As filed with the Securities and Exchange Commission on February 11, 1999
Registration No. 333-68363
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 2
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)
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
<TABLE>
<S> <C> <C> <C>
Maximum,
Minimum Maximum as adjusted
Per Share Price................................ $10.00 $10.00 $10.00
Number of Shares............................... 32,136,106 43,478,261 50,000,000
Underwriting Commission and other Expenses.... $5,445,652 $6,750,000 $7,500,000
Net Proceeds to Capitol Federal Financial...... $315,915,408 $428,032,610 $492,500,000
Net Proceeds Per Share........................ $9.83 $9.84 $9.85
</TABLE>
Please refer to "Risk Factors" beginning on page 8 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.
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.
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 $5.32 billion, deposits of $3.89
billion, and total equity of $662.3 million.
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. Persons who had membership rights in
Capitol Federal Savings as of the date of the change in structure will have
these rights automatically exchanged for identical 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.
3
<PAGE>
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 stock offering, the offering may increase to
50,000,000 shares with the approval of the Office of Thrift Supervision 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 "Our Corporate Change and Stock Offering -
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
of 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 the 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. This ratio is an important factor used by RP Financial in determining the
appraised value of Capitol Federal Savings. Our ratio is higher than our peer
group ratio of 87.37%, but is lower than the ratio for publicly traded
subsidiaries of mutual holding companies of 127.07%.
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 January 31, 1999.
(5) Capitol Federal Savings' directors, officers and employees.
4
<PAGE>
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 56 to 57.
Termination of the Offering
The subscription offering will end on March 17, 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 May 3, 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.
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:
$ 50,000,000 Retained by Capitol Federal Financial in short-term investments for
general corporate purposes
34,800,000 Employee stock ownership plan loan
17,400,000 Contribution to Capitol Federal Foundation
325,800,000 Used to buy the stock of Capitol Federal Savings
$428,000,000 Net proceeds from stock offering at the maximum
of the offering range
We intend to use the proceeds at Capitol Federal Savings primarily to
increase our mortgage-related and investment securities.
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. Based on our earnings history and the proceeds
from the stock offering, we believe we will have the financial ability to pay
this dividend. 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 tax-free
dividend which qualifies as a return of capital for one year following the stock
offering. See page 21.
5
<PAGE>
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." Our application to list our stock on the Nasdaq
National Market is currently pending. Persons purchasing shares may not be able
to sell their shares at a price equal to or above $10.00.
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, subject to shareholder
approval. 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 the price paid for the option shares 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."
6
<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 with a total
value equal to 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, worth $17.4 million, 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." If we do not establish the foundation, the $17.4 million cash
contribution will not be made and will become additional capital for use in
Capitol Federal Savings' business.
Payment for Shares
You may pay for your subscriptions:
(1) by personal check, official bank check or money order;
(2) by authorizing us to withdraw money from your deposit
account(s) maintained at Capitol Federal Savings; or
(3) in cash, if delivered in person at any full-service banking
office of Capitol Federal Savings, although we request that
you exchange cash for a check with any of our tellers.
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.
Capitol Federal Savings has a website (http://www.capfed.com). Upon
completion of the subscription offering on March 17, 1999, the website will
provide a current update on the status of the offering.
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.
7
<PAGE>
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 8 to 10 of this document.
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.
Rising interest rates may hurt our profits.
To be profitable, we have to earn more money in interest we receive on
loans and investments we make 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
8
<PAGE>
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 Capitol Federal Financial and Capitol Federal Savings."
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, worth $17.4 million, plus cash equal to the value of 4% of the
stock sold in the stock offering, or $17.4 million at the maximum of the
estimated offering range. This contribution will be a significant expense to
Capitol Federal Financial and 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 "Our Corporate Change and Stock Offering -
Capitol Federal 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 control.
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, worth $17.4 million at the purchase price and assuming
9
<PAGE>
the maximum of the estimated offering range, 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 control of all
stockholders. For further discussion regarding these plans, see "Pro Forma Data"
and "Management - Benefits - Other Stock Benefit Plans."
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."
10
<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......................................... $5,315,801 $4,923,657 $4,453,672 $4,350,293 $4,009,047
Loans receivable, net................................ 3,711,152 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................. 2,462 56 865 --- (1,986)
--------- --------- --------- --------- ---------
Net interest income after provision (recovery)
for loan losses.................................. 126,285 122,584 105,123 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........................ 50,366 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>
11
<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............................. 1.91 2.04 1.83 1.13 1.55
End of period..................................... 1.83 1.97 1.86 1.39 1.46
Net interest margin................................ 2.56 2.75 2.48 1.98 2.32
Ratio of operating expense to average
total assets...................................... 0.98 0.97 1.62 1.04 1.08
Ratio of average interest-earning assets to
average interest-bearing liabilities.............. 1.14 1.15 1.14 1.14 1.13
Efficiency ratio................................... 36.45 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.............................................. 65.52 26.83 39.67 32.35 65.40
Allowance for loan losses to loans
receivable, net.................................... 0.11 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.................... 12.37 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>
12
<PAGE>
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 adjustments (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.
December 31, September 30,
1998 1998
------------------------------
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total Assets..................................... $ 5,366,265 $ 5,315,801
Loans Receivable, net............................ 3,761,173 3,711,152
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>
<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
Provision for loan losses.................................. --- ---
Net interest income after provision for loan losses... 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>
13
<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.......................... 1.15 1.14
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....... 72.17% 31.98%
Allowance for loan losses to loans receivable, net...... 0.11% 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 Capitol Federal Savings' historical
compliance with its capital requirements at December 31, 1998. See "How We are
Regulated - Regulatory Capital Requirements".
At December 31, 1998
----------------------------------
Amount Percent
-------------- ------------------
Tangible Capital
Actual..................... $662,691 12.27%
Required................... 80,978 1.50%
Excess..................... 581,713 10.77%
Core Capital
Actual..................... $662,691 12.27%
Required................... 161,956 3.00%
Excess..................... 500,735 9.27%
Risk-based Capital
Actual..................... $666,461 27.62%
Required................... 193,048 8.00%
Excess..................... 473,413 19.62%
14
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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 $5.37 billion compared to $5.32
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.
At December 31, 1998, non-accruing one- to four-family loans totaled
$5.5 million and non-accruing consumer loans totaled $170,000. At the same date
in 1997, non-accruing one- to four-family loans totaled $5.0 million and total
non-accruing consumer loans totaled $80,000. There were no other non-accruing
loans at either date.
Total deposits of Capitol Federal Savings 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 in 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 7.1% 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 7.4% to $4.60 billion compared to the
three months ended December 31, 1997. The increase is the result of additional
borrowings from the Federal Home Loan Bank of $225 million and increased average
deposit balances. The net interest spread decreased 9 basis points from 1.99%
for the three months ended December 31, 1997 to 1.90% for the three months ended
December 31, 1998.
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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% 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.
Provision for Loan Losses. Capitol Federal Savings' total non-accruing
loans decreased from $6.2 million at September 30, 1998 to $5.7 million at
December 31, 1998. The decrease of $574,000 occurred in non-accruing one- to
four-family residential loans. No provision for loan losses was recorded for the
quarter ended December 31, 1998. The allowance for loan losses is based upon
management's ongoing, quarterly assessments of the estimated losses inherent in
the loan portfolio. Management believes that the balance of the allowance for
loan losses was adequate to cover losses inherent in the loan portfolio as of
December 31, 1998. Capitol Federal Savings' total non-accruing loans decreased
from $6.1 million at September 30, 1997 to $5.1 million at December 31, 1997.
The reduction in the balance of non-accruing loans was caused by a $1.0 million
commercial real estate loan at September 30, 1997 that became current by
December 31, 1997. No provision for loan losses was recorded for the quarter
ended December 31, 1997. Management believes that the balance of the allowance
for loan losses was adequate to cover losses inherent in the loan portfolio as
of December 31, 1997.
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
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<PAGE>
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
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:
- -----------------------------------
DEPOSITORS OF CAPITOL
FEDERAL SAVINGS BANK WITH
MEMBERSHIP RIGHTS
- -----------------------------------
|
| 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
- --------------------------------------------------------------------------------
Capitol Federal Financial will be incorporated under Federal law to
hold all of the stock of Capitol Federal Savings Bank. Capitol Federal Financial
has applied for the approval of the Office of Thrift Supervision to become a
savings and loan holding company and will be subject to regulation by that
agency. After we complete the stock sale, Capitol Federal Financial will be a
unitary savings and loan holding company. See "How We are Regulated - Capitol
Federal Financial." Capitol Federal Financial will have no significant assets
other than all of the outstanding shares of common stock of Capitol Federal
Savings, the $50.0 million of the net proceeds it keeps and its loan to the
Capitol Federal Financial employee stock ownership plan. Capitol Federal
Financial will have no significant liabilities. See "How We Intend to Use the
Proceeds." Initially, the management of Capitol Federal Financial and Capitol
Federal Savings will be substantially the same and Capitol Federal Financial
will use the offices of Capitol
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<PAGE>
Federal Savings. Capitol Federal Financial intends to utilize the support staff
of Capitol Federal Savings from time to time and will pay Capitol Federal
Savings for this expense. If Capitol Federal Financial 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. Capitol Federal Financial 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 Capitol Federal
Savings. 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
will be (785) 235-1341.
CAPITOL FEDERAL SAVINGS BANK
Capitol Federal Savings is a federally chartered and insured mutual
savings bank with 24 full service offices and five limited service offices. At
September 30, 1998, Capitol Federal Savings had total assets of $5.32 billion,
total deposits of $3.89 billion and equity of $662.3 million. For more
information regarding the business and operations of Capitol Federal Savings,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of Capitol Federal Savings."
Capitol Federal Savings is examined and regulated by the Office of
Thrift Supervision, its primary federal regulator. Capitol Federal Savings is
also regulated by the FDIC. Capitol Federal Savings is required to have certain
reserves set by the Federal Reserve Board and is a member of the Federal Home
Loan Bank of Topeka, which is one of the 12 regional banks in the Federal Home
Loan Bank System.
The executive offices of Capitol 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 Capitol Federal Savings pursuant to the
Plan of Reorganization and Stock Issuance Plan, Capitol Federal Savings will
organize the Capitol Federal Savings Bank MHC as a federal mutual holding
company. Persons with membership or liquidation rights in Capitol Federal
Savings as of the date of the reorganization will continue to have these rights
in Capitol Federal Savings Bank MHC after the reorganization as long as they
remain depositors of Capitol Federal Savings. Borrowers whose loans were
outstanding on January 6, 1993 have membership rights in Capitol Federal Savings
and will have membership rights in Capitol Federal Savings Bank MHC after the
reorganization as long as their loans remain outstanding. Members of Capitol
Federal Savings Bank MHC,
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<PAGE>
consisting solely of depositors and certain borrowers of Capitol Federal
Savings, will have the authority to elect the board of directors of Capitol
Federal Savings Bank MHC.
Capitol Federal Savings Bank MHC's principal assets will be the shares
of common stock, par value $.01 per share of Capitol Federal Financial received
in the reorganization and $100,000 contributed by Capitol Federal Savings as its
initial capitalization. Initially, Capitol Federal Savings Bank MHC does not
intend to conduct any business except to own a majority of the common stock of
Capitol Federal Financial and invest any money it has. Capitol Federal Savings
Bank MHC will be a mutual corporation chartered under federal law and regulated
by the Office of Thrift Supervision. Capitol Federal Savings Bank MHC will be
subject to the limitations and restrictions imposed on savings and loan holding
companies by the Home Owners' Loan Act. See "How We are Regulated - Capitol
Federal Savings Bank MHC."
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 this offering by 15%. See "Pro Forma Data" and "Our Corporate
Change and Stock Offering -How We Determined Our Price and the Number of Shares
to be Issued in the Stock Offering" as to the assumptions used to arrive at such
amounts.
Capitol Federal Financial will retain $50.0 million of the net
reorganization proceeds and will purchase all of the capital stock of Capitol
Federal Savings 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 employee stock ownership plan. Capitol Federal Financial intends
to use a portion of the net proceeds to make a loan directly to the employee
stock ownership plan to enable the employee stock ownership plan 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 employee stock
ownership plan would be $25.7 million and $34.8 million, respectively. See
"Management - Benefits - Employee Stock Ownership Plan." The remaining net
proceeds retained by Capitol Federal Financial 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 Capitol Federal Savings
or other financial institutions, or a combination thereof. The net proceeds
retained by Capitol Federal Financial may ultimately be used to:
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<PAGE>
o support Capitol Federal Savings' lending activities;
o repay borrowings in the ordinary course of business; 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.
Capitol Federal Financial and Capitol Federal Savings 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 completion of the
reorganization. Management of Capitol Federal Financial may consider expanding
or diversifying its activities, as such opportunities become available.
Following the six-month anniversary of the completion of the
reorganization, to the extent permitted by the Office of Thrift Supervision and
based upon then existing facts and circumstances, Capitol Federal Financial'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
Capitol Federal Financial'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 Capitol Federal Financial and its
stockholders.
Any stock repurchases will be subject to the determination of Capitol Federal
Financial's board of directors that Capitol Federal Savings will be capitalized
in excess of all applicable regulatory requirements after any such repurchases.
The portion of the net proceeds used by Capitol Federal Financial to
purchase the capital stock of Capitol Federal Savings will be added to Capitol
Federal Savings' general funds to be used for general corporate purposes,
including increased lending activities and to support the expansion of Capitol
Federal Savings' wholesale leverage strategy, which entails the purchase of
adjustable rate mortgage-related securities funded by fixed rate borrowings. See
20
<PAGE>
"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 Capitol
Federal Savings will further strengthen Capitol Federal Savings' capital
position, which already substantially exceeds all regulatory requirements, it
should be noted that Capitol Federal Savings is not reorganizing primarily to
raise capital. After the reorganization and stock issuance, based upon the
maximum of the estimated offering range, Capitol Federal Savings' tangible
capital ratio will be approximately 16.67%. As a result, Capitol Federal Savings
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 Capitol Federal Savings. Payments for shares made through withdrawals
from existing deposit accounts at Capitol Federal Savings will not result in the
receipt of new funds for investment by Capitol Federal Savings but will result
in a reduction of Capitol Federal Savings' interest expense and liabilities as
funds are transferred from interest-bearing certificates or other deposit
accounts.
MARKET FOR THE COMMON STOCK
Capitol Federal Financial and Capitol Federal Savings have never issued
capital stock, and, consequently, there is no established market for the common
stock at this time. Capitol Federal Financial 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 Capitol Federal
Financial, Capitol Federal Savings or any market maker. Accordingly, the number
of active buyers and sellers of the common stock at any particular time may be
limited. Capitol Federal Financial 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.
OUR POLICY REGARDING DIVIDENDS
Following completion of the reorganization, the board of directors of
Capitol Federal Financial 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, Capitol Federal Financial's and Capitol Federal Savings'
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 Capitol Federal Savings Bank MHC does
21
<PAGE>
not waive the receipt of any dividends from Capitol Federal Financial, the
amount of dividends payable by Capitol Federal Financial to public stockholders
may be reduced. Special cash dividends, stock dividends or returns of capital
may, to the extent permitted by Office of Thrift Supervision policy and
regulations, be paid in addition to, or in lieu of, regular cash dividends.
Capitol Federal Financial intends to file consolidated tax returns with Capitol
Federal Savings. Accordingly, it is anticipated that any cash distributions made
by Capitol Federal Financial 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 Capitol Federal Financial will depend, in large part,
upon receipt of dividends from Capitol Federal Savings, because Capitol Federal
Financial initially will have no source of income other than dividends from
Capitol Federal Savings, earnings from the investment of proceeds from the sale
of shares of common stock retained by Capitol Federal Financial, and interest
payments with respect to Capitol Federal Financial's loan to the employee stock
ownership plan. A regulation of the Office of Thrift Supervision imposes
limitations on "capital distributions" by savings institutions. See "How We Are
Regulated Limitations on Dividends and Other Capital Distributions."
Any payment of dividends by Capitol Federal Savings to Capitol Federal
Financial which would be deemed to be drawn out of Capitol Federal Savings' bad
debt reserves, would require a payment of taxes at the then-current tax rate by
Capitol Federal Savings on the amount of earnings deemed to be removed from the
reserves for such distribution. Capitol Federal Savings does not intend to make
any distribution to Capitol Federal Financial that would create such a federal
tax liability. See "Taxation."
CAPITOL FEDERAL SAVINGS BANK MHC
INTENDS TO WAIVE ANY DIVIDENDS FROM
CAPITOL FEDERAL FINANCIAL
The board of directors of Capitol Federal Savings Bank MHC will
determine whether Capitol Federal Savings Bank MHC will waive the receipt of
dividends declared by Capitol Federal Financial each time Capitol Federal
Financial declares a dividend. The board of directors of Capitol Federal Savings
Bank MHC presently intends to waive the receipt of dividends declared by Capitol
Federal Financial. Office of Thrift Supervision regulations require Capitol
Federal Savings Bank MHC to notify the Office of Thrift Supervision of any
proposed waiver of the right to receive dividends. It is the Office of Thrift
Supervision' 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
22
<PAGE>
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 Office of Thrift Supervision capital
distribution regulations; and
o in the event the mutual holding company converts to stock
form, the appraisal submitted to the Office of Thrift
Supervision in connection with the conversion transaction
takes into account the amount of the dividends waived by the
mutual holding company.
In addition, the Office of Thrift Supervision 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 would be exchanged for shares of common stock of the converted holding
company in a conversion transaction. The Office of Thrift Supervision 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 Capitol Federal Savings Bank 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 mutual holding company in a conversion transaction,
which adjustment will have the effect of diluting minority stockholders'
interests. The board of directors of Capitol Federal Savings Bank MHC has no
intention of converting to stock form. See "Capitol Federal Savings Bank MHC May
Consider Converting to Stock Form in the Future."
Capitol Federal Savings Bank MHC's board of directors may conclude that
a dividend waiver by Capitol Federal Savings Bank MHC, which permits retention
of capital by Capitol Federal Financial, is in the best interest of Capitol
Federal Savings Bank MHC's members because, among other reasons:
o Capitol Federal Savings Bank MHC has no need for the dividend
for its business operations;
o the cash that would be received could be invested by Capitol
Federal Financial more effectively; and
23
<PAGE>
o such waiver preserves the retained earnings of Capitol Federal
Savings Bank MHC through its principal asset (Capitol Federal
Financial), which would be available for distribution in the
unlikely event of a voluntary liquidation of Capitol Federal
Financial 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 Capitol Federal
Savings Bank MHC. There is no assurance that Capitol Federal Savings Bank MHC
will waive the receipt of the dividends.
Immediately after completion of the reorganization and the stock
issuance, it is expected that Capitol Federal Savings Bank MHC's operations will
consist of activities relating to its investment in, and control of, a majority
of the shares of common stock of Capitol Federal Financial, maintenance of books
and records relating to members of Capitol Federal Savings Bank MHC and
investing funds retained by it. In the future, Capitol Federal Savings Bank MHC
may accept dividends paid by Capitol Federal Financial 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 Capitol Federal Financial.
There can be no assurance that Capitol Federal Savings Bank MHC will accept
dividends paid by Capitol Federal Financial, or if such dividends are accepted,
that Capitol Federal Savings Bank MHC will purchase shares of common stock in
the open market. Any purchases of common stock other than from Capitol Federal
Savings Bank MHC will increase the percentage of Capitol Federal Financial's
outstanding shares of common stock held by Capitol Federal Savings Bank MHC and
increase the number of shares eligible to be sold in any subsequent offering or
mutual to stock conversion of Capitol Federal Savings Bank MHC. Any waiver of
dividends by Capitol Federal Savings Bank 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 mutual holding company in the event of a conversion
transaction, which adjustment will have the effect of diluting minority
stockholders' percentage ownership interest in the converted mutual holding
company's shares. See "Capitol Federal Savings Bank MHC May Consider Converting
to Stock Form in the Future."
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:
24
<PAGE>
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 employee
stock ownership plan, 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. on shares purchased by (1) the
employee stock ownership plan and any other employee benefit
plan of Capitol Federal Financial or Capitol Federal Savings,
(2) officers, directors, employees and members of their
immediate families or (3) the foundation;
o Charles Webb & Company 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 employee stock
ownership plan, employee benefit plans, officers, directors
and their immediate families and the foundation);
o Capitol Federal Financial 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 Charles
Webb & Company 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 Capitol
Federal Financial 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 Capitol Federal Financial and Capitol Federal Savings 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 employee stock ownership plan 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," Capitol
Federal Financial intends to make a loan to fund the purchase of 8.0% of the
common stock by the employee stock ownership plan and intends to retain $50
million of the net proceeds from the Offerings.
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<PAGE>
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 restricted stock plan, which is expected to be adopted by Capitol
Federal Financial 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 completion of the
reorganization. If the restricted stock plan is approved by stockholders, the
restricted stock plan 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 restricted stock plan are purchased in the open market at the purchase
price. No effect has been given to Capitol Federal Financial'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 restricted stock plan.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of Capitol Federal Financial
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.
26
<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>
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 employee stock
ownership plan.................................... (25,709) (30,246) (34,783) (40,000)
Shares purchased by the restricted stock plan.... (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 employee stock ownership plan
adjustment(3)....................................... (1,063) (1,250) (1,438) (1,653)
Pro forma restricted stock plan 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 Employee stock ownership plan
adjustment(3)....................................... (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan 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>
27
<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 foundation . 9,769 11,493 13,217 15,200
Less: Common stock acquired by the employee (25,709) (30,246) (34,783) (40,000)
stock ownership plan(3)........................
Common stock to be acquired by the
restricted stock plan(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 foundation . 0.13 0.13 0.13 0.13
Less: Common stock acquired by the employee (0.33) (0.33) (0.33) (0.33)
stock ownership plan(3)........................
Common stock to be acquired by the
restricted stock plan(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 employee stock ownership plan and (ii) the value of the shares to be
purchased by the restricted stock plan, 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. Capitol
Federal Financial 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
28
<PAGE>
represents shares issued to Capitol Federal Savings Bank MHC, shares
sold in the Offerings, shares contributed to the foundation and shares
to be allocated or distributed under the employee stock ownership plan
and restricted stock plan 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 employee stock ownership plan with funds loaned by
Capitol Federal Financial. Capitol Federal Financial and Capitol Federal
Savings intend to make annual contributions to the employee stock ownership
plan 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
employee stock ownership plan is payable over 15 years, with the employee
stock ownership plan 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 restricted stock plan 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 restricted stock plan
to purchase the shares initially will be contributed to the restricted
stock plan by Capitol Federal Financial. It is further assumed that the
shares were acquired by the restricted stock plan 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 restricted stock plan 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 restricted stock plan 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 Capitol Federal Savings Bank 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 employee stock ownership plan shares which
have not been committed for release during the year ended September 30,
1998. Thus, it is assumed at September 30, 1998 that 77,121,175 shares 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 employee stock ownership plan 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
Capitol Federal Savings on a fully converted basis, or 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 Capitol
Federal Financial following the reorganization and presented for approval
by stockholders at an annual or special meeting of stockholders of Capitol
Federal Financial held at least six months following the completion 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
restricted stock plan 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
29
<PAGE>
would be $11.94, $10.72, $9.81 and $9.02 at the minimum, midpoint,
maximum and 15% above the maximum of such range, respectively. See
"Management - Benefits -- Other Stock Benefit Plan."
(7) The retained earnings of Capitol Federal Savings will be substantially
restricted because certain distributions from Capitol Federal Savings'
retained earnings may be treated as being from its accumulated bad debt
reserve for tax purposes, which would cause Capitol Federal Savings 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 Capitol
Federal Savings for federal income tax purposes in the event of a
liquidation of Capitol Federal Savings. Pro forma retained earnings have
been reduced by $100,000 to reflect the proposed capitalization of
Capitol Federal Savings Bank 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 has estimated that
the pro forma aggregate market capitalization of Capitol Federal Financial would
be approximately $420.1 million at the midpoint, which is approximately $26.9
million greater than the pro forma aggregate market capitalization of Capitol
Federal Financial 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 Capitol Federal Financial 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.
30
<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.............................. 5,589,968 5,624,065 5,638,677 5,678,790 5,687,386 5,733,516 5,743,401 5,796,451
Total liabilities......................... 4,653,469 4,653,469 4,653,469 4,653,469 4,653,469 4,653,469 4,653,469 4,653,469
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
per share................................ 0.79 0.73 0.68 0.63 0.60 0.55 0.53 0.49
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
earnings per share(1)................ 12.66x 13.70x 14.71x 15.87x 16.67x 18.18x 18.87x 20.41x
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%
- ----------------
</TABLE>
(1) If the contribution to the foundation had been expensed during the year
ended September 30, 1998, the offering price to pro forma net earnings per
share would have been 17.70x, 21.85x, 26.43x and 32.43x at the minimum,
midpoint, maximum and maximum, as adjusted, respectively.
(2) If the contribution to the foundation had been expensed during the year
ended September 30, 1998, return on assets would have been 0.76%, 0.72%,
0.68% and 0.63% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the foundation had been expensed during the year
ended September 30, 1998, return on stockholders' equity would have been
4.55%, 4.12%, 3.73% and 3.33% at the minimum, midpoint, maximum and
maximum, as adjusted, respectively.
31
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Capitol
Federal Savings at September 30, 1998, and the pro forma consolidated
capitalization of Capitol Federal Financial 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>
Capitol Federal Financial - Pro Forma
Based Upon Sale at $10.00 Per Share
-------------- --------------- -------------- -------------- ------------
50,000,000
Capitol Federal 32,136,106 37,807,183 43,478,261 Shares(1)
Savings - 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:
Federal Home Loan Bank 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
employee stock ownership plan(6).............. --- (25,709) (30,246) (34,783) (40,000)
Common stock to be acquired by the
restricted stock plan(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.
32
<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 Capitol Federal
Financial's annual taxable income, subject to the ability of Capitol
Federal Financial 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 Capitol Federal Savings Bank MHC as its
initial capitalization upon completion of Capitol Federal Savings Bank MHC.
(6) Assumes that 8.0% of the common stock sold in the Offerings will be
purchased by the employee stock ownership plan, which is reflected as a
reduction from stockholders' equity. The employee stock ownership plan
shares will be purchased with funds loaned to the employee stock ownership
plan by Capitol Federal Financial. See "Pro Forma Data" and "Management -
Benefits -Employee Stock Ownership Plan."
(7) Capitol Federal Financial intends to adopt the restricted stock plan and to
submit such plan to stockholders at an annual or special meeting of
stockholders held at least six months following the completion of the
reorganization. If the plan is approved by stockholders, Capitol Federal
Financial intends to contribute sufficient funds to the restricted stock
plan 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
Capitol Federal Financial issues authorized but unissued shares of common
stock to the restricted stock plan 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."
CAPITOL FEDERAL SAVINGS
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At September 30, 1998, Capitol Federal Savings exceeded all of the
regulatory capital requirements applicable to it. The table on the following
page sets forth the historical regulatory capital of Capitol Federal Savings at
September 30, 1998 and the pro forma regulatory capital of Capitol Federal
Savings 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 Capitol Federal Savings of the net stock
issuance proceeds, minus expenses, the amounts to be loaned to the employee
stock ownership plan and contributed to the restricted stock plan and $50.0
million to be retained by Capitol Federal Financial. The pro forma risk-based
capital amounts assume the investment of the net proceeds received by Capitol
Federal Savings 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.
33
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1998
------------------ -------------------- ------------------ ------------------- --------------------
Historical at 32,136,106 Shares 37,807,183 Shares 43,487,261 Shares 50,000,000 Shares
September 30, 1998 Sold at Sold at Sold at Sold at
$10.00 per Share $10.00 per Share $10.00 per Share $10.00 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.................. $652,949 27.29% $870,611 35.52% $917,596 37.28% $964,581 39.02 $1,018,614 41.01%
Requirement............. 191,424 8.00 196,327 8.00 197,151 8.00 197,976 8.00 198,924 8.00
-------- ----- -------- ------ -------- ------ -------- ----- ---------- ------
Excess.................. $461,525 19.29% $674,284 27.52% $720,445 29.28% $766,605 31.02% 819,690 33.01%
- ----------------
<FN>
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
</FN>
</TABLE>
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OUR CORPORATE CHANGE AND STOCK OFFERING
General
The board of directors of Capitol Federal Savings adopted the Plan of
Reorganization and Stock Issuance Plan. Under this plan, Capitol Federal Savings
will reorganize into the federal mutual holding company structure as a wholly
owned subsidiary of Capitol Federal Financial, which in turn will be a
majority-owned subsidiary of Capitol Federal Savings Bank MHC. Following receipt
of all required regulatory approvals, the approval of the members of Capitol
Federal Savings entitled to vote on the plan of reorganization, and the
satisfaction of all other conditions precedent to the reorganization, Capitol
Federal Savings will complete the reorganization. Capitol Federal Savings in its
stock form will continue to conduct its business and operations from the same
offices with the same personnel as Capitol Federal Savings conducted prior to
the reorganization. The reorganization will not affect the balances, interest
rates or other terms of Capitol Federal Savings' loans or deposit accounts, and
the deposit accounts will continue to be insured by the FDIC. Capitol Federal
Savings Bank MHC initially will be capitalized with $100,000. When the
reorganization is completed, this capital will be used for general corporate
purposes.
Pursuant to the plan of reorganization, we will accomplish our
corporate change as follows or in any other manner that is consistent with
applicable federal law and regulations and the intent of the plan of
reorganization:
(1) Capitol Federal Savings 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 Capitol Federal Financial as a
wholly-owned subsidiary;
(4) Capitol Federal Savings will exchange its charter for a
federal stock savings bank charter to become Capitol Federal
Savings and Interim One will exchange its charter for a
federal mutual holding company charter to become Capitol
Federal Savings Bank MHC;
(5) simultaneously with step (4), Interim Two will merge with and
into Capitol Federal Savings with Capitol Federal Savings as
the resulting institution;
(6) all of the initially issued stock of Capitol Federal Savings
will be transferred to Capitol Federal Savings Bank MHC in
exchange for membership interests in Capitol Federal Savings
Bank MHC;
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(7) Capitol Federal Savings Bank MHC will contribute the capital
stock of Capitol Federal Savings to Capitol Federal Financial,
and Capitol Federal Savings will become a wholly-owned
subsidiary of Capitol Federal Financial; and
(8) contemporaneously with the reorganization, Capitol Federal
Financial will offer for sale in the Stock Offering shares of
common stock based on the pro forma market value of Capitol
Federal Financial and Capitol Federal Savings.
Capitol Federal Financial expects to receive the approval of the Office
of Thrift Supervision to become a savings and loan holding company and to own
all of the common stock of Capitol Federal Savings. Capitol Federal Financial
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 of reorganization.
The following is a 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 Capitol Federal Savings and at the Office of Thrift Supervision.
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 Capitol Federal Savings and the Office of
Thrift Supervision have approved the plan of reorganization, subject to approval
by the members of Capitol Federal Savings entitled to vote on the matter and the
satisfaction of certain other conditions. Office of Thrift Supervision approval,
however, does not constitute a recommendation or endorsement of the plan of
reorganization by the agency.
Our Reasons for the Corporate Change
As a mutual institution, Capitol Federal Savings 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 Capitol Federal Savings able to increase its capital position.
As a stock corporation upon completion of the reorganization, Capitol
Federal Savings 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 Capitol Federal Savings' or
Capitol Federal Financial's capital stock will allow Capitol Federal Savings the
flexibility to increase its capital position more rapidly than by accumulating
earnings and at times deemed advantageous by the board of directors of Capitol
Federal Savings. It will also support future growth and expanded operations,
including increased lending and investment activities, as business and
regulatory needs require. The ability to attract new capital also will help
Capitol Federal Savings address the needs of the communities it serves and
enhance its ability to make acquisitions or expand into new businesses. The
acquisition alternatives available to Capitol Federal Savings are quite limited
as a mutual institution, because of a
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requirement in Office of Thrift Supervision regulations that the surviving
institution in a merger involving a mutual institution generally must be in
mutual form. After the reorganization, Capitol Federal Savings will have
increased ability to merge with other mutual and stock institutions and Capitol
Federal Financial may acquire control of other mutual or stock savings
associations and retain the acquired institution as a separate subsidiary of
Capitol Federal Financial. Finally, the ability to issue capital stock will
enable Capitol Federal Savings to establish stock compensation plans for
directors, officers and employees, giving them equity interests in Capitol
Federal Savings and greater incentive to improve its performance. For a
description of the stock compensation plans which will be adopted by Capitol
Federal Savings in connection with the reorganization, see "Management."
Although Capitol Federal Savings' ability to raise capital and general business
flexibility will be improved by this reorganization, these 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. These advantages will also be limited by Capitol
Federal Financial'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 Capitol Federal Financial's ability to issue additional shares of common
stock in the future without additional issuances of stock to Capitol Federal
Savings Bank MHC.
The advantages of the reorganization also could be achieved if Capitol
Federal Savings were to reorganize into a wholly-owned subsidiary of a stock
holding company, known as a standard conversion, rather than as a second-tier
subsidiary of a mutual holding company. A standard conversion also would free
Capitol Federal Savings 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 Capitol Federal Financial. Nevertheless, the
board of directors of Capitol Federal Savings unanimously believes that the
reorganization is in the best interests of Capitol Federal Savings and its
account holders.
Office of Thrift Supervision 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. The amount of
equity capital that would be raised in a standard conversion would be
substantially more than the amount raised in a minority stock offering by a
subsidiary of a mutual holding company. A standard conversion would make it more
difficult for Capitol Federal Savings to maximize the return on its equity. A
standard conversion also would eliminate all aspects of the mutual form of
organization. Completion of the reorganization does not eliminate the
possibility of Capitol Federal Savings Bank MHC converting from mutual to stock
form in the future; however, a full conversion is not contemplated at this time.
See "Capitol Federal Savings Bank 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 holding company rather than as a second-tier subsidiary of a mutual
holding company, the board of directors of Capitol Federal Savings unanimously
approved the reorganization as being in the best interests of Capitol Federal
Savings and equitable to its account holders.
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Effects of the Corporate Change
General. The reorganization will have no effect on Capitol Federal
Savings' 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. Capitol Federal Savings will continue to
be subject to regulation, supervision and examination by the Office of Thrift
Supervision and the FDIC.
Deposits and Loans. Each holder of a deposit account in Capitol Federal
Savings at the time of the reorganization will continue as an account holder in
Capitol Federal Savings after the reorganization, and the reorganization will
not affect the deposit balance, interest rate or other terms of such accounts.
Each account will be insured by the FDIC to the same extent as before the
reorganization. Depositors in Capitol Federal Savings will continue to hold
their existing certificates, passbooks and other evidence of their accounts. The
reorganization will not affect the loan terms of any borrower from Capitol
Federal Savings. The amount, interest rate, maturity, security for and
obligations under each loan will remain as they existed prior to the
reorganization. See "-- Voting Rights" and "-- Depositors Rights if We
Liquidate" below for a discussion of the effects of the reorganization on the
voting and liquidation rights of the depositors of Capitol Federal Savings.
Continuity. During the reorganization and stock issuance process, the
normal business of Capitol Federal Savings of accepting deposits and making
loans will continue without interruption. Following completion of the
reorganization and stock issuance, Capitol Federal Savings will continue to be
subject to regulation by the Office of Thrift Supervision, and FDIC insurance of
accounts will continue without interruption. After the reorganization and stock
issuance, Capitol Federal Savings 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 Capitol Federal Savings will
serve as the board of directors of Capitol Federal Savings after the
reorganization and stock issuance. The initial members of the board of directors
of Capitol Federal Financial and Capitol Federal Savings Bank MHC will consist
of the individuals currently serving on the board of directors of Capitol
Federal Savings. After the reorganization, the voting stockholders of Capitol
Federal Financial will elect approximately one-third of Capitol Federal
Financial's directors annually, and approximately one-third of the directors of
Capitol Federal Savings Bank MHC will be elected annually by the members of
Capitol Federal Savings Bank MHC who will consist of certain of the former
Members of Capitol Federal Savings and all persons who become depositors of
Capitol Federal Savings after the reorganization. All current officers of
Capitol Federal Savings will retain their positions with Capitol Federal Savings
after the reorganization and stock issuance.
Voting Rights. After completion of the reorganization and stock
issuance, depositor and borrower members will have no voting rights in Capitol
Federal Savings or Capitol Federal Financial and, therefore, will not be able to
elect directors of Capitol Federal Savings or Capitol Federal Financial or to
control their affairs. Currently these rights are held by depositors and certain
borrowers of Capitol Federal Savings. After the reorganization and stock
issuance, voting
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rights will be vested exclusively in the stockholders of Capitol Federal
Financial, which will own all of the stock of Capitol Federal Savings. Each
holder of common stock will be entitled to vote on any matter to be considered
by the stockholders of Capitol Federal Financial, subject to the provisions of
Capitol Federal Financial's charter.
As a federally-chartered mutual holding company, Capitol Federal
Savings Bank MHC will have no authorized capital stock and no stockholders.
Capitol Federal Savings Bank MHC will be controlled by members of Capitol
Federal Savings, which include depositors and certain borrowers. These members
have generally signed proxies giving their voting rights to Capitol Federal
Savings' management. The revocable proxies that members of Capitol Federal
Savings have granted to the board of directors of Capitol Federal Savings give
the board of directors of Capitol Federal Savings general authority to cast a
member's vote on any and all matters presented to the members. These proxies are
deemed to cover the member's votes as members of Capitol Federal Savings Bank
MHC, and this authority is given to the board of directors of Capitol Federal
Savings Bank MHC. The plan of reorganization also provides for the transfer of
proxy rights to the board of directors of Capitol Federal Savings Bank MHC. As a
result, the board of directors of Capitol Federal Savings will be able to govern
the operations of Capitol Federal Savings Bank MHC, and Capitol Federal
Financial, notwithstanding objections raised by members of Capitol Federal
Savings Bank MHC or stockholders of Capitol Federal Financial, respectively, so
long as the board of directors has been appointed proxy for a majority of the
outstanding votes of members of Capitol Federal Savings Bank MHC and these
proxies have not been revoked. In addition, all persons who become depositors of
Capitol Federal Savings following the reorganization will have membership rights
with respect to Capitol Federal Savings Bank MHC. Borrowers who were borrowers
of Capitol Federal Savings under its existing charter immediately prior to the
reorganization and whose loans continue in existence are members of Capitol
Federal Savings and will have membership rights in Capitol Federal Savings Bank
MHC; all other borrowers are not members of Capitol Federal Savings and will not
receive membership rights in Capitol Federal Savings Bank MHC.
Depositors' Rights if We Liquidate. In the event of a voluntary
liquidation of Capitol Federal Savings prior to the reorganization, holders of
deposit accounts in Capitol Federal Savings would be entitled to distribution of
any assets of Capitol Federal Savings remaining after the claims of depositors
and all other creditors are satisfied. Following the reorganization, the holder
of Capitol Federal Savings' common stock, which will be Capitol Federal
Financial, would be entitled to any assets remaining upon a liquidation,
dissolution or winding up of Capitol Federal Savings and, except through their
liquidation interests in Capitol Federal Savings Bank MHC, discussed below,
holders of deposit accounts in Capitol Federal Savings would not have any
interest in these assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Capitol Federal Savings Bank MHC following completion of the
reorganization, holders of deposit accounts in Capitol Federal Savings would be
entitled, pro rata to the value of their accounts, to distribution of any assets
of Capitol Federal Savings Bank MHC remaining after the claims of all creditors
of Capitol Federal Savings Bank MHC are satisfied. Stockholders of
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Capitol Federal Financial will have no liquidation or other rights with respect
to Capitol Federal Savings Bank MHC solely as stockholders.
In the event of a liquidation, dissolution or winding up of Capitol
Federal Financial, each holder of shares of the common stock would be entitled
to receive, after payment of all debts and liabilities of Capitol Federal
Financial, a pro rata portion of all assets of Capitol Federal Financial
available for distribution to holders of the common stock.
There currently are no plans to liquidate Capitol Federal Savings,
Capitol Federal Financial or Capitol Federal Savings Bank MHC in the future.
Tax Effects of Our Corporate Change and Stock Offering. Capitol Federal
Savings 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 Capitol Federal
Savings, Capitol Federal Financial and Capitol Federal Savings Bank MHC, and as
to the generally applicable material federal income tax consequences of the
reorganization and stock issuance to Capitol Federal Savings' account holders
and to persons who purchase common stock in the Offering.
The opinion provides that, among other things:
o Capitol Federal Savings' adoption of a charter in stock form,
known as 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 Capitol Federal Savings
or the stock bank in the bank conversion;
o no gain or loss will be recognized by the depositors of
Capitol Federal Savings on the receipt of equity interests
with respect to Capitol Federal Savings Bank MHC in exchange
for their equity interests surrendered therefor;
o the receipt of stock by depositors for equity interests in
Capitol Federal Savings Bank MHC will constitute a tax-free
exchange of property solely for voting "stock" pursuant to
Internal Revenue Code Section 351;
o the transfer by Capitol Federal Savings Bank MHC of the stock
bank's stock to Capitol Federal Financial will constitute a
tax-free exchange of property solely for voting stock pursuant
to Internal Revenue Code Section 351;
o Capitol Federal Savings Bank MHC will recognize no gain or
loss upon the transfer of the stock bank stock to Capitol
Federal Financial in exchange for common stock pursuant to
Internal Revenue Code Section 351;
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o Capitol Federal Financial will recognize no gain or loss upon
its receipt of stock bank stock from Capitol Federal Savings
Bank MHC in exchange for common stock;
o Capitol Federal Financial 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 Capitol Federal Savings'
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 Capitol Federal
Savings 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 Capitol
Federal Savings and upon certain assumptions and qualifications, including that
the reorganization and stock issuance are completed in the manner and according
to the terms provided in the plan of reorganization. This opinion is also based
upon the Internal Revenue Code, regulations now in effect or proposed, current
administrative rulings and practice and judicial authority, all of which are
subject to change and any 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 this opinion, or that this opinion will be upheld
by the courts if challenged by the IRS.
Capitol Federal Savings 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.
Capitol Federal Financial and Capitol Federal Savings have received a
letter from RP Financial, stating its belief that the subscription rights do not
have any value, based on the fact that these rights are acquired by the
recipients without cost, are nontransferable and of short duration, and give 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
these 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 Capitol Federal Financial and Capitol
Federal Savings could recognize gain on any distribution. Eligible subscribers
are encouraged to consult with their own tax advisor as to the tax consequences
in the event that 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 in the letter. In the
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event of any disagreement, there can be no assurance that the IRS would not
prevail in a judicial or administrative proceeding.
Capitol Federal Foundation
General. Continuing Capitol Federal Savings' commitment to the
communities that it serves, the plan of reorganization provides that Capitol
Federal Savings and Capitol Federal Financial 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
total value of shares of common stock sold in the Offerings. By increasing
Capitol Federal Savings' visibility and reputation in the communities that it
serves, Capitol Federal Savings believes that the foundation will improve the
long-term value of Capitol Federal Savings' community banking franchise.
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 Capitol Federal Savings. Traditionally, Capitol Federal Savings has
emphasized community lending and community development activities within the
communities that it serves. The foundation is being formed as a complement to
Capitol Federal Savings' existing community activities. Capitol Federal Savings
believes that the foundation will enable Capitol Federal Financial and Capitol
Federal Savings to assist their local communities in areas beyond community
development and lending. Capitol Federal Savings believes the establishment of
the foundation will help increase its activities in the affordable housing area.
The board of directors believes the establishment of a charitable
foundation is consistent with Capitol Federal Savings' commitment to community
service. The board also believes that the funding of the foundation with common
stock of Capitol Federal Financial is a means of enabling the communities served
by Capitol Federal Savings to share in the growth and success of Capitol Federal
Financial long after completion of the reorganization. The foundation will
accomplish that goal by providing for continued ties between the foundation and
Bank, forming a partnership with Capitol Federal Savings' communities. The
establishment of the foundation will also enable Capitol Federal Financial and
Capitol Federal Savings to develop a unified charitable donation strategy.
Capitol Federal Savings, however, does not expect the contribution to the
foundation to take the place of Capitol Federal Savings' traditional community
charitable activities. In this respect, subsequent to the reorganization,
Capitol Federal Savings 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
Capitol Federal Financial and Capitol Federal Savings' 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
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President - Community Development Director of Capitol Federal Savings) 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 after completion of the reorganization.
Capitol Federal Savings currently intends that less than a majority of Capitol
Federal Savings' 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 Capitol
Federal Savings. No determination has been made what, if any, compensation the
foundation directors will receive. The articles of incorporation of the
foundation provide that the corporation is organized exclusively for charitable
purposes, including community development, as set forth in Section 501(c)(3) of
the Internal Revenue Code. The foundation's articles of incorporation also
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 will be made by the foundation to any director, officer or
employee of Capitol Federal Financial or Capitol Federal Savings or any
affiliate thereof. In addition, any of these 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 Office of Thrift Supervision.
The authority for the affairs of the foundation will be vested in the
board of directors of the foundation. The directors of the foundation will be
responsible for establishing the policies of the foundation with respect to
grants or donations by the foundation, consistent with the purposes for which
the foundation was established. Although no formal policy governing foundation
grants exists at this time, the foundation's board of directors will adopt such
a policy upon establishment of the foundation. As directors of a nonprofit
corporation, directors of the foundation will at all times be bound by their
fiduciary duty to advance the foundation's charitable goals, to protect the
assets of the foundation and to act in a manner consistent with the charitable
purposes for which the foundation is established. The directors of the
foundation will also be responsible for directing the activities of the
foundation, including the management of the common stock of Capitol Federal
Financial held by the foundation. However, it is expected that as a condition to
receiving the approval of the Office of Thrift Supervision to Capitol Federal
Savings' reorganization, the foundation will be required to commit to the Office
of Thrift Supervision that all shares of common stock held by the foundation
will be voted in the same ratio as all other shares of Capitol Federal
Financial's common stock on all proposals considered by stockholders of Capitol
Federal Financial; provided, however, that, consistent with this expected
condition, the Office of Thrift Supervision would waive this voting restriction
under certain circumstances if compliance with the voting restriction would:
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o cause a violation of the law of the State of Kansas and the
Office of Thrift Supervision 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 Internal Revenue Code.
In order for the Office of Thrift Supervision to waive such voting restriction,
Capitol Federal Financial's or the foundation's legal counsel would be required
to render an opinion satisfactory to the Office of Thrift Supervision that
compliance with the voting requirement would have the effect described above.
Under those circumstances, the Office of Thrift Supervision would grant a waiver
of the voting restriction upon submission of such legal opinions(s) by Capitol
Federal Financial or the foundation that are satisfactory to the Office of
Thrift Supervision. In the event that the Office of Thrift Supervision 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 Capitol Federal Savings' executive offices and initially the foundation is
expected to have no separate employees but will utilize the staff of Capitol
Federal Savings and will pay Capitol Federal Savings for the value of these
services. The board of directors of the foundation expects to hire a full time
executive director. The board of directors of the foundation will appoint any
officers as may be necessary to manage the operations of the foundation. In this
regard, it is expected that Capitol Federal Savings will be required to provide
the Office of Thrift Supervision with a commitment that, to the extent
applicable, Capitol Federal Savings will comply with the affiliate restrictions
set forth in Sections 23A and 23B of the Federal Reserve Act with respect to any
transactions between Capitol Federal Savings and the foundation.
Capitol Federal Financial intends to capitalize the foundation with an
amount equal to 8.0% of the 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
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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 Internal Revenue 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 this minimum
return will require substantial federal taxes to be paid. Upon completion of the
reorganization and the stock issuance and the contribution of shares of common
stock to the foundation, Capitol Federal Financial 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 Capitol Federal Financial will have an
increased number of shares outstanding, the voting and ownership interests of
minority stockholders in Capitol Federal Financial's common stock would be
diluted to 41.31% as compared to a 42.01% interest in Capitol Federal Financial
if the foundation was not established. For additional discussion of the dilutive
effect, see "Pro Forma Data."
Tax Considerations. Capitol Federal Financial and Capitol Federal
Savings 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 Internal Revenue Code, and
further that such an organization should be classified as a private foundation
as defined in Section 509 of the Internal Revenue 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. Capitol
Federal Financial's and Capitol Federal Savings' 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 Capitol Federal
Financial held by the foundation must be voted in the same ratio as all other
outstanding shares of common stock of Capitol Federal Financial on all proposals
considered by stockholders of Capitol Federal Financial. Consistent with the
expected condition, in the event that Capitol Federal Financial 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 Internal Revenue Code, it is expected that the Office of Thrift Supervision
would waive such voting restriction upon submission of a legal opinion(s) by
Capitol Federal Financial or the foundation satisfactory to the Office of Thrift
Supervision. See "-- Regulatory Conditions Imposed on the Foundation."
Under the Internal Revenue Code, Capitol Federal Financial 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 Capitol Federal Financial in excess of the
annual deductible amount will be deductible over each of the five succeeding
taxable years, subject to certain limitations. Capitol Federal Financial and
Capitol Federal Savings 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
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reorganization. In making this determination, Capitol Federal Financial and
Capitol Federal Savings 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 this consideration, Capitol
Federal Financial and Capitol Federal Savings believe that the contribution to
the foundation in excess of the 10% annual deduction limitation is justified
given Capitol Federal Savings' 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 Capitol
Federal Savings. In this regard, assuming the sale of shares at the maximum of
the estimated offering range, Capitol Federal Financial would have pro forma
stockholders' equity of $1.03 billion or 18.18% of pro forma consolidated assets
and Capitol Federal Savings' pro forma tangible, core and total risk-based
capital ratios would be 16.67%, 16.67% and 38.93%, respectively. See "Capitol
Federal Savings Exceeds All Regulatory Capital Requirements," "Capitalization,"
"Pro Forma Data," and "Comparison of Valuation and Pro Forma Information With No
Foundation." Capitol Federal Financial and Capitol Federal Savings believe that
the amount of the charitable contribution is reasonable given Capitol Federal
Financial's and Capitol Federal Savings' pro forma capital positions. Capitol
Federal Financial and Capitol Federal Savings believe that the contribution does
not raise safety and soundness concerns.
Capitol Federal Financial and Capitol Federal Savings have received an
opinion from their outside tax advisors that Capitol Federal Financial's
contribution of its own stock to the foundation should not constitute an act of
self-dealing. Capitol Federal Financial 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 Capitol Federal Financial
for the stock, subject to the annual deduction limitation described above.
Capitol Federal Financial, however, would be able to carryforward any unused
portion of the deduction for five years following the contribution, subject to
certain limitations. Capitol Federal Financial's and Capitol Federal Savings'
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, Capitol Federal Financial would have
received tax benefits of approximately $13.2 million based on Capitol Federal
Savings' 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,
Capitol Federal Financial estimates that all of the contribution should be
deductible over the six-year period. Capitol Federal Financial and/or Capitol
Federal Savings may make further contributions to the foundation following the
initial contribution. In addition, Capitol Federal Savings and Capitol Federal
Financial 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 Capitol Federal Financial and Capitol
Federal Savings at that time, the interests of stockholders and depositors of
Capitol Federal Financial and Capitol Federal Savings, and the financial
condition and operations of the foundation.
Although Capitol Federal Financial and Capitol Federal Savings have
received an opinion of their outside tax advisors that Capitol Federal Financial
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
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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 also 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 Office of Thrift
Supervision' approval of the reorganization:
(1) the foundation will be subject to examination by the Office of
Thrift Supervision;
(2) the foundation must comply with supervisory directives imposed
by the Office of Thrift Supervision;
(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 Capitol
Federal Financial; provided, however, that, consistent with
the condition, the Office of Thrift Supervision 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 Office of Thrift Supervision determines that
federal law would not preempt the application of the
laws of Kansas to the foundation;
o cause the foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence
on the foundation; or
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o cause the foundation to be subject to an excise tax
under Section 4941 of the Internal Revenue Code; and
(5) any shares of common stock subsequently purchased by the
foundation will be aggregated with any shares repurchased by
Capitol Federal Financial or Capitol Federal Savings for
purposes of calculating the number of shares which may be
repurchased during the three-year period subsequent to
reorganization.
In order for the Office of Thrift Supervision to waive the voting restriction,
Capitol Federal Financial's or the foundation's legal counsel would be required
to give an opinion satisfactory to the Office of Thrift Supervision. While there
is no current intention for Capitol Federal Financial or the foundation to seek
a waiver from the Office of Thrift Supervision from these restrictions, there
can be no assurances that a legal opinion addressing these issues could be
given, or if given, that the Office of Thrift Supervision would grant an
unconditional waiver of the voting restriction. If the voting restriction is
waived or becomes unenforceable, the Office of Thrift Supervision 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 Capitol Federal Financial, Capitol Federal Savings or any
affiliate or impose other conditions relating to control of the foundation's
common stock as are determined by the Office of Thrift Supervision 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 Office of Thrift Supervision regulations may be deemed to apply
to the foundation including regulations regarding:
o transactions with affiliates;
o conflicts of interest;
o capital distributions; and
o repurchases of capital stock within the three-year period
subsequent to the stock issuance.
Because only two of the directors of Capitol Federal Financial and Capitol
Federal Savings are expected to serve as directors of the foundation, Capitol
Federal Financial and Capitol Federal Savings do not believe that the foundation
should be considered an affiliate of Capitol Federal Savings. Capitol Federal
Financial and Capitol Federal Savings anticipate that the foundation's affairs
will be conducted in a manner consistent with the Office of Thrift Supervision'
conflict of interest regulations. Capitol Federal Savings has provided
information to the Office of Thrift Supervision demonstrating that the initial
contribution of common stock to the foundation would be within the amount which
Capitol Federal Savings would be permitted to make as a capital distribution
assuming such contribution is deemed to have been made by Capitol Federal
Savings.
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How We Determined Our Price and the Number of Shares to be Issued in the Stock
Offering
The plan of reorganization requires that the purchase price of the
common stock must be based on the appraised pro forma market value of Capitol
Federal Financial and Capitol Federal Savings, as determined on the basis of an
independent valuation. Capitol Federal Savings has retained RP Financial to make
this valuation. For its services in making this appraisal, RP Financial's fees
and out-of-pocket expenses are estimated to be $117,500. Capitol Federal Savings
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 Capitol Federal Savings 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:
o the present and projected operating results and financial
condition of Capitol Federal Financial and Capitol Federal
Savings and the economic and demographic conditions in Capitol
Federal Savings' existing marketing areas;
o certain historical, financial and other information relating to
Capitol Federal Savings; a comparative evaluation of the
operating and financial statistics of Capitol Federal Savings
with those of other similarly situated publicly traded mutual
holding companies;
o the aggregate size of the offering of the common stock;
o the impact of the reorganization on Capitol Federal Savings' net
worth and earnings potential;
o the proposed dividend policy of Capitol Federal Financial and
Capitol Federal Savings; and
o 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 listed above, and the board of directors
believes that these assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised Capitol Federal
Financial and Capitol Federal Savings that in its opinion, dated November 20,
1998, the estimated pro forma
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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 Capitol Federal Savings
determined that the common stock should be sold at $10.00 per share and that
42.01% of the to-be-outstanding shares, prior to the contribution to the
foundation, should be offered to minority stockholders. Based on the estimated
valuation range and the purchase price, the number of shares of common stock
that Capitol Federal Financial 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 Capitol Federal Savings Bank 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
Capitol Federal Financial's common stock that are not sold in the Offerings or
contributed to the foundation will be issued to Capitol Federal Savings Bank
MHC. The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision, if required, or if necessitated by subsequent
developments in the financial condition of Capitol Federal Financial and Capitol
Federal Savings or market conditions generally, or to fill the order of the
employee stock ownership plan. 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.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, in the event Capitol Federal
Financial 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%), Capitol Federal Financial
may be required by the Office of Thrift Supervision to accept all such orders.
No assurances, however, can be made that Capitol Federal Financial 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 Capitol Federal Financial'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 Office of Thrift Supervision. 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 employee stock ownership plan. 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 these shares.
RP Financial did not independently verify the consolidated financial statements
and other information provided by Capitol Federal Savings, nor did RP Financial
value independently the assets or liabilities of Capitol Federal Savings. The
valuation considers Capitol Federal Savings as a going concern and should not be
considered as an indication of the liquidation value of Capitol Federal Savings.
Moreover, because this 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
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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
valuation described above.
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 employee stock ownership plan,
without the resolicitation of subscribers. See "-- Limitations on 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 completion 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 Capitol Federal Financial and Bank. If
this confirmation is not received, Capitol Federal Financial 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 any
other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start 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 reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at Capitol Federal Savings' 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 Office of Thrift Supervision. 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 employee stock
ownership plan, 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 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 Capitol Federal Financial'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 Capitol Federal Financial'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
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"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, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Capitol Federal Savings and the other locations specified under
"Additional Information."
Subscription Offering and Subscription Rights
Under the plan of reorganization, rights to subscribe for the purchase
of common stock have been granted to the following persons in the following
order of descending priority:
o depositors of Capitol Federal Savings 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 Capitol Federal Savings with account balances
of at least $50.00 as of the close of business on December
31, 1998 ("Supplemental Eligible Account Holders"),
o borrowers as of January 6, 1993 who continue as borrowers
and depositors of Capitol Federal Savings as of the close of
business on January 31, 1999, other than Eligible Account
Holders or Supplemental Eligible Account Holders ("Other
Members") and
o Directors, Officers and Employees of Capitol Federal
Savings.
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 of reorganization and as described below under "--
Limitations on Stock Purchases."
Preference Category No.1: Eligible Account Holders. Each Eligible
Account Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $500,000 or 50,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 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
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all Eligible Account Holders in Capitol Federal Savings 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 Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining after each subscribing Eligible Account Holder
has been allocated the lesser of the number of shares subscribed for or 100
shares will be allocated among the subscribing Eligible Account Holders pro rata
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all subscribing Eligible Account Holders whose subscriptions remain unfilled.
Subscription Rights of Eligible Account Holders will be subordinated to the
priority rights of Tax-Qualified Employee 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 Capitol Federal
Savings 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 employee stock ownership plan 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 employee stock ownership plan
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 Capitol Federal Savings' 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 of reorganization 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
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shares offered in the Offerings is increased to an amount greater than the
number of shares representing the maximum of the estimated offering range, each
Tax-Qualified Employee Plan will have a priority right to purchase any such
shares exceeding the maximum of the estimated offering range 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:
(1) $500,000 or 50,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator of which is the total amount
of qualifying deposits of all Supplemental Eligible Account
Holders in Capitol Federal Savings 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 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
Capitol Federal Financial common stock, up to the greater of $500,000 or 50,000
shares of common stock or one-tenth of one percent of the total offering of
shares of common stock in the Stock Offering, subject to the overall purchase
limitations. See "-- Limitations on Stock Purchases."
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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 January 31, 1999, the date for determining voting members entitled
to vote at the special meeting, which we call 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 Capitol
Federal Savings' mutual charter and bylaws in effect on the date of approval by
members of the plan of reorganization.
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 Capitol Federal Savings as of the date of the
commencement of the Subscription Offering shall be entitled to receive, without
payment, 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 of reorganization as they may fall within
higher priority categories, and the plan of reorganization generally allows such
persons to purchase in the aggregate up to 25% of common stock sold in the
Offering. See "-- Limitations on 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, central time, on March 17, 1999 (the "Subscription
Expiration Date"), unless extended for up to 45 days or for such additional
periods by Capitol Federal Financial and Capitol Federal Savings as may be
approved by the Office of Thrift Supervision. The Subscription Offering may not
be extended beyond March 17, 2001. Subscription rights which have not been
exercised prior to the Subscription Expiration Date (unless extended) will
become void.
Capitol Federal Financial and Capitol Federal Savings 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 this period is extended with the consent of the Office of Thrift
Supervision, all funds delivered to Capitol Federal Savings 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, Capitol
Federal Financial and Capitol Federal Savings will notify subscribers of the
extension of time and of any rights of subscribers to modify or rescind their
subscriptions.
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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 Capitol Federal Savings anticipate that
they will offer shares pursuant to the plan of reorganization to certain members
of the general public, with preference given to natural persons residing in the
State of Kansas, in the counties in which Capitol Federal Savings has offices or
in any contiguous counties. These natural persons are referred to as Preferred
Subscribers. 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 Capitol
Federal Financial and Capitol Federal Savings 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, Capitol Federal Financial and Capitol Federal Savings 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 Capitol Federal
Financial and Capitol Federal Savings, 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 Capitol Federal Financial and
Capitol Federal Savings, and shall commence concurrently with, during or
promptly after the Subscription Offering.
In the event of an oversubscription for shares in the Direct Community
Offering, shares may be allocated, to the extent shares remain available, first
to each Preferred Subscriber whose order is accepted by Capitol Federal
Financial. 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 of reorganization 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. We call this
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. Capitol Federal Financial and Capitol Federal
Savings, in their sole discretion, have the right to reject orders in whole or
in part received in the Public Offering. Neither Charles Webb & Company nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of common stock in the Public Offering; however, Charles Webb & Company
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
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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 Purchases."
Charles Webb & Company may enter into agreements with broker-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, Charles Webb & Company 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 Capitol Federal Financial as of a certain order date for the
purchase of shares of Capitol Federal Financial common stock. When, and if,
Charles Webb & Company and Capitol Federal Savings believe that enough
indications of interest and orders have not been received in the Subscription
and Direct Community Offerings to consummate the reorganization, Charles Webb &
Company 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 deposit funds to the account established
by Capitol Federal Savings for each selected dealer. Each customer's funds
forwarded to Capitol Federal Savings, 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 Capitol Federal
Savings from selected dealers, funds will earn interest at Capitol Federal
Savings' passbook rate until the completion 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 Capitol Federal
Savings with the approval of the Office of Thrift Supervision. See "-- How We
Determined Our Price and the Number of Shares to be Issued in the Stock
Offering" above for a discussion of rights of subscribers, if any, in the event
an extension is granted.
Persons Who are Not Permitted to Participate in the Stock Offering
Capitol Federal Savings 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 of reorganization reside. However,
Capitol Federal Savings 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:
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<PAGE>
o the number of persons otherwise eligible to subscribe for shares
under the plan of reorganization 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
Capitol Federal Financial and Capitol Federal Savings 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
Capitol Federal Savings 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, Capitol Federal Savings will base its decision as to whether or not to
offer the common stock in that 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 Capitol Federal
Savings, its officers, directors or employees as brokers, dealers or salesmen.
Limitations on Stock Purchases
The plan of reorganization includes the following limitations on the
number of shares of Capitol Federal Financial 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 shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of:
(a) $500,000 or 50,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares of
common stock; or
(c) 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 Capitol Federal
Savings 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 employee stock
ownership plan, may purchase in the aggregate up to 10% of the
shares of common stock sold in
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<PAGE>
the stock issuance, including any additional shares issued in the
event of an increase in the estimated offering range; although at
this time the employee stock ownership plan 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:
(a) $500,000 or 50,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares of
common stock; or
(c) 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 Capitol Federal Savings 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 $500,000 or 50,000 shares of common
stock or one-tenth of one percent 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 Capitol Federal Financial common
stock subscribed for or purchased in all categories of the Stock
Offering by any person, together with associates of and groups of
persons acting in concert with such persons, shall not exceed
$5,000,000 or 500,000 shares of common stock offered in the Stock
Offering; and
(8) No more than 15% of the total number of shares offered for sale
in the Subscription Offering may be purchased by directors,
officers and employees of Capitol Federal Savings 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 Capitol
Federal Savings and their associates in the aggregate, excluding
purchases by the Tax-Qualified Employee Plans.
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<PAGE>
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
Capitol Federal Savings, the boards of directors of Capitol Federal Financial
and Capitol Federal Savings 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 Capitol Federal
Savings, Capitol Federal Financial, Capitol Federal Savings Bank
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 Capitol Federal Savings, Capitol Federal Savings
Bank MHC, Capitol Federal Financial or any subsidiary of Capitol
Federal Savings Bank MHC or Capitol Federal Financial or any
affiliate thereof; and
o any person acting in concert with any of the persons or entities
specified 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 Capitol Federal
Savings, Capitol Federal Financial or Capitol Federal Savings Bank MHC, to the
extent provided in the plan of reorganization. When used to refer to a person
other than an officer or director of Capitol Federal Savings 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 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 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
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<PAGE>
concert shall be made solely by the board of directors of Capitol Federal
Savings 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
Capitol Federal Financial and Capitol Federal Savings have retained
Charles Webb & Company to consult with and to advise Capitol Federal Savings,
and to assist Capitol Federal Financial, on a best efforts basis, in the
distribution of the shares of common stock in the Subscription and Direct
Community Offerings. The services that Charles Webb & Company will provide
include, but are not limited to:
o training the employees of Capitol Federal Savings 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 centers 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 Capitol Federal
Savings' members for use at the special meeting.
For its services, Charles Webb & Company will receive a management fee of
$100,000 and a success fee of 1.25% of the aggregate purchase price of the
shares of Capitol Federal Financial 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 Capitol
Federal Savings and members of their immediate families as well as shares issued
to the foundation. The success fee paid to Charles Webb & Company 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 Capitol Federal Financial common
stock in the Direct Community Offering, these dealers will be paid a fee of up
to 5.5% of the total purchase price of the shares sold by such dealers. Capitol
Federal Savings has agreed to indemnify Charles Webb & Company against certain
claims or liabilities, including certain liabilities under the Securities Act of
1933, as amended, and will contribute to payments Charles Webb & Company may be
required to make in connection with any such claims or liabilities.
Sales of shares of Capitol Federal Financial common stock will be made
by registered representatives affiliated with Charles Webb & Company or by the
broker-dealers managed by Charles Webb & Company. Charles Webb & Company has
undertaken that the shares of Capitol Federal Financial 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 Capitol Federal Savings in Topeka, in Wichita and in the Kansas
City metropolitan area. Capitol Federal Financial will rely on Rule 3a4-1 of the
Securities Exchange Act of 1934 and sales of Capitol Federal Financial common
stock will be conducted within the
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<PAGE>
requirements of this Rule, so as to permit officers, directors and employees to
participate in the sale of Capitol Federal Financial common stock in those
states where the law permits. No officer, director or employee of Capitol
Federal Financial or Capitol Federal Savings 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 Securities Exchange Act of 1934, 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 Capitol Federal Savings,
which may be given by completing the appropriate blanks in the order form, must
be received by Capitol Federal Savings by noon, central time, on the
Subscription Expiration Date, unless extended. In addition, Capitol Federal
Financial and Capitol Federal Savings will require a prospective purchaser to
execute a certification in the form required by applicable Office of Thrift
Supervision regulations in connection with any sale of common stock. Order forms
which are not received by this time or are executed defectively or are received
without full payment or appropriate withdrawal instructions are not required to
be accepted. In addition, Capitol Federal Savings will not accept orders
submitted on photocopied or facsimiled order forms nor order forms unaccompanied
by an executed certification form. Capitol Federal Savings 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 Capitol Federal
Savings, unless the reorganization has not been completed within 45 days after
the end of the Subscription Offering, or this 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 and certain borrowers as of the close of
business on the Voting Record Date (January 31, 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;
o by authorization of withdrawal from deposit accounts maintained
with Capitol Federal Savings (including a certificate of
deposit); or
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o in cash, if delivered in person at any full-service banking
office of Capitol Federal Savings, although we request that you
exchange cash for a check with any of our tellers;
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check or money order at our then-current passbook yield from the date
payment is received until completion of the Offerings. 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 Capitol
Federal Financial common stock has been sold or the plan of reorganization is
terminated, whichever is earlier.
If a subscriber authorizes Capitol Federal Savings to withdraw the
amount of the purchase price from his deposit account, Capitol Federal Savings
will do so as of the effective date of the reorganization. Capitol Federal
Savings will waive any applicable penalties for early withdrawal from
certificate accounts.
In the event of an unfilled amount of any subscription order, Capitol
Federal Savings will make an appropriate refund or cancel an appropriate portion
of the related withdrawal authorization, after completion of the Offerings. If
for any reason the Offerings are not consummated, purchasers will have refunded
to them all payments made, with interest, and all withdrawal authorizations will
be canceled in the case of subscription payments authorized from accounts at
Capitol Federal Savings.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the Subscription and Direct Community Offerings, if all
shares are sold, or upon completion 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 Capitol Federal Financial common stock in the Subscription
and Direct Community Offerings. ERISA provisions and IRS regulations require
that officers, directors and 10% stockholders who use self-directed IRA funds to
purchase shares of common stock in the Offerings make such purchases for the
exclusive benefit of the IRAs. IRAs maintained at Capitol Federal Savings are
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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 Capitol Federal Savings 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 Office of Thrift
Supervision, 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 of reorganization 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.
Capitol Federal Savings will refer to the Office of Thrift Supervision
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 Offerings will be
mailed by Capitol Federal Financial'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 completion of the reorganization. Any certificates
returned as undeliverable will be held by Capitol Federal Financial until
claimed by persons legally entitled to them or otherwise disposed of in
accordance with applicable law. Until certificates for common stock are
available and delivered to subscribers, they 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 Office of Thrift Supervision are required in
order to consummate the reorganization. The Office of Thrift Supervision has
approved the plan of reorganization, subject to approval by Capitol Federal
Savings' members and other standard conditions. Capitol Federal Financial's
holding company application is currently pending.
Capitol Federal Financial is required to make certain filings with
state securities regulatory authorities in connection with the issuance of
Capitol Federal Financial common stock in the Offerings.
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Judicial Review
Any person hurt by a final action of the Office of Thrift Supervision
which approves, with or without conditions, or disapproves a plan of
reorganization may obtain review of this action by filing in the court of
appeals of the United States for the circuit in which the principal office or
residence of the person is located, or in the United States Court of Appeals for
the District of Columbia, a written petition asking that the final action of the
Office of Thrift Supervision be modified, terminated or set aside. This petition
must be filed within 30 days after the publication of notice of 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
promptly transmitted to the Office of Thrift Supervision by the clerk of the
court and then the Office of Thrift Supervision 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 Office of Thrift Supervision.
Review of these 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 Corporate Change
All shares of common stock purchased in connection with the
reorganization by a director or an executive officer of Capitol Federal
Financial and Capitol Federal Savings 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 the director or officer or pursuant to a merger or
similar transaction approved by the Office of Thrift Supervision. 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 the
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 the restricted stock
will be subject to the same restrictions.
Purchases of common stock of Capitol Federal Financial 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 Office of
Thrift Supervision. This restriction does not apply, however, to negotiated
transactions involving more than 1% of Capitol Federal Financial's outstanding
common stock or to certain purchases of stock pursuant to an employee stock
benefit plan.
Pursuant to Office of Thrift Supervision regulations, Capitol Federal
Financial 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 (a) an offer to all stockholders on a pro rata basis which is
approved by the Office of Thrift Supervision (provided, however, that Capitol
Federal Savings Bank MHC may be excluded with the approval of the Office of
Thrift Supervision) or (b) the repurchase of qualifying shares of a director, if
any.
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The above limitations are subject to Office of Thrift Supervision
policies which generally provide that Capitol Federal Financial 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 Capitol Federal Savings to become
undercapitalized; and
o Capitol Federal Savings provides to the Regional Director of the
Office of Thrift Supervision 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 Office of Thrift Supervision may permit stock repurchases in excess of such
amounts prior to the third anniversary of the reorganization if exceptional
circumstances are shown to exist.
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PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of Capitol Federal Savings'
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 At the Maximum of
Estimated Offering Range Estimated Offering Range
------------------------ ------------------------
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ---------------------------------- ------------------ -------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
- ------------------
<FN>
* Less than 1.0%
</FN>
</TABLE>
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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 ..................... 2,462 56 865
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN LOSSES .................... 126,285 122,584 105,123
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
Provision for commitment losses ............. 900
BIF/SAIF special assessment ................. 24,158
Other, net .................................. 4,340 2,858 3,177
-------- -------- --------
Total other expenses ................ 50,366 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.
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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 Capitol Federal Savings. The
discussion and analysis does not include any comments relating to Capitol
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.
Capitol Federal Savings' 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. Capitol Federal Savings'
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 Capitol
Federal Financial. 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.
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.
69
<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 .98% 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
36.45%. 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 Capitol Federal Savings 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 71 through
74 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
8.
Asset and Liability Management and Market Risk
Our Risk When Interest Rates Change. 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 Capitol Federal Savings' most significant market risk.
70
<PAGE>
How We Measure Our Risk of Interest Rate Changes. In an attempt to
manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor Capitol Federal Savings' 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 Capitol Federal Savings' 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 Capitol Federal Savings' results of
operations, Capitol Federal Savings has adopted asset and liability management
policies to better match the maturities and repricing terms of Capitol Federal
Savings' interest-earning assets and interest-bearing liabilities. The board of
directors sets and recommends the asset and liability policies of Capitol
Federal Savings which are implemented by the asset and liability management
committee. The asset and liability management committee is chaired by the Chief
Financial Officer and is comprised of members of Capitol Federal Savings' senior
management. The purpose of the asset and liability management committee is to
communicate, coordinate and control asset/liability management consistent with
Capitol Federal Savings' business plan and Board approved policies. The asset
and liability management committee establishes and monitors the volume and mix
of assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs. The objectives are to manage
assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The asset and
liability management committee generally meets on 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 asset and liability management committee 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.
71
<PAGE>
In order to manage its assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, Capitol Federal Savings has focused its strategies on:
o originating adjustable rate loans,
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
Capitol Federal Savings' loan portfolio.
At times, depending on the level of general interest rates, the relationship
between long- and short-term interest rates, market conditions and competitive
factors, the asset and liability management committee may determine to increase
Capitol Federal Savings' interest rate risk position somewhat in order to
maintain its net interest margins. In the future, Capitol Federal Savings
intends to increase its emphasis on the origination of relatively short-term
and/or adjustable rate consumer loans.
The asset and liability management committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity
that are authorized by the board of directors of Capitol Federal Savings.
The following table sets forth at September 30, 1998 the estimated
percentage change in Capitol Federal Savings' net interest income over a
four-quarter period and market value of portfolio equity based on the indicated
changes in interest rates.
Estimated Change in
Change (in Basis Points) Net Interest Income Market Value of
in Interest Rates(1) (next four quarters) Portfolio Equity
-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.
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<PAGE>
The assumptions used by management to evaluate the vulnerability of
Capitol Federal Savings' 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
Capitol Federal Savings' assets and liabilities and the estimated effects of
changes in interest rates on Capitol Federal Savings' net interest income and
market value of portfolio equity indicated in the above table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions.
The following table summarizes the anticipated maturities or repricing
of Capitol Federal Savings' 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>
73
<PAGE>
(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 Capitol Federal Savings' region.
(2) Balances have not been reduced for non-performing loans, which amounted to
$6.2 million at September 30, 1998.
(3) Based on contractual maturities.
(4) Reflects estimated prepayments in the current interest rate environment.
(5) Although Capitol Federal Savings' NOW accounts, passcard savings accounts
and money market deposit accounts are subject to immediate withdrawal,
management considers a substantial amount of such accounts to be core
deposits having significantly longer effective maturities. The decay rates
used on these accounts are based on the latest available Office of Thrift
Supervision assumptions and should not be regarded as indicative of the
actual withdrawals that may be experienced by Capitol Federal Savings. If
all of Capitol Federal Savings' 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. Capitol Federal Savings' total assets increased by $392.1
million or 8.0% to $5.32 billion at September 30, 1998 compared to $4.92 billion
at September 30, 1997. The increase was primarily due to a $389.1 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
Capitol Federal Savings' 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. Capitol Federal Savings' 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
74
<PAGE>
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 Capitol Federal Savings' loan and mortgage-related securities growth. In
order to reduce interest-rate risk exposure, Capitol Federal Savings 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. Capitol Federal
Savings' mortgage-related securities are generally comprised of mortgage-backed
securities issued by Fannie Mae or Freddie Mac, which minimizes credit risk, and
these are delivered, in Capitol Federal Savings' name to our account at the
Federal Reserve in exchange for the funds we wish to invest.
Liabilities. Capitol Federal Savings' total liabilities increased
$334.6 million or 7.75% 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.
75
<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
Federal Home Loan Bank stock......... 41,598 3,186 7.66 38,698 2,647 6.84 36,272 2,337 6.44
------------ --------- ---------- -------- ---------- ---------
Total Interest-Earning Assets(1)..... $5,026,883 363,644 7.23 $4,463,166 330,097 7.40 $4,276,130 306,389 7.17
========== --------- ========== -------- ========== ---------
Interest-Bearing Liabilities:
Savings deposits...................... $ 131,343 2,918 2.22 $ 131,912 2,931 2.22 $ 134,337 2,985 2.22
Demand and NOW deposits............... 661,871 19,861 3.00 570,865 15,141 2.65 578,325 15,879 2.75
Certificate accounts.................. 3,071,829 180,647 5.88 3,082,984 184,357 5.98 2,963,367 176,901 5.97
Borrowings............................ 548,275 31,471 5.74 87,140 5,028 5.77 77,917 4,636 5.95
------------ --------- ---------- ------- ---------- ---------
Total Interest-Bearing Liabilities... $4,413,318 234,897 5.32 $3,872,901 207,457 5.36 $3,753,946 200,401 5.34
========== --------- ========== -------- ========== ---------
Net interest income.................... $128,747 $122,640 $105,988
======== ======== ========
Net interest rate spread............... 1.91% 2.04% 1.83%
==== ==== ====
Net earning assets..................... $ 613,565 $ 590,265 $ 522,184
============ ========= ===========
Net interest margin.................... 2.56% 2.75% 2.48%
==== ==== ====
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities.. 113.90% 115.24% 113.91%
====== ====== ======
- -----------------
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process .
76
<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
(1) changes in volume, which are changes in volume multiplied by the old rate,
and (2) changes in rate, which are changes in rate multiplied by the old volume.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------------------
1997 vs. 1998 1996 vs. 1997
-----------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
---------------------------------- ------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
<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>
77
<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.
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. Capitol Federal Savings 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. Capitol Federal Savings' 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
Capitol Federal Savings' 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 Capitol
Federal Savings' mortgage-related securities and investment securities
portfolios increased $158.5 million or 12.1% to $1.47 billion for 1998 compared
to 1997
78
<PAGE>
primarily as a result of the use of additional borrowings to purchase
mortgage-related assets. The average yield earned on Capitol Federal Savings'
loan portfolio decreased from 7.70% in 1997 to 7.63% in 1998, and the average
yield earned on Capitol Federal Savings' mortgage-related and investment
securities portfolios decreased from 6.68% for 1997 to 6.27% for 1998. The
decrease in average yield earned on Capitol Federal Savings' 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 Capitol Federal Savings' 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 $2.5 million compared to a
provision for loan losses in 1997 of $56,000. At September 30, 1998, Capitol
Federal Savings' allowance for loan losses was $4,081,000 or .11% of the total
loan portfolio and approximately 66% 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 $60,000. The allocated portion of the allowance of $4,021,000 is
composed of inherent credit losses related to the loan portfolio. See "Business
of Capitol Federal Savings - 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.
During 1998, Capitol Federal Savings' single family residential loan
portfolio increased by $359.6 million over 1997. In addition, the non-performing
single-family loans increased by $1.0 million, or 21%, from $5.0 million at
September 30, 1997 to $6.0 million at September 30, 1998, primarily due to an
increased number of borrowers being overextended in their consumer debt. The
provision for loan losses in fiscal 1998 of $2.0 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 faster market growth in the portfolio as a result of increased
refinancings and the exposure presented by the level of nonperforming loans.
Capitol Federal Savings also reviewed
79
<PAGE>
the ratio of its non-performing loans to total loans and compared this to its
ratio of allowance for loan losses to net loans receivable.
During 1998, Capitol Federal Savings' multi-family loan portfolio
increased by approximately 51% to $40.4 million. This growth is the result of
increased lending opportunities in various market areas. Capitol Federal Savings
increased its provision for credit losses to 0.5% of the multi-family loan
portfolio. Capitol Federal Savings increased its portfolio of commercial real
estate loans by approximately 53% to $9.1 million and increased its provision
for credit losses to 0.9% of the commercial real estate loan portfolio. The
portfolio of construction and development loans remained generally unchanged
from 1997 to 1998. However, Capitol Federal Savings increased its provision for
credit losses to 1.1% of the construction and development loan portfolio.
Capitol Federal Savings' consumer loan portfolio increased 12% to $143.3 million
during 1998 as a result of increased marketing efforts. Capitol Federal Savings
increased its provision for credit losses on consumer loans to approximately
0.1% of the consumer loan portfolio. These increases in provision for credit
losses properly allocate the inherent credit loss provision based upon the known
risks of the various loan portfolios in 1998.
Based upon the foregoing analysis of Capitol Federal Savings' reserving
methodology, it is management's belief that the increase in the formula
allowance provided for the additional losses inherent in the portfolio.
Historical net charge-offs are not necessarily indicative of the amount of net
charge-offs that Capitol Federal Savings will realize in the future related to
the increase in the single family residential loan portfolio.
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 $5.1 million or 11.2% to $50.4
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.
Capitol Federal Savings also set up a reserve for losses on unfunded commitments
of $900,000, reflecting the growth in mortgage and consumer loan commitments and
letters of credit.
Provision for Income Taxes. The provision for income taxes amounted to
$34.8 million and $35.7 million for 1998 and 1997, respectively, resulting in
effective tax rates of 39.2% and 40.4%, respectively.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
General. Capitol Federal Savings' 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
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$14.5 million after-tax charge for the Savings Association Insurance Fund of the
FDIC 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 Capitol Federal Savings' 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 Capitol Federal Savings' 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 Capitol Federal Savings' 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 Capitol Federal Savings' 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 Capitol Federal Savings' loan portfolio
was due primarily to the adjustment of certain of Capitol Federal Savings'
adjustable-rate loans to the fully indexed rate. The increase in the average
yield earned on Capitol Federal Savings' 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 1997, Capitol Federal
Savings had several advertising campaigns to attract longer-term certificate of
deposit accounts at competitive rates. 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 Capitol Federal Savings' 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 Savings
Association Insurance Fund insurance premiums of $5.3 million, partially offset
by a $2.1 million increase in personnel expenses as a
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result of the addition of two limited service branch offices, a customer service
call center and the introduction of the debit card operations center.
Provision for Income Taxes. The provision for income taxes amounted to
$35.7 million and $18.4 million for the years ended September 30, 1997 and 1996,
respectively, resulting in effective tax rates of 40.4% and 40.9%, respectively.
Liquidity and Commitments
Capitol Federal Savings' liquidity, represented by cash and cash
equivalents, is a product of its operating, investing and financing activities.
Capitol Federal Savings' primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans and mortgage-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, Capitol Federal Savings
invests excess funds in short-term interest-earning assets, which provide
liquidity to meet lending requirements. Historically, Capitol Federal Savings
has been able to generate sufficient cash through its deposits and has only
utilized borrowings to a limited degree. Capitol Federal Savings utilizes
repurchase agreements and Federal Home Loan Bank advances to leverage its
capital base and provide funds for its lending and investment activities, and to
enhance its interest rate risk management. Capitol Federal Savings 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,
Capitol Federal Savings maintains a strategy of investing in various lending
products as described in greater detail under "Business of Capitol Federal
Savings - Lending Activities." Capitol Federal Savings 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 Capitol Federal Savings. Capitol Federal Savings anticipates
that it will continue to have sufficient funds, through deposits and borrowings,
to meet its current commitments.
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Capital
Consistent with its goals to operate a sound and profitable financial
organization, Capitol Federal Savings 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, Capitol Federal Savings exceeded all capital
requirements of the Office of Thrift Supervision. Capitol Federal Savings'
regulatory capital ratios at September 30, 1998 were as follows: Tier I
(leverage) capital, 12.2%; Tier I risk-based capital, 27.2%; and Total
risk-based capital, 27.3%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
Year 2000 Issues
General. The Year 2000 issue confronting Capitol Federal Savings 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 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, Capitol Federal Savings
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 Capitol Federal Savings' direct
control and third parties with whom Capitol Federal Savings 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 Capitol Federal Savings could experience
an inability to process transactions, prepare statements or engage in similar
normal business activities.
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Likewise, under certain circumstances a failure to adequately address the Y2K
issue could adversely affect the viability of Capitol Federal Savings' 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 Capitol
Federal Savings' operations and, in turn, its financial condition and results of
operations.
State of Readiness. During April 1997, Capitol Federal Savings
formulated its plan to address the Y2K issue. Since that time, Capitol Federal
Savings has taken the following steps:
o Established senior management advisory and review
responsibilities;
o Completed a company-wide inventory of application and system
software;
o Built an internal tracking database for application and vendor
software;
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 Capitol Federal Savings' Y2K
plan:
Awareness Phase. Capitol Federal Savings' 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. Capitol Federal Savings' 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 Capitol Federal Savings' 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.
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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, Capitol Federal Savings 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, Capitol Federal Savings' larger borrowers were
evaluated for Y2K exposure using a questionnaire developed by Capitol
Federal Savings' Y2K Business Systems Team. As part of the current
credit approval process, all new and renewed loans are evaluated for
Y2K risk. Capitol Federal Savings' 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 Capitol Federal Savings. While Capitol Federal Savings
will continue to monitor the progress being made by its larger
borrowers in addressing their own Y2K issues, to date Capitol Federal
Savings is generally satisfied with these customers' responses to
Capitol Federal Savings' inquiries.
Renovation Phase. Capitol Federal Savings' 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. Capitol
Federal Savings 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. Capitol Federal Savings currently is in the process of validation
testing of each mission critical system. Capitol Federal Savings has
created a test environment comprised of an IBM Multiprise 2000
dedicated to Y2K testing which is virtually insulated from production
and development environments. Capitol Federal Savings 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. Capitol Federal Savings
has increased staff in anticipation of that work effort. Capitol
Federal Savings' 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. Capitol Federal Savings' 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.
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Bank Resources Invested. Capitol Federal Savings' Y2K project team has
been assigned the task of ensuring that all mission critical systems across
Capitol Federal Savings 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 Capitol Federal Savings,
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. Capitol Federal Savings' board of directors oversees
the Y2K plan and provides guidance and resources to and receives monthly updates
from the Y2K project team leader.
Capitol Federal Savings 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
Capitol Federal Savings is estimated to be $2.3 million. Expenses of
approximately $914,000 were incurred and expensed through September 30, 1998.
Y2K expenses are not expected to exceed the budget, and Capitol Federal Savings
does not expect significant increases in future data processing costs relating
to Y2K compliance.
Contingency Plans. During the assessment phase, Capitol Federal Savings
began to develop back-up or contingency plans for each of its mission critical
systems. A few of Capitol Federal Savings' 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, Capitol Federal Savings 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.
Capitol Federal Savings 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 one day. Contingency planning is an integral part of
Capitol Federal Savings' 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 Capitol Federal Savings' mission critical systems are
written and maintained by Capitol Federal Savings' Information Systems
Department. Capitol Federal Savings 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, Capitol Federal Savings does not anticipate any material adverse
effect on its operations as a result of the impact of the Y2K issue.
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Impact of Accounting Pronouncements
New Statements of Financial Accounting Standards - In February 1997,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128, "Earnings per Share". The Statement establishes
standards for computing and presenting earnings per share. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. The Statement is effective for Capitol Federal Savings' financial
statements as of September 30, 1999. Capitol Federal Savings 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 Capitol Federal Savings' financial statements as of September 30,
1999. Capitol Federal Savings 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 Capitol Federal
Savings' 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 Capitol Federal Savings (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 Capitol Federal Savings' financial
statements for the fiscal year ending September 30, 1999. Capitol Federal
Savings 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 Capitol Federal Savings' 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 Capitol Federal Savings' financial statements for
the fiscal year ending September 30, 1999. Capitol Federal Savings 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 Capitol Federal Savings' consolidated financial statements.
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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 Capitol Federal Savings' financial statements for the
fiscal year ending September 30, 1999. Capitol Federal Savings 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 Capitol Federal Savings' 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 Capitol Federal Savings' financial statements for the fiscal year
ending September 30, 2000. The adoption of this Statement is not expected to
have a material impact on Capitol Federal Savings' consolidated financial
statements.
In October 1998, FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". The Statement changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. The Statement
is effective for Capitol Federal Savings' financial statements as of January 1,
1999. Capitol Federal Savings does not anticipate that the implementation of
this Statement will have a material impact on the consolidated financial
statements.
BUSINESS OF CAPITOL FEDERAL FINANCIAL
Capitol Federal Savings 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 Capitol Federal Savings and the employee
stock ownership plan 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 Capitol
Federal Savings. At the present time, Capitol Federal Financial does not intend
to employ any persons other than certain officers of Capitol Federal Savings,
but will utilize the support staff of Capitol Federal Savings from time to time.
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BUSINESS OF CAPITOL FEDERAL SAVINGS
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 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 asset and liability management committee and loans over $1.5
million must be approved by the board of directors. For loans requiring Board
approval, management is responsible for presenting to the
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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 Capitol Federal Savings, in addition
to personal guarantees of up to $2.3 million. The loan terms require additional
contingent interest payments to Capitol Federal Savings of 25% of the net
profits of the development, if any. At September 30, 1998, five of a planned
eight phases have been developed, with 267 lots completed and 165 lots sold to
builders, with an additional 30 lots sold but not yet closed. An additional 166
lots remained to be developed at that date. The next largest loan to one of the
partners in this group of borrowers is a $6.2 million, combination two year
construction and 10 year permanent loan for the construction of a 51 unit
apartment building located in Kansas City, Missouri. The loan was originated in
1997, has a fixed interest rate with a 25 year amortization and a loan-to-value
ratio, as completed, of 79%. The loan requires the payment of interest only
during the construction period, which may be funded from loan proceeds. This
loan is fully guaranteed by the borrower, is cross-collateralized with other
loan collateral held by Capitol Federal Savings, and Capitol Federal Savings 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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Our Loan Portfolio. The following table presents information
concerning the composition of Capitol Federal Savings' 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........... 4,081 1,639 1,583 1,359 3,878
--------- ---------- ---------- ---------- ----------
Total loans receivable, net.... $3,711,152 $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 Capitol Federal Savings'
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........ 4,081 1,639 1,583 1,359 3,878
---------- ---------- ---------- ---------- ----------
Total loans receivable, net... $3,711,152 $3,322,102 $2,944,906 $2,751,634 $2,288,472
========== ========== ========== ========== ==========
</TABLE>
92
<PAGE>
The following schedule illustrates the contractual maturity of Capitol
Federal Savings' loan portfolio at September 30, 1998. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------------
Multi-family and Construction Commercial
One- to Four-Family Commercial and Development Consumer Business Total
----------------- ---------------- ---------------- ---------------- ---------------- ----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
----------------- ---------------- ---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <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
</TABLE>
- ----------------
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
The total amount of loans due after September 30, 1999 which have
predetermined interest rates is $2.10 billion, while the total amount of loans
due after such date which have floating or adjustable interest rates is $1.60
billion.
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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 Fannie
Mae and Freddie Mac, 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.
94
<PAGE>
In order to remain competitive in our market areas, we currently
originate ARM loans at initial rates below the fully indexed rate, and qualify
borrowers based on this initial discounted rate for our three and five year ARMs
and at 2% over the initial rate for one-year ARMs.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "- Asset Quality --Non-performing
Assets" and "-Asset Quality -- Classified Assets." At September 30, 1998, our
one- to four-family ARM loan portfolio totaled $1.49 billion, or 39.9% of our
gross loan portfolio. At that date the fixed-rate one- to four-family mortgage
loan portfolio totaled $2.01 billion, or 53.6% of our gross loan portfolio.
Multi-family and Commercial Real Estate Lending. We offer a variety of
multi-family and commercial real estate loans. These loans are secured primarily
by multi-family dwellings, small retail establishments and small office
buildings located in our market areas. At September 30, 1998, multi-family and
commercial real estate loans totaled $49.4 million or 1.3% of our gross loan
portfolio.
Our loans secured by multi-family and commercial real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indexes, generally determined
through negotiation with the borrower. Loan-to-value ratios on our multi-family
and commercial real estate loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments and have maximum maturities of 25 years. While maximum maturities may
extend to 30 years, loans frequently have shorter maturities and may not be
fully amortizing, requiring balloon payments of unamortized principal at
maturity.
Loans secured by multi-family and commercial real estate are granted
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income (the income derived from the
operation of the property less all operating expenses) must be sufficient to
cover the payments related to the outstanding debt. We generally require
personal guarantees of the borrowers covering a portion of the debt in addition
to the security property as collateral for such loans. We generally require an
assignment of rents or leases in order to be assured that the cash flow from the
project will be used to repay the debt. Appraisals on properties securing
multi-family and commercial real estate loans are performed by independent state
certified fee appraisers approved by the board of directors. See "-- Loan
Originations, Purchases, Sales and Repayments."
Capitol Federal Savings 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.
95
<PAGE>
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.
See "- Asset Quality -- Non-performing Loans."
Construction and Development Lending. We originate construction loans
primarily secured by existing commercial real estate or building lots. Capitol
Federal Savings 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 Capitol Federal Savings. 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
Capitol Federal Savings. At September 30, 1998, Capitol Federal Savings 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 Capitol Federal Savings' 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
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<PAGE>
$1.0 million or more, and require personal guarantees from the borrowers for all
or a portion of the debt. We also require updated financial statements from the
borrowers on an ongoing basis.
Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans. In addition, payment of interest from loan proceeds can make it difficult
to monitor the progress of a project.
Consumer Lending. Consumer loans generally have shorter terms to
maturity, which reduces our exposure to changes in interest rates, and carry
higher rates of interest than do one- to four-family residential mortgage loans.
In addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities. At
September 30, 1998, our consumer loan portfolio totaled $143.3 million, or 3.8%
of our gross loan portfolio.
Capitol Federal Savings 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. Capitol Federal Savings' 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 Capitol Federal
Savings' 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 Capitol Federal Savings 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.
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<PAGE>
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles.
Loan Originations, Purchases, Sales and Repayments
We originate loans through referrals from real estate brokers and
builders, our marketing efforts, and our existing and walk-in customers. While
we originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon customer demand for loans in our market areas. Demand is
affected by local competition and the interest rate environment. During the last
several years, our dollar volume of fixed-rate, one- to four-family loans has
exceeded the dollar volume of the same type of adjustable-rate loans. While our
primary business is the origination of one- to four-family mortgage loans,
competition from other lenders in our market areas limits, to a certain extent,
the volume of loans we have been able to originate and place in our portfolio.
As a result we have purchased mortgage loans and investment and mortgage-related
securities to supplement our portfolios. Such whole loan purchases also serve to
reduce our risk of geographic concentration. We sell a limited amount of loans
and some of our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, we, like many other
financial institutions, have experienced significant prepayments on loans and
mortgage-related securities due to the low interest rate environment prevailing
in the United States.
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 Capitol Federal Savings.
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 Capitol Federal Savings, to originate or purchase large
dollar volumes of real estate loans may be substantially reduced or restricted,
with a resultant decrease in interest income.
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<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of Capitol Federal Savings for the periods indicated.
Year Ended September 30,
----------------------------------
1998 1997 1996
----------------------------------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family.......... $ 198,857 $315,314 $253,596
- multi-family............... --- 6,240 18,000
- commercial................. --- --- ---
Non-real estate - consumer................. 86,848 71,536 58,808
- commercial business... 10 --- ---
---------- --------- --------
Total adjustable-rate............... 285,715 393,090 330,404
---------- --------- --------
Fixed rate:
Real estate - one- to four-family.......... 878,567 412,960 384,842
- multi-family............... --- 250 2,600
- commercial................. 350 --- 264
Non-real estate - consumer................. 26,312 26,514 20,554
---------- --------- --------
Total fixed-rate.................... 905,229 439,724 408,260
---------- --------- --------
Total loans originated.............. 1,190,944 832,814 738,664
---------- --------- --------
Purchases:
Real estate - one- to four-family.......... 124,725 106,403 38,086
- multi-family............... --- --- ---
- commercial................. --- --- ---
Non-real estate - consumer................. 30 --- ---
---------- --------- --------
Total loans purchased............... 124,755 106,403 38,086
Mortgage-related securities (excluding
REMICs and CMOs)........................... 256,076 245,102 ---
REMICs and CMOs............................ 363,068 112,442 ---
---------- --------- --------
Total purchased..................... 743,899 463,947 38,086
---------- --------- --------
Sales and Repayments:
Real estate - one- to four-family.......... 23,160 4,563 15,588
Non-real estate - consumer (student loans). 13,620 15,059 20,168
---------- --------- --------
Total loans sold.................... 36,780 19,622 35,756
Mortgage-backed securities................. --- --- ---
---------- --------- --------
Total sales......................... 36,780 19,622 35,756
Principal repayments....................... 1,113,628 558,990 588,565
---------- --------- --------
Total reductions.................... 1,150,408 578,612 624,321
---------- --------- --------
Increase in other items, net................. 202,101 91,511 105,576
---------- --------- --------
Net increase........................ $ 582,334 $626,638 $ 46,853
========== ======== ========
Asset Quality
When a borrower fails to make a payment on a loan on or before the
default date, a late charge notice is mailed 15 days after the due date. When
the loan is 30 days past due, we mail a delinquent notice to the borrower. All
delinquent accounts are reviewed by a collection officer, who attempts to cause
the delinquency to be cured by contacting the borrower. If the loan becomes 60
days delinquent, the collection officer will generally send a personal letter to
the borrower requesting payment of the delinquent amount in full, or the
establishment of an
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<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 Capitol
Federal Savings' 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%
=== ======= ===
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<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.
September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
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%
====== ====== ====== ======= ======
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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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
Office of Thrift Supervision 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 Office of Thrift
Supervision 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 Office
of Thrift Supervision 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. Capitol Federal Savings recorded a provision
for loan losses in fiscal 1998 of $2,462,000, compared to $56,000 in fiscal 1997
and $865,000 in fiscal 1996. The provision for loan losses is charged to income
to bring Capitol Federal Savings' 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 1998 was based on
management's review of such factors which indicated that the allowance for
102
<PAGE>
loan losses was adequate to cover losses inherent in the loan portfolio as of
September 30, 1998.
Allowance for Loan Losses. Capitol Federal Savings 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. Capitol Federal Savings' methodology for
assessing the appropriateness of the allowance consists of several key elements,
which include the formula allowance, specific allowances for identified problem
loans and portfolio segments and the unallocated allowance. In addition, the
allowance incorporates the results of measuring impaired loans as provided in
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These accounting standards prescribe the measurement methods,
income recognition and disclosures related to impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of such loans or pools
of loans . Changes in risk evaluations of both performing and nonperforming
loans affect the amount of the formula allowance. Loss factors are based both on
Capitol Federal Savings' 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 and consumer
loans .
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 Capitol Federal Savings 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 Capitol Federal Savings' senior credit
officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the loss related to this condition is reflected in
the unallocated allowance. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent
in the loan portfolio. The amounts actually observed in respect of these losses
can vary significantly from the estimated amounts. Capitol Federal Savings'
methodology as described permits adjustments to any loss factor used in the
computation of the formula allowance in the event that, in
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<PAGE>
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, Capitol Federal Savings is able to adjust specific and inherent loss
estimates based upon any more recent information that has become available.
At September 30, 1998, Capitol Federal Savings' allowance for loan
losses was $4,081,000 or .11% of the total loan portfolio and approximately 66%
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 $60,000. 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.
During 1998, Capitol Federal Savings' single family residential loan
portfolio increased by $359.6 million over 1997. In addition, the non-performing
single-family loans increased by $1.0 million, or 21%, from $5.0 million at
September 30, 1997 to $6.0 million at September 30, 1998, primarily due to an
increased number of borrowers being overextended in their consumer debt. The
provision for loan losses in fiscal 1998 of $2.0 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 faster market growth in the portfolio as a result of increased
refinancings and the exposure presented by the level of nonperforming loans.
Capitol Federal Savings also reviewed the ratio of its non-performing loans to
total loans and compared this to its ratio of allowance for loan losses to net
loans receivable.
During 1998, Capitol Federal Savings' multi-family loan portfolio
increased by approximately 51% to $40.4 million. This growth is the result of
increased lending opportunities in various market areas. Capitol Federal Savings
increased its provision for credit losses to 0.5% of the multi-family loan
portfolio. Capitol Federal Savings increased its portfolio of commercial real
estate loans by approximately 53% to $9.1 million and increased its provision
for credit losses to 0.9% of the commercial real estate loan portfolio. The
portfolio of construction and development loans remained generally unchanged
from 1997 to 1998. However, Capitol Federal Savings increased its provision for
credit losses to 1.1% of the construction and development loan portfolio.
Capitol Federal Savings' consumer loan portfolio increased 12% to $143.3 million
during 1998 as a result of increased marketing efforts. Capitol Federal Savings
increased its provision for credit losses on consumer loans to approximately
0.1% of the consumer loan portfolio. These increases in provision for credit
losses properly allocate the inherent credit loss provision based upon the known
risks of the various loan portfolios in 1998.
104
<PAGE>
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 Capitol Federal Savings' loan portfolios.
Based upon the foregoing analysis of Capitol Federal Savings' reserving
methodology, it is management's belief that the increase in the formula
allowance provided for the additional losses inherent in the portfolio.
Historical net charge-offs are not necessarily indicative of the amount of net
charge-offs that Capitol Federal Savings will realize in the future related to
the increase in the single family residential loan portfolio.
The following table sets forth an analysis of our allowance for loan
losses.
Year Ended September 30,
----------------------------------------
1998 1997 1996 1995 1994
----------------------------------------
(Dollars in Thousands)
Balance at beginning of period........ $1,639 $1,583 $1,359 $3,878 $6,935
Charge offs:
One- to four-family................. 20 --- --- --- ---
Multi-family........................ --- --- 641 2,519 1,071
Commercial real estate.............. --- --- --- --- ---
Construction or development......... --- --- --- --- ---
Consumer............................ --- --- --- --- ---
Commercial business................. --- --- --- --- ---
-------- ------ ----- ----- -----
Total charge-offs................. 20 --- 641 2,519 1,071
-------- ------ ----- ----- -----
Recoveries............................ --- --- --- --- ---
Net charge-offs....................... 20 --- 641 2,519 1,071
Provisions (recoveries)
charged to operations............... 2,462 56 865 --- (1,986)
-------- ------ ------ ------ ------
Balance at end of period............ $4,081 $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............. 65.52% 26.83% 39.67% 32.35% 65.40%
====== ===== ===== ===== =====
Allowance as a percentage
of total loans (end of period)...... 0.11% 0.05% 0.05% 0.05% 0.17%
====== ===== ===== ===== =====
105
<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................ 60 --- --- 239 --- --- 9 --- ---
------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Total................. $4,081 $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>
106
<PAGE>
Investment Activities
We are required to maintain minimum levels of investments that qualify
as liquid assets under Office of Thrift Supervision 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
Office of Thrift Supervision 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 " How We are Regulated - Capitol Federal Savings and - Qualified
Thrift Lender Test" for a discussion of additional restrictions on our
investment activities.
The Chief Financial Officer has the basic responsibility for the
management of Capitol Federal Savings' investment portfolio, subject to the
direction and guidance of the asset and liability management committee. The
Chief Financial Officer considers various factors when making decisions,
including the marketability, maturity and tax consequences of the proposed
investment. The maturity structure of investments will be affected by various
market conditions, including the current and anticipated slope of the yield
curve, the level of interest rates, the trend of new deposit inflows, and the
anticipated demand for funds via deposit withdrawals and loan originations and
purchases.
The general objectives of our investment portfolio are to: provide
liquidity when loan demand is high 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,
107
<PAGE>
amortization schedules, as well as a residual interest, with each such class
possessing different risk characteristics. Capitol Federal Savings intends to
increase by up to $3.00 billion its current portfolio of these securities by
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 Office of Thrift Supervision regulations. Capitol Federal Savings
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>
108
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding Federal Home Loan Bank 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>
109
<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 Capitol Federal
Savings 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%
==== ==== ====
110
<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>
111
<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
112
<PAGE>
the Federal Home Loan Bank 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 Federal Home Loan Bank of Topeka upon
the security of certain of our mortgage loans and mortgage-related securities.
Such advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At
September 30, 1998, Capitol Federal Savings had $500.0 million in Federal Home
Loan Bank advances outstanding.
The following table sets forth the maximum month-end balance and
average balance of Federal Home Loan Bank advances and securities sold under
agreements to repurchase for the periods indicated.
Year Ended September 30,
------------------------------
1998 1997 1996
---------- ---------- --------
(In Thousands)
Maximum Balance:
Federal Home Loan Bank advances................ $500,000 $275,000 $35,000
Securities sold under agreement to repurchase... 175,000 175,000 75,000
Average Balance:
Federal Home Loan Bank advances................ $365,000 $24,167 $ 2,917
Securities sold under agreement to repurchase... 175,000 82,692 75,000
The following table sets forth certain information as to Capitol
Federal Savings' borrowings at the dates indicated.
September 30,
---------------------------------------
1998 1997 1996
--------- -------------- --------------
(Dollars in Thousands)
Federal Home Loan Bank
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 Federal Home Loan
Bank advances...................... 5.73% 5.76% 6.09%
Weighted average interest
rate of securities sold
under agreement to repurchase...... 5.73% 5.73% 5.78%
Subsidiary and Other Activities
As a federally chartered savings association, we are permitted by
Office of Thrift Supervision 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
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additional 1% of our assets in service corporations where such additional funds
are used for inner-city or community development purposes.
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
At September 30, 1998, we had 24 full service offices and five limited
service offices. Capitol Federal Savings owns the office building in which its
home office and executive offices are located. At September 30, 1998, Capitol
Federal Savings 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 Capitol Federal Savings'
investment in premises, equipment and leaseholds, excluding computer equipment,
was approximately $21.0 million.
Capitol Federal Savings believes that is current facilities are
adequate to meet the present and immediately foreseeable needs of Capitol
Federal Savings and Capitol Federal Financial.
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Capitol Federal Savings maintains an on-line data base of depositor and
borrower customer information. The net book value of the data processing and
computer equipment utilized by Capitol Federal Savings at September 30, 1998 was
$1.8 million.
Legal Proceedings
From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. Capitol Federal Savings
does not anticipate incurring any material liability as a result of such
litigation.
MANAGEMENT
Management of Capitol Federal Financial
The board of directors of Capitol Federal Financial will consist of the
same individuals who serve as directors of Capitol Federal Savings. The board of
directors of Capitol Federal Financial is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of Capitol Federal Financial for staggered three
year terms, or until their successors are elected. One class of directors,
consisting of B.B. Andersen and John C. Dicus, has a term of office expiring at
the first annual meeting of stockholders, a second class, consisting of John B.
Dicus and Frederick P. Reynolds, has a term of office expiring at the second
annual meeting of stockholders and a third class, consisting of Robert B.
Maupin, Carl W. Quarnstrom, and Marilyn S. Ward, has a term of office expiring
at the third annual meeting of stockholders.
The following individuals are executive officers of Capitol Federal
Financial and hold the offices set forth below opposite their names.
Executive Position Held with Capitol Federal Financial
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 Capitol Federal Financial 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 Capitol Federal Financial is set
forth under "- Management of Capitol Federal Savings Bank" and "- Executive
Officers Who Are Not Directors." Directors of Capitol Federal Financial
initially will not be compensated by Capitol Federal Financial but will serve
and be compensated by Capitol Federal Savings. It is not anticipated that
separate compensation
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will be paid to directors of Capitol Federal Financial until such time as these
persons devote significant time to the separate management of Capitol Federal
Financial's affairs, which is not expected to occur until Capitol Federal
Financial becomes actively engaged in additional businesses other than holding
the stock of Capitol Federal Savings. Capitol Federal Financial may determine
that such compensation is appropriate in the future.
Management of Capitol Federal Savings Bank
Because Capitol Federal Savings is a mutual savings association, its
members have elected its board of directors. Upon completion of the
reorganization and stock issuance, the directors of Capitol Federal Savings
immediately prior to the stock issuance will continue to serve as directors of
Capitol Federal Savings in stock form. The board of directors of Capitol Federal
Savings 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 Capitol Federal Financial will own all the
issued and outstanding capital stock of Capitol Federal Savings following the
reorganization and stock issuance, the board of directors of Capitol Federal
Financial will elect the directors of Capitol Federal Savings. The persons who
are serving as directors of Capitol Federal Savings will also serve as directors
of Capitol Federal Savings Bank MHC and Capitol Federal Financial upon
completion of the reorganization and stock issuance.
The following table sets forth certain information regarding the board
of directors of Capitol Federal Savings.
Term of
Positions Held With Director Office
Name Age(1) Capitol Federal Savings Since Expires
---- ------ ----------------------- ----- -------
B.B. Andersen 62 Director 1981 1999
John B. Dicus 37 President, Chief Operating
Officer and Director 1989 2000
John C. Dicus 65 Chairman, Chief Executive
Officer and Director 1963 1999
Robert B. Maupin 73 Director 1973 2001
Carl W. Quarnstrom 69 Director 1985 2001
Frederick P. Reynolds 74 Director 1979 2000
Marilyn S. Ward 59 Director 1977 2001
- ---------------------
(1) As of September 30, 1998.
The business experience of each director for at least the past five
years is set forth below.
B.B. Andersen. Mr. Andersen had a life long career in construction and
development activities. He is currently involved in various real estate
development projects in Colorado.
John B. Dicus. Mr. Dicus is President and Chief Operating Officer of
Capitol Federal Savings, positions he has held since1996. Prior to that, he
served as the Executive Vice President of Corporate Services for Capitol Federal
Savings for four years. He has been with Capitol
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Federal Savings 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 Capitol Federal Savings, positions he has held since
1989. He has served Capitol Federal Savings in various capacities since 1959. He
also served as President of Capitol Federal Savings from 1969 until 1996.
Robert B. Maupin. Mr. Maupin is currently retired. Previously, he
worked for Capitol Federal Savings for over forty years. He retired in 1991 as
Capitol Federal Savings' 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 Capitol Federal Savings.
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.
Executive Officers Who Are Not Directors
Each of the executive officers of Capitol Federal Savings will retain
his office following the reorganization. Officers are elected annually by the
board of directors of Capitol Federal Savings. The business experience of each
director for at least the past five years for the four executive officers of
Capitol Federal Savings 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 Capitol Federal Savings since 1991. Since
1994, he has also served as President of Capitol Funds Inc., a subsidiary of
Capitol Federal Savings.
Neil F.M. McKay. Age 57 years. Mr. McKay serves as Executive Vice
President, Chief Financial Officer and Treasurer of Capitol Federal Savings,
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
Capitol Federal Savings since 1971 and currently serves as Executive Vice
President for Corporate Services of Capitol Federal Savings, a position he has
held since 1997. Prior to that, he was employed by Capitol Federal Savings as
the Eastern Region Manager for seven years.
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R. Joe Aleshire. Age 51 years. Mr. Aleshire has been employed with
Capitol Federal Savings since 1973 and currently serves as Executive Vice
President for Retail Operations of Capitol Federal Savings, a position he has
held since 1997. Prior to that, he was employed by Capitol Federal Savings as
the Wichita Area Manager for 17 years.
Meetings 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 Capitol Federal Savings and meets periodically
with Capitol Federal Savings' accounting firm in order to review the annual
audit. This committee met three times in fiscal 1998.
The entire board of directors of Capitol Federal Savings is responsible
for determining salaries to be paid to officers and employees of Capitol Federal
Savings, 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 $400 per
committee meeting. See "-- Benefits - Other Stock Benefit Plans."
Mr. Quarnstrom, a director of Capitol Federal Savings, is a partner in
the law firm of Shaw, Hergenreter, Quarnstrom & Kocher, L.L.P. The firm receives
a retainer fee to serve as general counsel for Capitol Federal Savings regarding
real estate and litigation issues. The legal
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fees received by the law firm for professional services rendered to the
Association during the year ending September 30, 1998 did not exceed 5% of the
firm's gross revenues.
Executive Compensation
The following table sets forth a summary of certain information
concerning the compensation paid by Capitol Federal Savings, including amounts
deferred to future periods by the officers, for services rendered in all
capacities during the fiscal year ended September 30, 1998 to the Chairman and
Chief Executive Officer of Capitol Federal Savings and the four other highest
compensated executive officers of Capitol Federal Savings.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation(1) Compensation Awards
-------------------------------------------- ----------------------------------------
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) (#)(2) sation
--------------------------- ---- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
John C. Dicus, Chairman and Chief 1998 $622,800(3) $ 95,355 109,620(4) --- --- $219,630(5)
Executive Officer
John B. Dicus, President and Chief 1998 312,800(3) 40,096 19,292(4) --- --- 76,650(5)
Operating Officer
Stanley F. Mick, Executive Vice President 1998 256,000 45,149 8,148(4) --- --- 41,850(5)
and Chief Lending Officer
Neil F. M. McKay, Executive Vice 1998 203,500 31,410 5,086(4) --- --- 29,250(5)
President, Chief Financial Officer and
Treasurer
Larry K. Brubaker, Executive Vice 1998 186,500 38,938 --- --- --- 8,250(6)
President for Corporate Services
</TABLE>
- -------------
(1) Does not include perquisites, which did not exceed the lesser of $50,000 or
10% of the named individuals' salary and bonus.
(2) As a mutual institution, Capitol Federal Savings does not have any stock
options or restricted stock plans. Capitol Federal Savings 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 Capitol Federal Savings' 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.
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(6) Amount represents the allocation under Capitol Federal Savings' profit
sharing plan for Mr. Brubaker.
Benefits
General. Capitol Federal Savings 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. Capitol Federal Savings sponsors a defined
benefit pension plan for its employees. 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 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 Capitol Federal Savings.
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. 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
Internal Revenue 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
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Capitol Federal Savings 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, Capitol Federal Savings intends to distribute the plan's
assets to participants in accordance with their accrued benefits and the
requirements of applicable law.
Retirement Program. Capitol Federal Savings 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 Capitol Federal Savings for a period
of twenty years following the retirement of Mr. Dicus. A portion of the amount
received by Capitol Federal Savings will be paid to Mr. Dicus. Upon retirement,
Mr. Dicus will receive $2,083 monthly under this program.
Employees' Profit Sharing Plan. Capitol Federal Savings has a
qualified, tax-exempt profit sharing thrift 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.
Capitol Federal Savings 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 Capitol
Federal Savings 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 Capitol Federal Savings' 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 Capitol Federal Savings' 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.
Capitol Federal Savings 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, Capitol Federal
Savings' 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. Capitol Federal Financial intends to
adopt an Employee stock ownership plan for employees of Capitol Federal
Financial and Capitol Federal
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Savings to become effective upon the reorganization and stock issuance.
Employees of Capitol Federal Financial and Capitol Federal Savings who have been
credited with at least 1,000 hours of service during a twelve month period are
eligible to participate in the employee stock ownership plan.
As part of the reorganization and stock issuance, it is anticipated
that the employee stock ownership plan will borrow funds from Capitol Federal
Financial. The Employee stock ownership plan 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
employee stock ownership plan. The loan to the employee stock ownership plan
will be repaid principally from Capitol Federal Savings' contributions to the
employee stock ownership plan over a period of 15 years, and the collateral for
the loan will be the common stock purchased by the employee stock ownership
plan. The interest rate for the employee stock ownership plan loan is expected
to be the minimum rate prescribed by the Internal Revenue Code. Capitol Federal
Financial may, in any plan year, make additional discretionary contributions for
the benefit of plan participants in either cash or shares of common stock, which
may be acquired through the purchase of outstanding shares in the market or from
individual stockholders, upon the original issuance of additional shares by
Capitol Federal Financial or upon the sale of treasury shares by Capitol Federal
Financial. Such purchases, if made, would be funded through additional
borrowings by the employee stock ownership plan or additional contributions from
Capitol Federal Financial. The timing, amount and manner of future contributions
to the employee stock ownership plan will be affected by various factors,
including prevailing regulatory policies, the requirements of applicable laws
and regulations and market conditions.
Shares purchased by the employee stock ownership plan 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 employee
stock ownership plan will be allocated to each eligible participant's employee
stock ownership plan account based on the ratio of each such participant's
compensation to the total compensation of all eligible employee stock ownership
plan participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount Capitol Federal Financial might otherwise
have contributed to the employee stock ownership plan. The account balances of
participants within the employee stock ownership plan 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 Capitol Federal Savings prior to adoption of the employee
stock ownership plan. In the case of a "change in control," as defined, which
triggers a termination of the employee stock ownership plan, participants will
become immediately fully vested in their account balances. Benefits are payable
upon retirement or other separation from service. Capitol Federal Financial's
contributions to the employee stock ownership plan are not fixed, so benefits
payable under the employee stock ownership plan cannot be estimated.
Intrust Bank, N.A. will serve as trustee of the employee stock
ownership plan. Under the employee stock ownership plan, the trustee must vote
all allocated shares held in the employee stock ownership plan in accordance
with the instructions of the participating employees, and
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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 employee stock
ownership plan be reflected as a liability on Capitol Federal Financial's
statement of financial condition. Since the employee stock ownership plan is
borrowing from Capitol Federal Financial, such obligation is not treated as a
liability, but will be excluded from stockholders' equity. If the employee stock
ownership plan purchases newly issued shares from Capitol Federal Financial,
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 employee stock ownership plan participants.
The employee stock ownership plan will be subject to the requirements
of 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 Capitol Federal Financial common
stock sold in the stock issuance. Grants of common stock pursuant to the
restricted stock plan will be issued without cost to the recipient. If a
determination is made to implement a stock option plan or restricted stock plan,
it is anticipated that any such plans will be submitted to stockholders for
their consideration at which time stockholders would be provided with detailed
information regarding such plan. If such plans are approved, and effected, they
will have a dilutive effect on Capitol Federal Financial's stockholders as well
as affect Capitol Federal Financial'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 completion of the
reorganization, subject to continuing Office of Thrift Supervision jurisdiction.
Loans and Other Transactions with Officers and Directors
Capitol Federal Savings 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 Office of Thrift Supervision regulations restricting loan and other
transactions with affiliated persons of Capitol Federal Savings. 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.
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HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to Capitol Federal Savings Bank MHC, Capitol Federal
Financial and Capitol Federal Savings. 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 Capitol Federal Savings Bank MHC,
Capitol Federal Financial and Capitol Federal Savings. In addition, the
regulations governing Capitol Federal Savings Bank MHC, Capitol Federal
Financial and Capitol Federal Savings may be amended from time to time by the
Office of Thrift Supervision. Any such legislation or regulatory changes in the
future could adversely affect Capitol Federal Savings Bank MHC, Capitol Federal
Financial or Capitol Federal Savings. No assurance can be given as to whether or
in what form any such changes may occur.
General
Capitol Federal Savings, as a federally chartered savings institution,
is subject to federal regulation and oversight by the Office of Thrift
Supervision extending to all aspects of its operations. Capitol Federal Savings
also is subject to regulation and examination by the FDIC, which insures the
deposits of Capitol Federal Savings to the maximum extent permitted by law, and
requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the Office of
Thrift Supervision and are subject to periodic examinations by the Office of
Thrift Supervision and the FDIC. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Such regulation and supervision primarily is intended
for the protection of depositors and not for the purpose of protecting
shareholders. This regulatory oversight will continue to apply to Capitol
Federal Savings following the reorganization.
The Office of Thrift Supervision regularly examines Capitol Federal
Savings and prepares reports for the consideration of Capitol Federal Savings'
board of directors on any deficiencies that it may find in Capitol Federal
Savings' operations. The FDIC also has the authority to examine Capitol Federal
Savings in its role as the administrator of the Savings Association Insurance
Fund. Capitol Federal Savings' relationship with its depositors and borrowers
also is regulated to a great extent by both federal and state laws, especially
in such matters as the ownership of savings accounts and the form and content of
Capitol Federal Savings' mortgage requirements. Any change in such regulations,
whether by the FDIC, Office of Thrift Supervision or Congress, could have a
material adverse impact on Capitol Federal Savings Bank MHC, Capitol Federal
Financial and Capitol Federal Savings and their operations.
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Capitol Federal Savings Bank MHC
Upon completion of the reorganization and stock issuance, Capitol
Federal Savings Bank MHC will become a federal mutual holding company within the
meaning of Section 10(o) of the Home Owners Loan Act. As such, Capitol Federal
Savings Bank MHC will be required to register with and be subject to Office of
Thrift Supervision examination and supervision as well as certain reporting
requirements. In addition, the Office of Thrift Supervision has enforcement
authority over Capitol Federal Savings Bank MHC and its non-savings institution
subsidiaries, if any. Among other things, this authority permits the Office of
Thrift Supervision to restrict or prohibit activities that are determined to be
a serious risk to the financial safety, soundness or stability of a subsidiary
savings bank.
A mutual holding company is permitted to, among other things:
o invest in the stock of a savings institution;
o acquire a mutual institution through the merger of such
institution into a savings institution subsidiary of such mutual
holding company or an interim savings institution of such mutual
holding company;
o merge with or acquire another mutual holding company, one of
whose subsidiaries is a savings institution;
o acquire non-controlling amounts of the stock of savings
institutions and savings institution holding companies, subject
to certain restrictions;
o invest in a corporation the capital stock of which is available
for purchase by a savings institution under Federal law or under
the law of any state where the subsidiary savings institution or
institutions have their home offices;
o furnish or perform management services for a savings institution
subsidiary of such company;
o hold, manage or liquidate assets owned or acquired from a savings
institution subsidiary of such company;
o hold or manage properties used or occupied by a savings
institution subsidiary of such company; and
o act as a trustee under deed or trust.
In addition, a mutual holding company may engage in the activities of a
multiple savings and loan holding company which are permissible by statute and
Office of Thrift Supervision regulations and to the activities of bank holding
companies which the Federal Reserve Board has deemed permissible by regulation
under Section 4(c)(8) of the Bank Holding
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Company Act of 1956, as amended, subject to prior approval by the Office of
Thrift Supervision.
Capitol Federal Financial
Pursuant to regulations of the Office of Thrift Supervision and the
terms of Capitol Federal Financial's federal stock charter, the purpose and
powers of Capitol Federal Financial 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 Capitol Federal Savings fails the qualified thrift lender test,
Capitol Federal Financial must obtain the approval of the Office of Thrift
Supervision prior to continuing after such failure, directly or through its
other subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure Capitol Federal Savings Bank MHC and Capitol Federal
Financial must register as, and will become subject to, the restrictions
applicable to bank holding companies. The activities authorized for a bank
holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "--Qualified Thrift
Lender Test."
Capitol Federal Savings Bank MHC and Capitol Federal Financial must
obtain approval from the Office of Thrift Supervision before acquiring control
of any other Savings Association Insurance Fund insured institution. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings institutions in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings institution.
Capitol Federal Savings
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Capitol Federal
Savings is required to file periodic reports with the Office of Thrift
Supervision and is subject to periodic examinations by the Office of Thrift
Supervision and the FDIC. The last regular Office of Thrift Supervision
examination of Capitol Federal Savings was as of June 30, 1998. Under agency
scheduling guidelines, it is likely that another examination will be initiated
in the fourth quarter of 1999. When these examinations are conducted by the
Office of Thrift Supervision and the FDIC, the examiners may require Capitol
Federal Savings to provide for higher general or specific loan loss reserves.
All savings institutions are subject to a semi-annual assessment, based upon the
savings institution's total assets, to fund the operations of the Office of
Thrift Supervision. Capitol Federal Savings' Office of Thrift Supervision
assessment for the fiscal year ended September 30, 1998 was $695,000.
The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Capitol Federal Savings, Capitol Federal Financial and Capitol Federal Savings
Bank MHC. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or
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removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision. Except under certain circumstances, public
disclosure of final enforcement actions by the Office of Thrift Supervision is
required.
In addition, the investment, lending and branching authority of Capitol
Federal Savings is prescribed by federal laws and it is prohibited from engaging
in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Capitol Federal
Savings is in compliance with the noted restrictions.
Capitol Federal Savings' general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1998, Capitol Federal Savings'
lending limit under this restriction was $97.6 million. Capitol Federal Savings
is in compliance with the loans-to-one-borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
Capitol Federal Savings is a member of the Savings Association
Insurance Fund, which is administered by the FDIC. Deposits are insured up to
the applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the Savings Association Insurance Fund or Bank
Insurance Fund. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
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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 Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for an explanation
on the special Savings Association Insurance Fund assessment amount paid by
Capitol Federal Savings.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund insured institutions
are required to pay a Financing Corporation assessment, in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s, equal to
approximately 6 basis points for each $100 in domestic deposits, while Bank
Insurance Fund insured institutions pay an assessment equal to approximately
1.00 basis point for each $100 in domestic deposits. The assessment is expected
to be reduced to about 2 basis points no later than January 1, 2000, when Bank
Insurance Fund insured institutions fully participate in the assessment. These
assessments, which may be revised based upon the level of Bank Insurance Fund
and Savings Association Insurance Fund deposits will continue until the bonds
mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings institutions, such as Capitol Federal
Savings, are required to maintain a minimum level of regulatory capital. The
Office of Thrift Supervision has established capital standards, including a
tangible capital requirement, a leverage ratio, or core capital, requirement and
a risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 1998, Capitol Federal Savings did not have any
intangible assets.
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At September 30, 1998, Capitol Federal Savings had tangible capital of
$649.2 million, or 12.2% 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,
Capitol Federal Savings had no intangibles which were subject to these tests.
At September 30, 1998, Capitol Federal Savings had core capital equal
to $649.2 million, or 12.2% of adjusted total assets, which is $489.7 million
above the minimum leverage ratio requirement of 3% as in effect on that date.
The Office of Thrift Supervision 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 Office of Thrift
Supervision is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1998, Capitol
Federal Savings had $4.1 million of general loan loss reserves, which was less
than 1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the Office of Thrift Supervision has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage loans
not more than 90 days delinquent and having a loan to value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
the Fannie Mae or Freddie Mac.
On September 30, 1998, Capitol Federal Savings had total risk-based
capital of $652.9 million (including $649.2 million in core capital and $3.7
million in supplementary capital) and risk-weighted assets of $2.39 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 Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances required, to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until such plan is approved
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by the Office of Thrift Supervision may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and generally
may not make capital distributions. The Office of Thrift Supervision is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized institutions.
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 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 Office of Thrift Supervision must appoint a receiver, or conservator with
the concurrence of the FDIC, for a savings institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of the Office of Thrift Supervision and the FDIC, including the
appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any
of these measures on Capitol Federal Savings may have a substantial adverse
effect on its operations and profitability.
Limitations on Dividends and Other Capital Distributions
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions, such as Capitol Federal Savings, that
before and after the proposed distribution 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 Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Capitol Federal Savings may pay
dividends in accordance with this general authority.
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Savings institutions proposing to make any capital distribution need
only submit written notice to the Office of Thrift Supervision 30 days prior to
such distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution,
however, must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "--
Regulatory Capital Requirements."
The Office of Thrift Supervision 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 Office
of Thrift Supervision, 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 Office of
Thrift Supervision 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 Office of Thrift Supervision 30 days prior to declaring a
capital distribution. The Office of Thrift Supervision stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings institution may not make a capital
distribution without prior approval of the Office of Thrift Supervision and the
FDIC if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the Office of Thrift Supervision 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 Capitol Federal Savings, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the average daily balance of its liquidity base during the
preceding calendar quarter or a percentage of the amount of its liquidity base
at the end of the preceding quarter. For a discussion of what Capitol Federal
Savings includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Commitments." 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, Capitol Federal Savings was in
compliance with the requirement, with an overall liquid asset ratio of 45.3%.
Qualified Thrift Lender Test
All savings institutions, including Capitol Federal Savings, are
required to meet a qualified thrift lender test to avoid certain restrictions on
their operations. This test requires a savings institution to have at least 65%
of its portfolio assets, as defined by regulation, in
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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,
Capitol Federal Savings met the test and has always met the test since its
effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender and thereafter remains a qualified thrift lender. If an
institution does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund insured until the FDIC permits it to
transfer to the Bank Insurance Fund. If such an institution has not yet
requalified or converted to a national bank, its new investments and activities
are limited to those permissible for both a savings institution and a national
bank, and it is limited to national bank branching rights in its home state. In
addition, the institution is immediately ineligible to receive any new Federal
Home Loan Bank borrowings and is subject to national bank limits for payment of
dividends. If such an institution has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding Federal Home Loan Bank borrowings, which may
result in prepayment penalties. If any institution that fails the qualified
thrift lender test is controlled by a holding company, then within one year
after the failure, the holding company must register as a bank holding company
and become subject to all restrictions on bank holding companies. See "--
Capitol Federal Financial."
Community Reinvestment Act
Under the Community Reinvestment Act, every FDIC insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the Community Reinvestment Act. The Community
Reinvestment Act requires the Office of Thrift Supervision, in connection with
the examination of Capitol Federal Savings, to assess the institution's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by Capitol Federal Savings. An unsatisfactory rating
may be used as the basis for the denial of an application by the Office of
Thrift Supervision. Due to the heightened attention being given to the Community
Reinvestment Act in the past few years, Capitol Federal Savings may be required
to devote additional funds for investment and lending in its local community.
Capitol Federal Savings was examined for Community Reinvestment Act 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
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addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the institution's capital. Affiliates of Capitol
Federal Savings include Capitol Federal Financial and any company which is under
common control with Capitol Federal Savings. In addition, a savings institution
may not lend to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates. The Office of
Thrift Supervision has the discretion to treat subsidiaries of savings
institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
Federal Securities Law
The stock of Capitol Federal Financial will be registered with the SEC
under the Securities Exchange Act of 1934, as amended. Capitol Federal Financial
will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934.
Capitol Federal Financial stock held by persons who are affiliates of
Capitol Federal Financial may not be resold without registration or unless sold
in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal stockholders. If Capitol
Federal Financial meets specified current public information requirements, each
affiliate of Capitol Federal Financial 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, Capitol Federal Savings was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the Office of Thrift Supervision. See
"--Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve
Bank.
Federal Home Loan Bank System
Capitol Federal Savings is a member of the Federal Home Loan Bank of
Topeka, which is one of 12 regional Federal Home Loan Banks, that administers
the home financing
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credit function of savings institutions. Each Federal Home Loan Bank serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans or advances to members in
accordance with policies and procedures, established by the board of directors
of the Federal Home Loan Bank, which are subject to the oversight of the Federal
Housing Finance Board. All advances from the Federal Home Loan Bank are required
to be fully secured by sufficient collateral as determined by the Federal Home
Loan Bank. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, Capitol Federal Savings is required to purchase and
maintain stock in the Federal Home Loan Bank of Topeka. For the year ended
September 30, 1998, Capitol Federal Savings had an average outstanding balance
of $41.6 million in Federal Home Loan Bank stock, which was in compliance with
this requirement. In past years, Capitol Federal Savings has received
substantial dividends on its Federal Home Loan Bank stock. Over the past five
fiscal years such dividends have averaged 6.71% and were 7.66% for fiscal year
1998.
Under federal law the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Capitol Federal Savings' Federal Home Loan Bank stock may result in a
corresponding reduction in Capitol Federal Savings' capital.
For the year ended September 30, 1998, dividends paid by the Federal
Home Loan Bank of Topeka to Capitol Federal Savings totaled $3.2 million, which
was an increase over the amount of dividends received in fiscal year 1997.
TAXATION
Federal Taxation
General. Capitol Federal Financial and Capitol Federal Savings 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 Capitol Federal Financial or Capitol Federal Savings. Capitol Federal
Savings' federal income tax returns have been closed without audit by the IRS
through its fiscal year ended September 30, 1995.
Following the reorganization, Capitol Federal Financial anticipates
that it will file a consolidated federal income tax return with Capitol Federal
Savings commencing with the first taxable year after completion of the
reorganization. Accordingly, it is anticipated that any cash distributions made
by Capitol Federal Financial to its stockholders would be considered to
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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, Capitol Federal
Savings 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,
Capitol Federal Savings was permitted to establish a reserve for bad debts and
to make annual additions to the reserve. These additions could, within specified
formula limits, be deducted in arriving at taxable income. As a result of the
Small Business Job Protection Act, savings associations must now use the
specific chargeoff method in computing bad debt deductions beginning with their
1996 Federal tax return. In addition, federal legislation requires Capitol
Federal Savings to recapture, over a six year period, the excess of tax bad debt
reserves at September 30, 1997 over those established as of the base year
reserve balance as of September 30, 1989. The amount of such reserve subject to
recapture as of September 30, 1998 for Capitol Federal Savings is approximately
$97.1 million. Capitol Federal Savings continues to utilize the reserve method
in determining its privilege tax obligations to the State of Kansas.
Taxable Distributions and Recapture. Prior to the Small Business Job
Protection Act, bad debt reserves created prior to the year ended September 30,
1997, were subject to recapture into taxable income should Capitol Federal
Savings fail to meet certain thrift asset and definitional tests. New federal
legislation eliminated these thrift related recapture rules. However, under
current law, pre-1988 reserves remain subject to recapture should Capitol
Federal Savings make certain non-dividend distributions or cease to maintain a
thrift charter.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum
tax at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Capitol Federal Savings has not been subject to the alternative minimum tax nor
does Capitol Federal Savings 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, Capitol Federal Savings
had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Capitol Federal Financial may
eliminate from its income dividends received from Capitol Federal Savings as a
wholly-owned subsidiary of Capitol Federal Financial if it elects to file a
consolidated return with Capitol Federal Savings. The corporate
dividends-received deduction is 100% or 80% in the case of dividends
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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
Capitol Federal Savings files Kansas privilege tax returns. For Kansas
privilege tax purposes, for taxable years beginning after 1997, the minimum tax
rate is 4.5% of earnings, which is calculated based on federal taxable income,
subject to certain adjustments. The earnings of Capitol Federal Financial may be
combined with Capitol Federal Savings for purposes of the Kansas privilege tax.
If it is not, Capitol Federal Financial will file Kansas income tax returns with
non-thrift members of the affiliated group.
CAPITOL FEDERAL SAVINGS BANK MHC
MAY CONSIDER CONVERTING TO STOCK FORM IN THE FUTURE
As long as Capitol Federal Savings Bank MHC remains a mutual holding
company, it must own at least a majority of the outstanding voting stock of
Capitol Federal Financial. Office of Thrift Supervision 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. Office of Thrift Supervision regulations require that such
exchange be "fair and reasonable" but do not specify the basis for such
exchange. Although Capitol Federal Savings Bank MHC could convert to stock form
in the future, Capitol Federal Savings and Capitol Federal Savings Bank 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 Office of Thrift Supervision in effect at
the time of the conversion transaction. In addition, the Office of Thrift
Supervision may, in the future, authorize alternative forms of structure or
organization for mutual holding companies or their affiliates or subsidiaries.
Although Capitol Federal Savings and Capitol Federal Savings Bank MHC may
consider such alternative forms of structure or organization, there can be no
assurances as to when, if ever, Capitol Federal Savings and Capitol Federal
Savings Bank MHC will choose to avail itself of any such alternative form of
structure or organization. A decision by Capitol Federal Savings Bank 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 mutual holding company. In a conversion
transaction, Capitol Federal Savings Bank MHC, Capitol Federal Financial or
Capitol Federal Savings will have to demonstrate to the Office of Thrift
Supervision that the terms of such exchange are fair and reasonable and comply
with the stock purchase limitations of the Office of Thrift Supervision
conversion regulations. This may, as a condition to Office of Thrift Supervision
approval of the conversion transaction, in certain limited circumstances,
require certain insiders of Capitol Federal Savings 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
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<PAGE>
purchase limitations. The fairness of the exchange may be supported by an
opinion from an independent third party.
The Office of Thrift Supervision 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 Capitol Federal
Savings Bank 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 mutual
holding company common stock. The Office of Thrift Supervision 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
Capitol Federal Savings Bank 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 mutual holding company in a conversion transaction, which adjustment
will have the effect of diluting minority stockholders' ownership interests. The
percentage of the converted mutual holding company's common stock received by
minority stockholders in any conversion transaction may also be affected by
purchases of common stock by Capitol Federal Savings Bank MHC, subsequent
offerings or other stock issuances by Capitol Federal Financial, including share
issuances under the terms of the Capitol Federal Financial stock option plan
subject to approval of Capitol Federal Financial's stockholders and the Capitol
Federal Financial restricted stock plan, subject to approval of Capitol Federal
Financial's stockholders any intervening acquisitions by Capitol Federal Savings
Bank MHC, Capitol Federal Financial's dividend policy, including special
dividends and the amount of dividends paid by Capitol Federal Financial.
As an alternative to the exchange of shares discussed above, if the
stockholders of Capitol Federal Financial do not receive shares of the converted
mutual holding company 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, Capitol Federal Financial
or Capitol Federal Savings Bank MHC and its successors may elect to purchase all
shares of the common stock not owned by it simultaneously with the completion of
the conversion transaction at the fair market value of the stock on the date of
the conversion transaction, subject to Office of Thrift Supervision approval and
compliance with the limitations of the Office of Thrift Supervision regulations
governing capital distributions and other conditions that the Office of Thrift
Supervision may impose. Such fair market value of Capitol Federal Financial's
common stock shall be established by an independent appraisal, and may be
greater than or less than $10.00 per share. 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 Capitol Federal Savings Bank MHC converts
to stock form in a conversion transaction, any options or other convertible
securities held by an officer, director or employee of Capitol Federal
Financial, convertible into shares of common stock shall become options to
purchase or convertible into shares of the converted mutual holding company;
provided, however, that if such options or convertible shares cannot be so
reconstituted, the
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<PAGE>
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 mutual holding company 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 Office of Thrift
Supervision, and there can be no assurance that such approval would be obtained.
In addition, the Office of Thrift Supervision may place restrictions on Capitol
Federal Financial's or Capitol Federal Savings Bank MHC's ability to purchase
common stock that are more restrictive than the Office of Thrift Supervision
regulations governing capital distributions. The fair market value of the common
stock of the converted mutual holding company shall be established by the
independent appraisal utilized in the conversion transaction pursuant to the
Office of Thrift Supervision 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 Capitol Federal Savings Bank MHC were to undertake a
conversion transaction, and in connection therewith additional shares of stock
of the converted mutual holding company were proposed to be contributed to the
Capitol Federal 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 Capitol Federal Savings Bank MHC eligible to
be cast and a majority vote of the total outstanding shares of common stock held
by stockholders other than Capitol Federal Savings Bank MHC and the foundation.
RESTRICTIONS ON ACQUISITION
OF CAPITOL FEDERAL FINANCIAL AND CAPITOL FEDERAL SAVINGS
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Capitol Federal Financial, Capitol
Federal Savings or their respective capital stock are described below. Also
discussed are certain provisions in Capitol Federal Financial's
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<PAGE>
charter and bylaws which may be deemed to affect the ability of a person, firm
or entity to acquire Capitol Federal Financial.
Federal Law
The Change in 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 institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition. The Office of Thrift Supervision 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.
These 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 plans do not have beneficial ownership of more than 25% of any
class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Capitol Federal Financial or Capitol Federal Savings without Office
of Thrift Supervision approval.
Charter and Bylaws of Capitol Federal Financial
The following discussion is a summary of certain provisions of the
charter and bylaws of Capitol Federal Financial 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 Capitol
Federal Financial is required by the charter and bylaws to be divided into three
classes which are as equal in size
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<PAGE>
as is possible. One class is required to be elected annually by stockholders of
Capitol Federal Financial for three-year terms. A classified board promotes
continuity and stability of management of Capitol Federal Financial 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, Capitol Federal Financial will have authorized but unissued shares of
preferred stock and common stock. See "Description of Capital Stock of Capitol
Federal Financial." Although these shares could be used by the board of
directors of Capitol Federal Financial to make it more difficult or to
discourage an attempt to obtain control of Capitol Federal Financial through a
merger, tender offer, proxy contest or otherwise, these uses will be unlikely
since Capitol Federal Savings Bank MHC owns a majority of the common stock.
Special Meetings of Stockholders. Capitol Federal Financial's charter
provides that for a period of five years after completing the reorganization,
special meetings of stockholders may be called only by Capitol Federal
Financial's board of directors, for matters relating to changes in control of
Capitol Federal Financial or amendments to its charter.
How Shares are Voted. Capitol Federal Financial's charter provides that
there will not be cumulative voting by stockholders for the election of Capitol
Federal Financial's directors. No cumulative voting rights means that Capitol
Federal Savings Bank MHC, as the holder of a majority of the shares voted at a
meeting of stockholders, may elect all directors of Capitol Federal Financial to
be elected at that meeting. This could prevent minority stockholder
representation on Capitol Federal Financial's board of directors.
Restrictions on Acquisitions of Shares. Capitol Federal Financial's
charter provides that for a period of five years from the closing of the stock
issuance, no person other than Capitol Federal Savings Bank MHC may offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of Capitol Federal Financial. This provision does not apply to
any tax-qualified employee stock benefit plan of Capitol Federal Financial or to
an underwriter or member of an underwriting or selling group involving the
public sale or resale of securities of Capitol Federal Financial or any of its
subsidiaries so long as after the sale or resale, no underwriter or member of
the selling group is a beneficial owner of more than 10% of any class of equity
securities of Capitol Federal Financial. In addition, during this five-year
period, all shares owned over the 10% limit may not be voted in any matter
submitted to stockholders for a vote.
Procedures for Stockholder Nominations. Capitol Federal Financial's
bylaws provide that any stockholder wanting to make a nomination for the
election of directors or a proposal for new business at a meeting of
stockholders must send written notice to the Secretary of Capitol Federal
Financial at least five days before the date of the annual meeting. The bylaws
further provide that if a stockholder wanting to make a nomination or a proposal
for new business does not follow the prescribed procedures, the proposal will
not be considered until 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 Capitol Federal Financial and
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<PAGE>
its stockholders to provide enough time for 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 if management
thinks it 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 Capitol Federal Financial's charter
and bylaws described above, certain benefit plans of Capitol Federal Financial
and Capitol Federal Savings adopted in connection with the reorganization and
stock issuance contain provisions which also may discourage hostile takeover
attempts which the board of directors of Capitol Federal Savings might conclude
are not in the best interests of Capitol Federal Financial, Capitol Federal
Financial and Capitol Federal Savings or Capitol Federal Financial's
stockholders. For a description of the benefit plans and the provisions of such
plans relating to changes in control of Capitol Federal Financial or Capitol
Federal Savings, see "Management - Benefits."
DESCRIPTION OF CAPITAL STOCK OF
CAPITOL FEDERAL FINANCIAL
General
Capitol Federal Financial 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. Capitol Federal Financial
currently expects to issue up to a maximum of 105,239,131 shares (121,025,001
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 Capitol Federal Financial'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 Capitol
Federal Financial's capital stock which are deemed material to an investment
decision with respect to the stock issuance.
The common stock of Capitol Federal Financial will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Common Stock
Distributions. Capitol Federal Financial can pay dividends if, as and
when declared by its board of directors, subject to compliance with limitations
which are imposed by law. See "Our Policy Regarding Dividends" and "Capitol
Federal Savings Bank MHC Intends to Waive Any Dividends From Capitol Federal
Financial." The holders of common stock of Capitol
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<PAGE>
Federal Financial will be entitled to receive and share equally in such
dividends as may be declared by the board of directors of Capitol Federal
Financial out of funds legally available therefor. If Capitol Federal Financial
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 Capitol Federal Financial will possess exclusive
voting rights in Capitol Federal Financial. 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 Capitol Federal Financial and Capitol Federal Savings." If
Capitol Federal Financial 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 Capitol Federal Savings, Capitol Federal Financial, as holder of Capitol
Federal Savings' capital stock, would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Capitol Federal Savings,
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 "Our Corporate
Change and Stock Offering -Effects of the Corporate Change -- Depositors Rights
if We Liquidate"), all assets of Capitol Federal Savings available for
distribution. In the event of liquidation, dissolution or winding up of Capitol
Federal Financial, 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 Capitol Federal Financial 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.
Rights to Buy Additional Shares. Holders of the common stock of Capitol
Federal Financial will not be entitled to preemptive rights with respect to any
shares which may be issued. Preemptive rights are the priority right to buy
additional shares if Capitol Federal Financial issues more shares in the future.
The common stock is not subject to redemption.
Preferred Stock
None of the shares of Capitol Federal Financial'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. Capitol Federal Financial has no present plans to issue preferred
stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Capitol Federal Financial common
stock is American Stock Transfer & Trust Company.
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<PAGE>
EXPERTS
The financial statements of Capitol Federal Savings 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 Capitol Federal Savings 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 Capitol Federal
Savings by Silver, Freedman & Taff, L.L.P., Washington, D.C., special counsel to
Capitol Federal Savings and Capitol Federal Financial. The Kansas income tax
consequences of the reorganization will be passed upon for Capitol Federal
Savings by Deloitte & Touche LLP. The federal income tax consequences of the
deductibility of a contribution of Capitol Federal Financial common stock to the
private foundation, and applicability of the self-dealing rules to such
contribution will be passed upon for Capitol Federal Savings 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
Capitol Federal Financial has filed with the SEC a Registration
Statement under the Securities Act of 1933 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 Capitol
Federal Financial. 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
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reference to such contract or document. Capitol Federal Savings also maintains a
website (http://www.capfed.com) which contains various information about Capitol
Federal Savings.
Capitol Federal Savings has filed Applications on Form MHC-1 and Form
MHC-2 and an Application H-(e)1 with the Office of Thrift Supervision 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 Office of Thrift Supervision, 1700 G Street, N.W.,
Washington, D.C. 20552, and at the Midwest Regional Office of the Office of
Thrift Supervision located at 122 West John Carpenter Freeway, Suite 600,
Irving, Texas, 75261-9027.
In connection with the reorganization, Capitol Federal Financial will
register its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon such registration, Capitol Federal Financial 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 Securities Exchange Act of 1934.
Under the Plan, Capitol Federal Financial 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 Capitol Federal Financial, Capitol Federal Savings and
Capitol Federal Savings Bank MHC are available without charge from Capitol
Federal Savings. Requests for such information should be directed to:
Stockholder Relations, Capitol Federal Savings, 700 Kansas Avenue, Topeka,
Kansas 66603.
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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....................................68
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 Capitol Federal Financial have been omitted
because Capitol Federal Financial 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 $4,081 and $1,639) ................ 3,711,152 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 ...................................... $5,315,801 $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 ............ 17,641 13,828
---------- ----------
Total liabilities ....................... 4,653,469 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 ....................... $5,315,801 $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 ......................................... 2,462 56 865
Provision for commitment losses ................................... 900
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.
The Bank records a loss valuation for loan losses inherent in unused
commitments to provide financing (Note 16). The Bank records the allowance
for these off-balance sheet commitments in accrued expenses.
Assessing the adequacy of the allowance for loan and unused commitment
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 .................... 4,081 1,639
Unearned loan fees and deferred costs ........ 12,751 12,029
---------- ----------
38,522 35,540
---------- ----------
$3,711,152 $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 ............. 2,462 56 865
Losses charged against the allowance ..... (20) (641)
------- ------- -------
Balance, end of year ....................... $ 4,081 $ 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
and commitment 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 and commitment 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) $652,949 27.3% $191,424 8.0% $239,280 10.0%
Core capital (to adjusted tangible assets) 649,199 12.2% 159,447 3.0% 266,865 5.0%
Tangible capital (to tangible assets) 649,199 12.2% 79,724 1.5% N/A N/A
Tier I capital (to risk weighted assets) 649,199 27.2% N/A N/A 143,376 6.0%
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
General loan loss reserve ....................... 4,081
Other ........................................... (331)
--------
Total risk based capital .......................... $652,949
========
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 ................................. 3,711,152 3,954,842 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>
<S> <C>
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by Capitol
Federal Financial, Capitol Federal Savings or Charles Webb & Company. This UP TO
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 50,000,000 SHARES
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. Neither
the delivery of this prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of Capitol Federal Financial or Capitol Federal Savings since any of the
dates as of which information is furnished herein or since the date hereof.
--------------
CAPITOL FEDERAL
TABLE OF CONTENTS FINANCIAL
Page (Proposed Holding Company for
Capitol Federal Savings Bank)
Summary................................................... 3
Risk Factors.............................................. 8
Selected Financial and Other Data......................... 11
Recent Developments..................................... 13
Management's Discussion and Analysis of Recent
Financial Information................................... 15 COMMON STOCK
Capitol Federal Financial................................. 17
Capitol Federal Savings Bank.............................. 18
Capitol Federal Savings Bank MHC.......................... 18
How We Intend to Use the Proceeds......................... 19
Market for the Common Stock............................... 21
Our Policy Regarding Dividends............................ 21 --------------
Capitol Federal Savings Bank MHC Intends to Waive
Any Dividends From Capitol Federal Financial........... 22 PROSPECTUS
Pro Forma Data........................................... 24 --------------
Comparison of Valuation and Pro Forma Information
With No Foundation..................................... 30
Capitalization............................................ 32
Capitol Federal Savings Exceeds All Regulatory Capital
Requirements........................................... 33
Our Corporate Change and Stock Offering................... 35
Proposed Purchases by Management.......................... 67 CHARLES WEBB & COMPANY, a
Management's Discussion and Analysis of Financial Division of Keefe, Bruyette &
Condition and Results of Operations.................... 69 Woods, Inc.
Business of Capitol Federal Financial..................... 88
Business of Capitol Federal Savings....................... 89
Management ............................................... 115 ____________, 1999
How We Are Regulated...................................... 123
Taxation.................................................. 134
Capitol Federal Savings Bank MHC May Consider
Converting to Stock Form in the Future................. 136
Restrictions on Acquisition of Capitol Federal
Financial and Capitol Federal Savings................ 138
Description of Capital Stock of Capitol Federal Financial 141
Transfer Agent and Registrar.............................. 142
Experts................................................... 142
Legal and Tax Opinions ................................... 143
Additional Information.................................... 143
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.
- ----------------
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>
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director 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 11, 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 11, 1999
- ----------------- Chief Executive Officer
JOHN C. DICUS (Principal Executive Officer)
/s/ John B. Dicus President, Chief Operating February 11, 1999
- ----------------- Officer and Director
JOHN B. DICUS
/s/ Neil F.M. McKay Executive Vice President February 11, 1999
- ------------------- and Chief Financial Officer
NEIL F.M. MCKAY (Principal Financial Officer)
4
<PAGE>
Name Title Date
---- ----- ----
/s/ Kent G. Townsend First Vice President February 11, 1999
- -------------------- and Controller
KENT G. TOWNSEND (Principal Accounting Officer)
/s/ B.B. Andersen Director February 11, 1999
- --------------------
B.B. ANDERSEN
/s/ Robert B. Maupin Director February 11, 1999
- --------------------
ROBERT B. MAUPIN
/s/ Frederick P. Reynolds Director February 11, 1999
- -------------------------
FREDERICK P. REYNOLDS
/s/ Carl W. Quarnstrom Director February 11, 1999
- ----------------------
CARL W. QUARNSTROM
/s/ Marilyn S. Ward Director February 11, 1999
- ----------------------
MARILYN S. WARD
5
<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 Restated Plan of Reorganization and Stock Issuance Plan
3.1 *Federal MHC Subsidiary Holding Company Charter for Capitol Federal
Financial
3.2 *Bylaws of Capitol Federal Financial
4.0 *Form of Stock Certificate of Capitol Federal Financial
5.0 *Opinion of Silver, Freedman & Taff L.L.P. Re: Legality
8.1 *Opinion of Silver, Freedman & Taff L.L.P. Re: Federal Tax Matters
8.2 Opinion of Deloitte & Touche L.L.P. Re: State Tax Matters
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. Re: legality (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.
[DELOITTE & TOUCHE LLP LETTERHEAD]
February 8, 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 February 5, 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
February 8, 1999
Page 2 of 5
(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 49.9% 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 files a privilege tax return with the state of Kansas.
Subsequent to the Conversion, the Stock Association will file a privilege tax
return with the state of Kansas which may potentially include, on a combined
basis, the Stock Holding Company and MHC. 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 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.
<PAGE>
Capitol Federal Savings & Loan Association
February 8, 1999
Page 3 of 5
OPINION
Based on the facts set forth herein or incorporated by reference, including the
Representation Letter referred to in the Federal Tax Opinion, and the opinions
rendered in the 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 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.
2. 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.
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 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.
5. 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.
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.
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.
<PAGE>
Capitol Federal Savings & Loan Association
February 8, 1999
Page 4 of 5
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 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.
<PAGE>
Capitol Federal Savings & Loan Association
February 8, 1999
Page 5 of 5
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.
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,
/s/ Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
INDEPENDENT AUDITORS' CONSENT
Capitol Federal Savings and Loan Association
Topeka, Kansas
We consent to the use in this Amendment No. 2 to the Registration Statement on
Form S-1 for Capitol Federal Financial and in Amendment No. 2 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
February 9, 1999
