formed as part of the reorganization
and will issue stock for sale to the public. Further, Capitol Federal Financial
will be a subsidiary of Capitol Federal Savings Bank MHC (the "MHC").
This brochure answers some of the most frequently asked questions about the
Reorganization and about your opportunity to invest in the Capitol Federal
Financial.
Investment in the stock of Capitol Federal Financial involves certain risks. For
a discussion of these risks and other factors, including a complete description
of the offering, investors are urged to read the accompanying Prospectus,
especially the discussion under the heading "Risk Factors".
WHY IS THE BANK REORGANIZING?
- -----------------------------
The Reorganization will allow you to purchase stock and share in Bank's future.
The mutual holding company structure will provide the Bank with greater
operating flexibility, enhance access to capital markets, and facilitate
expansion of products and services to members of the community.
<PAGE>
WILL THE REORGANIZATION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
- -------------------------------------------------------------------
No. The Reorganization will not affect the balance or terms of any deposit
account or loan. Your deposits will continue to be federally insured by the
Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. Your
deposit account is not being converted to stock.
WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERINGS?
- ----------------------------------------------------------------
Current and certain former depositors and certain borrowers of the Bank and the
Bank's Employee Stock Ownership Plan.
HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
- -------------------------------------------------------------
Capitol Federal Financial is offering through the Prospectus up to 50,000,000
shares of common stock, the maximum as adjusted, as described in the Prospectus,
at a price of $10.00 per share.
HOW MUCH STOCK MAY I BUY?
- -------------------------
The minimum order is 25 shares or $250. Generally, no person may purchase more
than $500,000 of common stock in the subscription offering and no person,
together with associates of and persons acting in concert with such person, may
purchase more than $5,000,000 of common stock.
DO MEMBERS HAVE TO BUY STOCK?
- -----------------------------
No. However, the Reorganization will allow the Bank's depositors and certain
borrowers an opportunity to buy stock and become charter shareholders of Capitol
Federal Financial.
<PAGE>
HOW DO I ORDER STOCK?
- ---------------------
You must complete the enclosed Stock Order and Certification Form. Instructions
for completing your Stock Order and Certification Form are contained in this
packet. Your order must be received by the Bank prior to 12:00 noon, Central
Time, on March XX, 1999.
HOW MAY I PAY FOR MY SHARES OF STOCK?
- -------------------------------------
First, you may pay for stock by check, cash or money order. If paying by cash,
please stop at any one of the Bank's tellers and convert your cash to a check.
Interest will be paid by the Bank on these funds at the passbook annual
percentage yield, which currently is 2.25%, from the day the funds are received
until the completion or termination of the Reorganization. Second, you may
authorize us to withdraw funds from your Capitol Federal savings account or
certificate of deposit for the amount of funds you specify for payment. You will
not have access to these funds from the day we receive your order until
completion or termination of the Reorganization.
CAN I PURCHASE SHARES USING FUNDS IN MY CAPITOL FEDERAL SAVINGS IRA ACCOUNT?
- ----------------------------------------------------------------------------
Yes, however, you must establish a self-directed IRA account at a brokerage firm
or trust department to which you can transfer a portion or all of your IRA
account at Capitol Federal that will enable such purchase. To accommodate these
transfers, Invest Financial Corporation can facilitate establishment of a
self-directed IRA. Please call our Stock Information Center as early as possible
for additional information as a transfer can take time to accomplish.
<PAGE>
WILL THE STOCK BE INSURED?
- --------------------------
No. Like any other common stock, Capitol Federal Financial's stock will not be
insured.
WILL DIVIDENDS BE PAID ON THE STOCK?
- ------------------------------------
The Board of Directors of Capitol Federal Financial intends to pay a quarterly
cash dividend, initially at an annualized rate of $.40 per share. Continued
payment depends upon a number of factors and no assurances can be given that any
dividends will be paid, or that if paid, will be at the same level in future
periods.
HOW WILL THE STOCK BE TRADED?
- -----------------------------
The Company's stock will trade on the Nasdaq National Market under the symbol
"CFFN". However, no assurance can be given that an active and liquid market will
develop.
HOW WILL I KNOW THE RESULTS OF THE OFFERING?
- --------------------------------------------
Upon completion of the Subscription Offering on March XX, 1999, the Bank's
website will provide a current update on the status of the offering and as
accurate an estimate as possible of when the offering will trade. The Bank's
website address is www.capfed.com.
ARE OFFICERS AND DIRECTORS OF THE BANK PLANNING TO PURCHASE STOCK?
- ------------------------------------------------------------------
Yes! The Bank's senior officers and directors plan to purchase, in the
aggregate, $3.5 million worth of stock.
MUST I PAY A COMMISSION?
- ------------------------
No. You will not be charged a commission or fee on the purchase of shares in the
Reorganization.
<PAGE>
HOW MANY VOTES DO I HAVE?
- -------------------------
Your proxy card(s) show(s) the number of votes you have. Every depositor
entitled to vote may cast one vote for each $100 or fraction thereof, on deposit
as of the voting record date, January 31, 1999, up to 1,000 votes. Borrowers of
the Bank as of January 6, 1993, who continued to have that loan as of the voting
record date, are entitled to cast one vote in addition to any votes they may
have as depositors.
MAY I VOTE IN PERSON AT THE SPECIAL MEETING?
- --------------------------------------------
Yes, but please sign and mail your proxy today. If you decide to revoke your
proxy you may do so by giving notice at the Special Meeting.
SHOULD I VOTE?
- --------------
Yes! Your "YES" vote is very important!
WHY DID I GET SEVERAL PROXY CARDS?
- ----------------------------------
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts.
PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS RECEIVED!
Stock Information Centers
Toll Free (877) 815-1820 9:00 am - 5:00 pm
Stock Center Locations & Hours
Nall Hills Office 9500 Nall Ave. Overland Park
9 am - 4 pm Monday - Friday
Main Office 700 Kansas Ave. Topeka
9 am - 4 pm Monday - Friday
Wichita Branch 8040 E. Douglas Ave.
Noon - 4 pm Monday
9 am - 4 pm Tuesday - Thursday
9am - 3pm Friday
<PAGE>
STOCK OFFERING
QUESTIONS
&
ANSWERS
Capitol
Financial
Federal
The proposed stock holding company for Capitol Federal Savings
- --------------------------------------------------------------------------------
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT
AGENCY.
- --------------------------------------------------------------------------------
<PAGE>
February XX, 1999
Dear Prospective Investor:
We are pleased to announce that Capitol Federal Savings and Loan
Association (the "Association") is reorganizing from a federally chartered
mutual savings institution to a federally chartered, three-tier mutual holding
company structure (the "Reorganization"). The Association is converting into a
federally chartered stock savings bank and will change its name to Capitol
Federal Savings Bank (the "Bank"). In connection with the Reorganization,
Capitol Federal Financial, the newly formed corporation that will serve as the
stock holding company for the Bank, is offering shares of common stock in a
subscription offering and a direct community offering pursuant to a Plan of
Reorganization and Stock Issuance Plan (the "Plan").
We have enclosed the following materials that will help you learn more
about the merits of Capitol Federal Financial common stock as an investment.
Please read and review the materials carefully.
PROSPECTUS: This document provides detailed information about
operations at the Association and a complete discussion on the
proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock
offering are found in this pamphlet.
STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase
stock by returning it with your payment in the enclosed business reply
envelope. The deadline for ordering stock is 12:00 noon, Central Time,
March XX, 1999.
We invite our loyal customers and local community members to become
charter shareholders of Capitol Federal Financial. Through this offering you
have the opportunity to buy stock directly from Capitol Federal Financial
without a commission or a fee. The Board of Directors and Senior Management of
the Bank fully support the stock offering.
If you have additional questions regarding the stock offering, please
call us toll free at (877) 815-1820, Monday through Friday from 9:00 a.m. to
5:00 p.m., or stop by any of the three Stock Information Centers located at the
places and operated at the times noted on the back of the outer folder
surrounding these materials.
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT
AGENCY.
<PAGE>
February XX, 1999
Dear Member:
We are pleased to announce that Capitol Federal Savings and Loan
Association (the "Association") is reorganizing from a federally chartered
mutual savings institution to a federally chartered, three-tier mutual holding
company structure (the "Reorganization"). The Association is converting into a
federally chartered stock savings bank and will change its name to Capitol
Federal Savings Bank (the "Bank"). In conjunction with the Reorganization,
Capitol Federal Financial, the newly formed corporation that will serve as
holding company for the Bank, is offering shares of common stock in a
subscription offering pursuant to a Plan of Reorganization and Stock Issuance
Plan (the "Plan").
Unfortunately, Capitol Federal Financial is unable to either offer or
sell its common stock to you because the small number of eligible subscribers in
your jurisdiction makes registration or qualification of the common stock under
the securities laws of your jurisdiction impractical, for reasons of cost or
otherwise. Accordingly, this letter should not be considered an offer to sell or
a solicitation of an offer to buy the common stock of Capitol Federal Financial.
However, as a member of Capitol Federal Savings you have the right to
vote on the Plan at the Special Meeting of Members to be held on March 26, 1999.
Therefore, enclosed is a proxy card, a Proxy Statement (which includes the
Notice of the Special Meeting), a Prospectus (which contains information
incorporated into the Proxy Statement) including a complete discussion of the
offering and a return envelope for your proxy card.
I invite you to attend the Special Meeting on March 26, 1999. However,
whether or not you are able to attend, please complete the enclosed proxy card
and return it in the enclosed envelope to ensure your vote is counted at the
Special Meeting.
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
<PAGE>
February XX, 1999
Dear Member:
We are pleased to announce that Capitol Federal Savings and Loan
Association (the "Association") is reorganizing from a federally chartered
mutual savings institution to a federally chartered, three-tier mutual holding
company structure (the "Reorganization"). The Association is converting into a
federally chartered stock savings bank and will change its name to Capitol
Federal Savings Bank (the "Bank"). In connection with the Reorganization,
Capitol Federal Financial, the newly formed corporation that will serve as the
stock holding company for the Bank, is offering shares of common stock in a
subscription offering pursuant to a Plan of Reorganization and Stock Issuance
Plan (the "Plan").
To accomplish the Reorganization, we need your participation in an
important vote. Enclosed is a proxy statement describing the Plan and your
voting and subscription rights. The Plan has been approved by the Office of
Thrift Supervision and now must be approved by you. YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the material, is your proxy card which is located
behind the window of your mailing envelope. This proxy needs to be signed and
returned to us prior to the Special Meeting to be held on March 26, 1999. Please
take a moment to sign all of the enclosed proxy cards and return them to us in
the blue postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS
VOTING AGAINST THE PLAN.
The Board of Directors of the Bank believes the Reorganization will
offer a number of advantages such as an opportunity for depositors and certain
borrowers of the Bank to become shareholders. Please remember:
o Your accounts at the Bank will continue to be insured up to the
maximum legal limit by the Federal Deposit Insurance Corporation
("FDIC").
o There will be no change in the balance, interest rate, or maturity of
any deposit accounts because of the Reorganization.
o Members have a right, but no obligation, to buy stock before it is
offered to the general public.
o Like all stock, shares of stock issued in this offering will not be
insured by the FDIC.
Enclosed is a prospectus containing a complete discussion of the stock
offering. We urge you to read this material carefully. If you are interested in
purchasing the common stock of Capitol Federal Financial, your enclosed Stock
Order and Certification Form and payment must be received by the Association
prior to 12:00 noon, Central Time, on March XX, 1999.
If you have additional questions regarding the stock offering, please
call us toll free at (877) 815-1820, Monday through Friday from 9:00 a.m. to
5:00 p.m., or stop by any of the three Stock Information Centers located at the
places and operated at the times noted on the back of the outer folder
surrounding these materials.
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT
AGENCY.
<PAGE>
February XX, 1999
Dear Friend:
We are pleased to announce that Capitol Federal Savings and Loan Association
(the "Association") is reorganizing from a federally chartered mutual savings
institution to a federally chartered, three-tier mutual holding company
structure (the "Reorganization"). The Association is converting into a federally
chartered stock savings bank and will change its name to Capitol Federal Savings
Bank (the "Bank"). In connection with the Reorganization, Capitol Federal
Financial, the newly formed corporation that will serve as the stock holding
company for the Bank, is offering shares of common stock in a subscription
offering pursuant to a Plan of Reorganization and Stock Issuance Plan (the
"Plan").
Because of your subscription rights as a former member of the Association, we
are sending you the following materials which describe the stock offering.
PROSPECTUS: This document provides detailed information about
operations at the Association and the proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock
offering are found in this pamphlet.
STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase
stock by returning it with your payment in the enclosed business reply
envelope. The deadline for ordering stock is Noon, Central Time, on
March XX, 1999.
As a former member of the Association, you will have the opportunity to buy
stock directly from Capitol Federal Financial in the Reorganization without
commission or fee. If you have additional questions regarding the stock
offering, please call us toll free at (877) 815-1820, Monday through Friday from
9:00 a.m. to 5:00 p.m., or stop by any of the three Stock Information Centers
located at the places and operated at the times noted on the back of the outer
folder surrounding these materials.
Sincerely,
John C. Dicus
Chairman and Chief Executive Officer
THE SHARES OF COMMON STOCK OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[LETTERHEAD: CHARLES WEBB & COMPANY]
To Members and Friends of
Capitol Federal Savings and Loan Association
- --------------------------------------------------------------------------------
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc., a member of
the National Association of Securities Dealers, Inc. ("NASD"), is assisting
Capitol Federal Savings and Loan Association (the "Association") in its
reorganization from a federally chartered mutual savings institution to a
federally chartered, three-tier mutual holding company structure (the
"Reorganization"). The Association is converting into a federally chartered
stock savings bank and will change its name to Capitol Federal Savings Bank (the
"Bank"). In connection with the Reorganization, Capitol Federal Financial, the
newly formed corporation that will serve as the stock holding company for the
Bank, is offering shares of common stock in a subscription offering pursuant to
a Plan of Reorganization and Stock Issuance Plan (the "Plan").
At the request of the Capitol Federal Financial, we are enclosing materials
explaining this process and your options, including an opportunity to invest in
shares of Capitol Federal Financial's common stock being offered to customers
through March XX, 1999. Please read the enclosed offering materials including
the Prospectus carefully for a complete discussion of the offering. Capitol
Federal Financial has asked us to forward these documents to you in view of
certain requirements of the securities laws in your state.
Should you have any questions, please call us toll free at (877) 815-1820 or
stop by any of the three Stock Information Centers located at the places and
operated at the times noted on the back of the outer folder surrounding these
materials.
Very truly yours,
Charles Webb & Company
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY GOVERNMENT
AGENCY.
<PAGE>
Capitol Federal Financial - Investor Presentation
1. Title - Capitol Federal Financial - Investor Presentation, February 1999
<PAGE>
2. Branch Network - Branch Map (Map denoting branch locations)
<PAGE>
3. List - Management of the Bank - John C. Dicus, Chairman of the Board and
Chief Executive Officer; John B. Dicus, President and Chief Operating Officer;
Neil F. McKay, Execuitve Vice President, Chief Financial Officer and Treasurer;
Kent G. Townsend, First Vice President and Controller
<PAGE>
4. List - Capitol Federal Corporation History - Capitol Federal Savings and Loan
Association began operations in 1893; In 1938 they obtained a federal charter
and became a member of the Federal Home Loan Bank; As part of the
reorganization, Capitol Federal Savings Bank MHC will be organized and will own
at least a majority (50.1%) of the issued and outstanding stock of Capitol
Federal Financial (the Stock Holding Company); Capitol Federal Financial will be
formed as a federally chartered corporation to be the mid-tier holding company
for the bank.
<PAGE>
5. Bar chart - Total Assets (9/30/94 - $4,009.0 million,
9/30/95 - $4,350.3 million,
9/30/96 - $4,453.7 million,
9/30/97 - $4,923.7 million,
9/30/98 - $5,314.9 million,
12/31/98 - $3,777.4 million)
<PAGE>
6. Pie chart - Asset Mix at 9/30/98 (Mortgage loans - 67%,
Mortgage related securities - 20%,
Cash and investments - 9%,
Other loans & assets - 4%)
<PAGE>
7. Bar chart - Loans Receivable, net (9/30/94 - $2,288.5 million,
9/30/95 - $2,751.6 million,
9/30/96 - $2,944.9 million,
9/30/97 - $3,322.1 million,
9/30/98 - $3,710.3 million,
12/31/98 - $3,777.4 million)
<PAGE>
8. Pie chart - Loan Portfolio Mix at 9/30/98 (1-4 Family - 93.5%,
Other Consumer - 1.2%,
Other real estate - 1.3%,
Home Equity - 2.6%,
Construction & Development - 1.4%)
<PAGE>
9. Bar chart - Non-performing Assets to Total Assets (9/30/94 - 0,21%,
9/30/95 - 0.41%,
9/30/96 - 0.17%,
9/30/97 - 0.18%,
9/30/98 - 0.15%,
12/31/98 - 0.14%)
<PAGE>
10. Bar chart - Allowance for Loan Loss Reserves to Non-performing Loans
(9/30/94 - 65.4%,
9/30/95 - 32.4%,
9/30/96 - 39.7%,
9/30/97 - 26.8%,
9/30/98 - 80.0%,
12/31/98 - 88.10%)
<PAGE>
11. Pie chart - Deposit Account Mix at 9/30/98 (CD's - 78.7%,
Demand Deposit - 6.7%,
Cash Fund - 5.8%,
Money Market Select - 5.5%,
Passbook & Passcard - 3.3%)
<PAGE>
12. Bar chart - Equity to total Assets (9/30/94 - 12.11%,
9/30/95 - 11.86%,
9/30/96 - 12.29%,
9/30/97 - 12.28%,
9/30/98 - 12.46%,
12/31/98 - 12.49%)
<PAGE>
13. Bar chart - Net Income (9/30/94 - $39,836 thousand,
9/30/95 - $30,374 thousand,
9/30/96 - $26,622 thousand,
9/30/97 - $52,704 thousand,
9/30/98 - $53,991 thousand,
12/31/98 - $13,492 thousand)
<PAGE>
14. Bar chart - Return on Average Assets (9/30/94 - 1.01%,
9/30/95 - 0.73%,
9/30/96 - 0.60%,
9/30/97 - 1.12%,
9/30/98 - 1.05%,
12/31/98 - 1.04%)
<PAGE>
15. Bar chart - Return on Average Equity (9/30/94 - 8.56%,
9/30/95 - 6.07%,
9/30/96 - 5.01%,
9/30/97 - 9.15%,
9/30/98 - 8.52%,
12/31/98 - 8.37%)
<PAGE>
16.Bar chart - Net Interest Margin (9/30/94 - 2.33%,
9/30/95 - 2.01%,
9/30/96 - 2.46%,
9/30/97 - 2.66%,
9/30/98 - 2.55%,
12/31/98 - 1.79%)
<PAGE>
17. Bar chart - Efficiency Ratio (9/30/94 - 41.74%,
9/30/95 - 47.43%,
9/30/95 - 47.43%,
9/30/96 - 62.51%,
9/30/97 - 34.63%,
9/30/98 - 35.8%,
12/31/98 - 36.50%)
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18. Table - Branch Summary - City - Shawnee Mission, County - Johnson, Jun-98
deposits ($000s) $1,320,889, 9 branches, 33.6% of list, 21.1% of city, 18.4% of
county; City - Topeka, County - Shawnee, jun-98 deposits ($000s) $1,090,014, 5
branches, 27.8% of list, 41.9% of city, 40.7% of county; City - Wichita, County
- - Sedgwick, Jun-98 deposits ($000s) $481,299 6 branches, 12.3% of list, 9.7% of
city, 34.4% of county; City - Lawrence, County - Douglas, Jun-98 deposits
($000s) $344,389 of list, 3 branches, 37.8% of city, 34.4% of county; City -
Manhattan, County - Riley, Jun-98 deeeeposits ($000s) $211,308, 1 branch, 5.4%
of list, 28.3% of city, 26.7% of county; City - Saline, County - Saline, Jun-98
deposits ($000s) $162,115, 1 branch, 4.1% of list, 13.3% of city, 13.1% of
county; City - Emporia, County - Lyon, Jun-98 deposits ($000s) $160,981, 1
branch, 4.1% of list, 36.8% of city, 33.0% of county, City - Olathe, County -
Johnson, Jun-98 deposits ($000s) $156,226, 3 branches, 4.0% of list, 19.8% of
city, 2.2% of county.
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19. Table - Preference Categories -
1.) Eligible Account Holders;
2.) Employee Stock Ownership Plan (ESOP);
3.) Supplemental Eligible Account Holders;
4.) Other Members
5.) Directors, Officers and Employees of the Bank
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20. Table - Pro Forma Data -
Gross Proceeds (000's): Minimum - 321,361, Midpoint - 378,072, Maximum -
434,783, 15% above Maximum - 500,000;
Stockholders' Equity (000's): Minimum - 936,499, Midpoint - 985,207, Maximum -
1,033,917, 15% above Maximum - 1,089,932;
Stockholders' Equity Per Share: Minimum - $12.04, Midpoint - $10.93, Maximum -
$9.82, 15% above Maximum - $9.00;
Net Income (000's): Minimum - $58,530, Midpoint - $59,341, Maximum $60,150, 15%
above Maximum - $61,083;
Earnings Per Share: Minimum - $0.79, Midpoint - $0.68, Maximum - $0.60, 15%
above Maximum - $0.53;
Price to Book: Minimum - 83.06%, Midpoint - 92.85%, Maximum - 101.83%, 15% above
Maximum - 111.11%;
Price to Earnings: Minimum - 12.66x, Midpoint - 14.7x, Maximum - 16.67x, 15%
above Maximum - 18.87x
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21. Chart - Post-Conversion and Reorganization Corporate Structure - Capitol
Federal Savings Bank MHC owns 57.03% of the common stock, for the Total Public
Shares, 41.31% of the common stock will be owned by the minority stockholders,
and 1.65% of the common stock will be owned by Capitol Federal Foundation;
Capitol Federal Financial will own 100% of the common stock of Capitol Federal
Savings Bank.
<PAGE>
22. Title - We thank you for your interest in Capitol Federal Financial,
NASDAQ NMS:"CFFN"
