UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number 333-68363
CAPITOL FEDERAL FINANCIAL
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
United States 48-1212142
-------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
700 Kansas Avenue, Topeka, Kansas 66603
--------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (785) 235-1341
--------------
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Transitional Small Business Format: Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock 84,217,579
------------ ------------------
Class Shares Outstanding
<PAGE>
<TABLE>
<CAPTION>
FORM 10-Q
Capitol Federal Financial
INDEX
Page
PART I -- FINANCIAL INFORMATION Number
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 and September 30, 1999 3
Consolidated Statements of Income for the three and nine months ended 4
June 30, 2000 and June 30, 1999
Consolidated Statement of Stockholders' Equity for the nine months ended 5
June 30, 2000
Consolidated Statements of Cash Flows for the nine months ended June 30, 2000 6
and June 30, 1999
Notes to Consolidated Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 13
Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART 1 -- FINANCIAL INFORMATION
CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, September 30,
2000 1999
---------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 28,639 $ 22,275
Investment securities held to maturity (market value of $14,580 15,100 15,100
and $14,754)
Capital stock of Federal Home Loan Bank 139,250 68,336
Mortgage-related securities:
Available-for-sale(amortized cost of $921,510 and $1,129,995) 919,406 1,136,776
Held-to-maturity (market value of $1,584,629 and $914,820) 1,625,556 939,492
Loans held for sale, net 7,252 3,651
Loans receivable, net 5,178,551 4,291,288
Premises and equipment 24,229 24,046
Real estate owned, net 1,698 1,073
Accrued interest receivable 40,764 32,845
Other assets 3,774 4,433
---------------------------------------
TOTAL ASSETS $7,984,219 $6,539,315
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $3,941,150 $3,899,565
Advances from Federal Home Loan Bank 2,785,000 1,345,000
Securities sold under agreement to repurchase 175,000 175,000
Advance payments by borrowers for taxes and insurance 20,809 37,422
Deferred income taxes 10,408 13,779
Accounts payable and accrued expenses 34,801 22,035
---------------------------------------
Total liabilities 6,967,168 5,492,801
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value) 50,000,000 shares 0 0
authorized; none issued
Common stock ($0.01 par value) 450,000,000 authorized; 915 915
91,512,287 shares issued as of June 30, 2000 and September 30, 1999
Additional paid in capital 383,488 384,864
Retained earnings 730,003 684,761
Accumulated other comprehensive income (1,309) 4,204
Unearned compensation, Employee Stock Ownership Plan (26,717) (28,230)
Unearned compensation, Recognition and Retention Plan (9,077) 0
Less shares held in treasury: 6,129,208 shares at cost (60,252) 0
---------------------------------------
Total stockholders' equity 1,017,051 1,046,514
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,984,219 $6,539,315
=======================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans receivable $88,609 $70,840 $249,913 $211,022
Mortgage-related securities 44,299 27,873 115,975 66,943
Investment securities 227 200 697 965
Securities purchased under agreement to resell - - - 3,894
Cash and cash equivalents 314 241 1,630 2,003
Capital stock of Federal Home Loan Bank 2,446 826 5,535 2,361
--------------------------- ----------------------------
Total interest and dividend income 135,895 99,980 373,750 287,188
INTEREST EXPENSE:
Deposits 51,225 48,669 151,134 148,499
Borrowings 41,427 13,388 96,845 35,315
--------------------------- ----------------------------
Total interest expense 92,652 62,057 247,979 183,814
--------------------------- ----------------------------
Net interest and dividend income 43,243 37,923 125,771 103,374
Provision for loan losses - - 494 135
--------------------------- ----------------------------
Net interest and dividend income after 43,243 37,923 125,277 103,239
provision for loan losses
OTHER INCOME:
Automated teller and debit card transaction fees 1,317 1,188 3,756 2,950
Checking account transaction fees 778 720 2,314 2,109
Loan fees 392 438 1,201 1,434
Insurance commissions 392 347 1,287 1,145
Other, net 969 833 2,148 2,284
--------------------------- ----------------------------
Total other income 3,848 3,526 10,706 9,922
OTHER EXPENSES:
Salaries and employee benefits 11,199 7,345 27,491 23,538
Occupancy of premises 2,159 1,866 7,052 6,298
Office supplies and related expenses 878 849 2,432 2,419
Deposit and loan transaction fees 943 1,014 2,800 2,942
Advertising 505 1,101 1,698 2,128
Federal insurance premium 210 582 1,016 1,751
Contribution to Foundation - - - 30,231
Other, net 1,084 1,024 3,655 2,747
--------------------------- ----------------------------
Total other expenses 16,978 13,781 46,144 72,054
--------------------------- ----------------------------
Income before income tax expense 30,113 27,668 89,839 41,107
Income tax expense 11,368 10,395 33,914 15,684
--------------------------- ----------------------------
NET INCOME $18,745 $17,273 $55,925 $25,423
=========================== ============================
</TABLE>
See accompanying notes to consolidated interim financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
Common Additional Retained Accumulated
Stock Paid-In Earnings Other
Capital Comprehensive
Income
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1999 $915 $384,864 $684,761 $4,204
Comprehensive Income:
Net income - - 55,925 -
Other Comprehensive income -
Change in unrealized gains on mortgage-
related securities available-for-sale, net of
deferred taxes of $(3,371) - - - (5,513)
Total Comprehensive income
Repurchase of common stock, at cost - - - -
Transfer Shares to Recognition and Retention (1,432)
plan (1,280,000 shares)
Common stock vested upon grant, 81
Recognition and Retention Plan (256,000
shares)
Amortization of Recognition and Retention
Plan
Employee stock options exercised (1,000 (1)
shares)
Common stock committed to be released for -
allocation - Employee Stock Ownership - - -
Plan
Decrease in fair market value of Employee - (24) - -
Stock Ownership Plan shares committed
to be released for allocation
Dividends on common stock to stockholders
($0.32 per share) - - (10,683) -
-------------------------------------------------------
Balance at June 30, 2000 $915 $383,488 $730,003 $(1,309)
=======================================================
</TABLE>
<TABLE>
<CAPTION>
Unearned Unearned Treasury Total
Compensation Compensation Stock
(RRP) (ESOP)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1999 0 $(28,230) - $1,046,514
Comprehensive Income:
Net income - - 55,925
Other Comprehensive income -
Change in unrealized gains on mortgage-
related securities available-for-sale, net of
deferred taxes of $(3,371) - - (5,513)
----------------
Total Comprehensive income 50,412
Repurchase of common stock, at cost - (73,534) (73,534)
Transfer Shares to Recognition and Retention (11,840) 13,272 -
plan (1,280,000 shares)
Common stock vested upon grant, 2,368 2,449
Recognition and Retention Plan (256,000
shares)
Amortization of Recognition and Retention 395 395
Plan
Employee stock options exercised (1,000 10 9
shares)
Common stock committed to be released for
allocation - Employee Stock Ownership 1,513 - 1,513
Plan
Decrease in fair market value of Employee - - (24)
Stock Ownership Plan shares committed
to be released for allocation
Dividends on common stock to stockholders
($0.32 per share) - - (10,683)
----------------------------------------- ----------------------------
Balance at June 30, 2000 (9,077) $(26,717) (60,252) $1,017,051
======================================================================
</TABLE>
See accompanying notes to consolidated interim financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
For Nine Months Ended June 30,
------------------------------------------
2000 1999
------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,925 $ 25,423
Adjustments to reconcile net income to net
cash provided by operating activities:
Federal Home Loan Bank stock dividends (1,367) (5,021)
Amortization of net deferred loan origination fees (820) (7,622)
Provision for loan losses 494 135
Net loan origination fees capitalized 2,865 8,440
Gain on sales of real estate owned, net (158) (118)
Originations of loans held for sale (3,699) (854)
Proceeds from sales of loans held for sale 0 12,976
Amortization and accretion of premiums and discounts on
mortgage-related securities and investment securities 332 3,090
Depreciation and amortization on premises and equipment 2,932 2,479
Deferred income tax benefit 0 (11,488)
Termination of Pension Plan 0 1,600
Decrease in fair market value of Employee stock Ownership (24) 0
Plan shares committed to be released for allocation
Amortization of unearned compensation - ESOP 1,513 1,574
Amortization of unearned compensation - RRP 2,763 0
Changes in:
Accrued interest receivable (7,920) (2,366)
Other assets 757 (363)
Income taxes payable 5,003 4,779
Accounts payable and accrued expenses 7,771 2,418
-----------------------------------
Net cash provided by operating activities 66,367 35,082
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 0 160,470
Purchases of investment securities (69,547) (15,000)
Purchases of securities under agreement to resell 0 (1,383,410)
Principal collected on mortgage-related securities available-for- 207,819 470,178
sale
Purchases of mortgage-related securities available-for-sale 0 (1,010,909)
Principal collected on mortgage-related securities held-to- 130,399 270,494
maturity
Purchases of mortgage-related securities held-to-maturity (816,128) (600,824)
Loan originations net of principal collected on loans receivable (320,893) (210,591)
Purchases of loans receivable (571,933) (105,527)
Purchases of premises and equipment, net (3,115) (3,762)
Proceeds from sales of real estate owned 2,549 2,153
-----------------------------------
Net cash used in investing activities (1,440,849) (2,426,728)
6
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (10,683) (3,932)
Deposits, net of payments 41,585 47,278
Proceeds from advances from Federal Home Loan Bank 2,008,000 895,000
Repayments on advances from Federal Home Loan Bank (568,000) (495,000)
Proceeds from securities sold under agreement to repurchase 0 1,618,410
Proceeds from stock issuance, net 90 355,295
Payments for the repurchase of common stock (73,534) 0
Change in advance payments by borrowers for taxes and (16,612) (15,335)
insurance
-----------------------------------
Net cash provided by financing activities 1,380,846 2,401,716
NET INCREASE IN CASH AND CASH 6,364 10,070
EQUIVALENTS
CASH AND CASH EQUIVALENTS:
Beginning of Period $22,275 $24,454
-----------------------------------
End of Period $ 28,639 $ 34,524
===================================
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING TRANSACTIONS:
Note received from ESOP in exchange for stock $30,246
---------------------
</TABLE>
See accompanying notes to consolidated interim financial statements.
7
<PAGE>
Notes to Consolidated Interim Financial Statements
1. Basis of Financial Statement Presentation and Significant Accounting Policies
The accompanying consolidated interim financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). Accordingly, they do not include information or footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with GAAP. However, all normal,
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation of the consolidated interim financial statements, have been
included. These financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto for the period
ended September 30, 1999 contained in the Company's Annual Report for the fiscal
year ended September 30, 1999. The results for the nine months ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended September 30, 2000.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowances for losses on loans and
real estate owned. While management believes that these allowances are adequate,
future additions to the allowances may be necessary based on changes in economic
conditions.
2. Summary of Significant Accounting Policies
On March 31, 1999, Capitol Federal Financial (the "Company") completed the
reorganization of Capitol Federal Savings and Loan Association, a federally
chartered mutual savings and loan ("Capitol Federal Savings" or the "Bank"),
into the federal mutual holding company form of ownership, whereby the Bank
converted into a federally chartered stock savings bank as a wholly owned
subsidiary of the Company, and the Company became a majority-owned subsidiary of
Capitol Federal Savings Bank MHC, a federally chartered mutual holding company
(the "MHC") (the "Reorganization"). In connection with the Reorganization, the
Company sold 37,807,183 shares of Company common stock, par value $0.01 per
share ("Company Common Stock") at $10.00 per share, which net of issuance costs
generated proceeds of $355.5 million, including shares issued to the Employee
Stock Ownership Plan ("ESOP"). The Company also issued 52,192,817 shares of
Company Common Stock to the MHC. In addition, the Company established an ESOP
for the employees of the Company and the Bank which became effective with the
completion of the Reorganization.
Additional information regarding the Reorganization is included in the Company's
Registration Statement on Form S-1 filed on December 4, 1998, as amended.
8
<PAGE>
3. Loan Portfolio
The following table presents the Company's loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 2000 September 30, 1999
---------------------------------------------------------------------
Amount Percent Amount Percent
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family $4,934,946 94.56% $4,083,148 94.10%
Multi-family 50,034 0.96 31,114 0.72
Commercial 13,832 0.27 11,415 0.26
Construction or development 40,556 0.77 56,660 1.30
--------------------------------------------------------------------
Total real estate loans 5,039,368 96.56 4,182,337 96.38
Consumer loans:
Savings loans 14,164 0.27 15,281 0.35
Student 17,520 0.34 16,424 0.38
Home improvement 2,406 0.05 2,072 0.05
Automobile 10,053 0.19 7,122 0.16
Home equity 134,749 2.58 115,779 2.67
Other 748 0.01 330 0.01
--------------------------------------------------------------------
Total consumer loans 179,640 3.44 157,008 3.62
Total loans receivable 5,219,008 100.00% 4,339,345 100.00%
Less:
Loans in process 20,500 29,043
Deferred fees and discounts 15,227 14,607
Allowance for losses 4,730 4,407
------------- ------------------
Total loans receivable, net $5,178,551 $4,291,288
============= ==================
</TABLE>
9
<PAGE>
4. Non-Performing Loans
The following table presents the Company's non-performing loans, including
non-accrual loans and real estate owned, at the dates indicated.
June 30, September 30,
2000 1999
-------------------------
Non-accruing loans:
One-to four-family $3,404 $4,921
Multi-family --- --
Commercial real estate --- --
Construction or development --- --
Consumer 97 55
Total $3,501 $4,976
=========================
Accruing loans delinquent more than 90 days:
One- to four-family --- ---
Multi-family --- ---
Commercial real estate --- ---
Construction or development --- ---
Consumer --- ---
Total --- ---
=========================
Real Estate Owned:
One- to four-family $1,698 $1,073
Multi-family --- ---
Commercial real estate --- ---
Construction or development --- ---
Consumer --- ---
Total $1,698 $1,073
=========================
Total non-performing assets $5,199 $6,049
=========================
Total as a percentage of total assets 0.07% 0.09%
=========================
10
<PAGE>
5. Allowance for Loan Losses
The following table presents the Company's activity for loan losses at the dates
and for the periods indicated.
<TABLE>
<CAPTION>
For the quarter ending For the nine months ending
June 30, June 30,
------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at the beginning of period $4,866 $4,175 $4,407 $4,081
Charge offs:
One- to four-family 6 --- 39 33
Multi-family 125 --- 125 ---
Commercial real estate --- --- --- ---
Construction or development --- --- --- ---
Consumer 10 10 13 18
Total charge-offs 141 10 177 51
Recoveries:
One- to four-family 5 --- 5 ---
Multi-family --- --- --- ---
Commercial real estate --- --- --- ---
Construction or development --- --- --- ---
Consumer --- --- 1 ---
Total recoveries 5 --- 6 ---
Net charge-offs 136 10 171 51
Additions charged to operations --- --- 494 135
-----------------------------------------------------------------
Balance at end of period $4,730 $4,165 $4,730 $4,165
=================================================================
</TABLE>
6. Deposits
The table below presents the Company's savings portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 September 30, 1999
------------------------------------------------------------------------
Amount Percent of Total Amount Percent of Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits $ 306,704 7.78% $ 278,722 7.15%
Passbook and passcard 112,256 2.85 123,479 3.17
Money market select 394,613 10.01 322,660 8.27
Cash fund 137,082 3.48 201,275 5.16
Certificates 2,990,495 75.88 2,973,429 76.25
------------------------------------------------------------------------
Total deposits $3,941,150 100.00% $3,899,565 100.00%
========================================================================
</TABLE>
11
<PAGE>
7. Earnings Per Share
Earnings per share for the quarter ended June 30, 2000 was $0.22 per share and
$0.65 per share year-to-date. The Company accounts for the 3,024,574 shares
acquired by its ESOP in accordance with Statement of Position 93-6; shares
controlled by the ESOP are not considered in the weighted average shares
outstanding until the shares are committed for allocation to an employee's
individual account. Shares vested in the Recognition and Retention Plan ("RRP")
are included in the common shares outstanding for calculating basis earnings per
share. Shares granted, but not yet vested, in the RRP are included in the
calculation of the diluted earnings per share. The following is a reconciliation
of the numerators and denominators of the basic and diluted earnings per share
calculations.
Three Months Ended Nine Months Ended
June 30, 2000 June 30, 2000
------------------ -----------------
Net Income $ 18,745 $ 55,925
Average common shares outstanding 82,078,245 84,836,258
Allocated ESOP shares outstanding 303,011 252,415
----------- ------------
Total basic average common shares 82,381,256 85,088,673
=========== ============
outstanding
Dilutive effect of SOP & RRP 358,884 119,191
Total diluted average common shares 82,740,140 85,207,8648
outstanding
Net earnings per share
Basic $ 0.22 $ 0.65
Diluted $ 0.22 $ 0.65
8. Equity
At June 30, 2000, the Bank exceeded all minimum regulatory requirements for a
well capitalized institution, with tangible capital of 12.7% and risk-based
capital of 27.8%. The Company declared a $0.12 per share dividend on July 18,
2000 to holders of record on August 4, 2000, payable on August 18, 2000. During
the quarter ended June 30, 2000 the Company purchased 1,512,287 shares of its
publicly traded stock in the open market at an average cost of $10.29 per share
to fund the RRP approved by shareholders at a special meeting on April 18, 2000.
At June 30, 2000, the Company had 6,129,208 shares held in treasury. Book value
per share at June 30, 2000 was $12.45.
9. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133. "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and hedging activities. The Statement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Due to the
issuance of SFAS No. 137, "Accounting for Derivative and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", the Statement will
not be effective for the Company's consolidated financial statements until the
fiscal year ending September 30, 2001. The adoption of this Statement is not
expected to have material impact on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which will be adopted by the
12
<PAGE>
Company no later than the first fiscal quarter of the fiscal year beginning
after December 15, 1999. SAB 101 provides guidance on revenue recognition
policies and procedures. The Company does not believe that SAB101 will have a
material effect on its consolidated financial statements as of and for the year
ending September 30, 2001.
10. Comprehensive Income
The only component of other comprehensive income is the change in the estimated
fair value of mortgage-related securities available-for-sale, net of deferred
income taxes. This component of comprehensive income was $2.4 million for the
three months ended June 30, 2000 and a loss of $5.5 million for the nine months
ended June 30, 2000.
11. Commitments and Contingencies
In the normal course of business, the Company and its subsidiaries are from time
to time named defendants in various lawsuits and counter claims. In the opinion
of management, after consultation with legal counsel, no pending suit is
expected to have a materially adverse effect on the financial position or
results of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained in this filing, the matters
discussed may be deemed to be forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties, including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area, competition, and other
risks detailed from time to time in the Company's SEC reports. Actual strategies
and results in future periods may differ materially from those currently
expected. These forward-looking statements represent the Company's judgment as
of the date of this release. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
The following discussion is intended to assist in understanding the financial
condition and results of operations of Capitol Federal Financial. The discussion
includes comments relating to Capitol Federal Savings Bank since the Bank is
wholly owned by Capital Federal Financial and comprises the majority of assets
and sources of income for the Company.
Financial Condition
Assets. For the nine month period ended June 30, 2000, total assets of the
Company increased $1.44 billion, or 22.1%, from $6.54 billion at September 30,
1999 to $7.98 billion at June 30, 2000. The increase from September 30, 1999 was
primarily due to the growth in the Company's loan and mortgage-related
securities portfolio. This increase in total assets was distributed as follows:
o $887.3 million, or 20.7%, increase in net loans receivable which increased
from $4.29 billion at September 30, 1999 to $5.18 billion at June 30, 2000.
o $468.7 million, or 22.6%, increase in mortgage-related securities which
increased from $2.08 billion at September 30, 1999 to $2.54 billion at June
30, 2000.
Total one- to four-family loan originations for the quarter ended June 30, 2000
were $281.8 million; and were $674.5 million year to date. Refinancing of loans
already serviced by the Bank were 3.7% of loan originations for the quarter and
5.0 % year to date. Adjustable-rate loan originations accounted for 57.3% of
originations for the quarter and 53.3% year to date. Loans purchased totaled
$335.3 million for the quarter ending June 30, 2000 and $571.9 million
year-to-date, which were generally adjustable
13
<PAGE>
rate. Total originations of consumer loans for the quarter ended June 30, 2000
were $41.3 million, and $108.6 million year to date. The Company purchased $85.1
million of mortgage-related securities in March 2000 as part of its capital
management plan. These assets were delivered in April 2000 and were funded with
Federal Home Loan Bank ("FHLB") advances at an average spread of 117 basis
points. During the three months ended June 30, 2000, the interest rate spread
available in the wholesale market for mortgage-related securities was not at an
acceptable level of profitability. Year-to-date purchases of
mortgage-related-securities totaled $803.4 million at an average spread of 117
basis points over the cost of funding. All mortgage-related securities purchased
year-to-date were fixed rate.
Liabilities. Deposits increased $41.6 million, or 1.1%, from $3.90 billion at
September 30, 1999, to $3.94 billion at June 30, 2000. This increase was
attributable to $133.6 million of interest credits during the nine month period,
partially offset by a $92.0 million decrease in the balance of savings accounts.
Borrowings, all of which were FHLB advances, increased by $1.44 billion, or
107.1% during the nine-month period ended June 30, 2000. Of the total increase
in borrowings, $803.4 million were used to fund the purchase of mortgage-related
securities related to the continuation of the capital utilization plan. The
remaining balance of the increase in borrowings have been used to fund the
purchase of single-family loans. The average rate paid on new borrowings,
year-to-date, was 5.91%. Generally, the borrowings have a ten year life and a
call option on the anniversary date at three or five years. The Company does
utilize a line-of-credit with the FHLB to facilitate short-term funding needs.
Equity. Total stockholders' equity decreased $29.5 million, or (2.8)%, from
$1.05 billion at September 30, 1999, to $1.02 billion at June 30, 2000. The
decrease was attributable to the purchase of Capitol Federal Financial stock
totaling $73.5 million, dividends paid of $10.7 million, and a change from a
$4.2 million gain to a $1.3 million loss on securities available-for-sale,
offset by year-to-date earnings of $55.9 million and the issuance of $2.4
million in stock as a result of the initiation of the recognition and retention
plan (RRP) approved by shareholders on April 18, 2000.
Comparison of Operating Results
for the Three Months Ended June 30, 2000 and 1999
General. For the three months ended June 30, 2000, the Company recognized net
income of $18.7 million, compared to $17.3 million for the three months ended
June 30, 1999. The Company's efficiency ratio for the three months ended June
30, 2000 was 36.05% compared to 33.28% for the quarter ended June 30, 1999.
Net Interest Income. Net interest income for the three months ended June 30,
2000 was $43.2 million, an increase of $5.3 million, or 14.0% from the same
period last year. The increase in earnings was primarily the result of an
increase in the average balance of loans receivable of $960.0million and
mortgage-related securities of $760.6 million, offset by a $1.79 billion
increase in the average balance of interest bearing liabilities for the quarter
ended June 30, 2000 over the same period one year ago. The net interest margin
decreased 33 basis points from 2.59% for the quarter ended June 30, 1999 to
2.26% for the quarter ended June 30, 2000.
Interest and Dividend Income. Interest income for the three months ended June
30, 2000 was $135.9 million, up from $100.0 million for the same period in
fiscal year 1999. The largest component of interest income, interest on loans,
increased from $70.8 million for the three months ended June 30, 1999 to $88.6
million for the three months ended June 30, 2000. The increase of $17.8 million
was the result of an increase in the average balance of, and the average yield
earned on, loans. The average balance of loans receivable increased $960.0
million to $4.89 billion for the three months ended June 30, 2000 compared to
$3.93 billion for the same period one year ago, while the average yield on loans
increased 4 basis points to 7.24% for the quarter ended June 30, 2000 from 7.20%
for the quarter ended June 30, 1999. The increase in interest on loans was
supplemented by an increase in interest on mortgage-related securities. Interest
income on mortgage-related securities increased $16.4 million from $27.9 million
for the quarter ended June 30, 1999 to $44.3 million for the quarter ended June
30, 2000. The average
14
<PAGE>
balance of mortgage-related securities increased $760.6 million from $1.84
billion at June 30, 1999 to $2.60 billion at June 30, 2000, while the average
yield increased from 6.07% for the quarter ended June 30, 1999 to 6.82% for the
quarter ended June 30, 2000. Dividends earned on capital stock of the Federal
Home Loan Bank of Topeka ("FHLB") were $2.4 million for the quarter ended June
30, 2000, compared to $826,000 for the same period in fiscal year 1999. The
increase was due to the increased balance of stock held by the Bank in
accordance with the terms of advances from the FHLB and a higher dividend rate
paid by the FHLB.
Interest Expense. Interest expense increased for the quarter ended June 30, 2000
to $92.7 million from $62.1 million for the same period in 1999. For the quarter
ended June 30, 2000 interest expense on deposits was $51.2 million compared to
$48.7 million for the quarter ended June 30, 1999, an increase of $2.6 million.
The increase was due to higher rates paid on money market accounts, and
certificates of deposit maturing and renewing into higher rate accounts with
maturities of generally less than two years, which was partially offset by a
reduction in the rate paid on checking and short-term deposits. The average
balance of deposits during the quarter ended June 30, 2000 was $3.92 billion
compared to $3.93 billion for the quarter ended June 30, 1999, a decrease of
$9.0 million, or (0.2)%. The average rate paid on deposits for the quarter ended
June 30, 2000 was 5.24% compared to 4.95% for the quarter ended June 30, 1999,
an increase of 29 basis points. Interest expense on borrowings for the quarter
ended June 30, 2000 was $41.4 million compared to $13.4 million for the quarter
ended June 30, 1999, an increase of $28.0 million, or 209.0%. The average
balance of borrowings for the quarter ended June 30, 2000 was $2.71 billion
compared to $911.8 million for the quarter ended June 30, 1999, an increase of
$1.80 billion, or 197.4%. The increase in interest expense on borrowings was
primarily due to an increase in long-term fixed rate, callable advances from the
FHLB and, to a lesser extent, short-term advances obtained primarily to fund the
origination and purchase of loans. The average cost of the borrowings for the
quarter ended June 30, 2000 was 6.05% compared to 5.87% for the quarter ended
June 30, 1999.
Provision for Loan Losses. During the quarter, additional provisions for loan
losses were not recorded. The current balance of the allowance for loan losses
is believed to be sufficient to cover known losses in the portfolio as of June
30, 2000. During the quarter, $124,800 of the allowance for loan losses was
allocated to specific loans. At June 30, 2000, the balance of non-accruing loans
was $3.5 million, down 34.7% from the same period one year ago. Total
non-performing assets were $5.2 million at June 30, 2000 compared to $6.0
million at September 30, 1999. The percentage of non-performing assets to total
assets was 0.07% at June 30, 2000 compared to 0.09% at September 30, 1999. The
allowance for loan losses was $4.7 million at June 30, 2000 compared to $4.4
million at September 30, 1999. The allowance for loan losses as a percentage of
non-performing loans was 135.1% at June 30, 2000 compared to 88.6% at September
30, 1999.
Noninterest Income. Total noninterest income for the quarter ended June 30, 2000
was $3.8 million, up from $3.5 million for the quarter ended June 30, 1999.
There were no significant changes in noninterest income for any category during
the quarter ended June 30, 1999 compared to the quarter ended June 30, 2000.
Noninterest Expense. Non-interest expense was $17.0 million for the quarter just
ended compared to $13.8 million one year ago. The increase of $3.2 million in
non-interest expense was due primarily to an additional $3.8 million in
compensation expense, of which $2.4 million was associated with the RRP grants,
and additional office occupancy expense. These increases were partially offset
by a decrease in other expenses of $1.0 million.
Income Tax Expense. Income tax expense increased from $10.4 million for the
quarter ended June 30, 1999 to $11.4 million for the quarter ended June 30,
2000. The increase was due to an increase in pre-tax earnings.
15
<PAGE>
Comparison of Operating Results
for the Nine Months Ended June 30, 2000 and 1999
General. For the nine months ended June 30, 2000, the Company recognized net
income of $55.9 million compared to net income of $45.8 million for the nine
months ended June 30, 1999, excluding conversion related expenses. The
efficiency ratio, for the nine months ended June 30, 2000 was 33.83% compared to
34.61% for the nine months ended June 30, 1999, exclusive of conversion related
expenses.
Net Interest Income. Net interest income for the nine months ended June 30, 2000
was $125.8 million compared to $103.4 million for the nine months ended June 30,
1999, an increase of $22.4 million, or 21.7%. The net interest rate spread
decreased 13 basis points from 1.74% at June 30, 1999 to 1.61% at June 30, 2000.
Interest and Dividend Income. Interest income for the nine months ended June 30,
2000 was $373.8 million, up from $287.2 million for the nine months ended June
30, 1999. The largest component of interest income, interest on loans
receivable, increased from $211.0 million for the nine months ended June 30,
1999 to $249.9 million for the nine months ended June 30, 2000. This increase of
$38.9 million was the result of an increase in the average balance of loans
receivable, which was partially offset by a decrease in the average yield
earned. The average balance of loans increased $808.4 million to $4.64 billion
for the nine months ended June 30, 2000 from $3.83 billion for the nine months
ended June 30, 1999. The average yield on loans decreased 16 basis points from
7.35% for the nine months ended June 30, 1999 to 7.19% for the nine months ended
June 30, 2000. Interest on mortgage-related securities increased by $49.0
million, or 73.2%, from $66.9 million for the nine months ended June 30, 1999 to
$116.0 million for the nine months ended June 30, 2000, as a result of an
increase in the average balance of, and in the average yield, on
mortgage-related securities. The average balance of mortgage-related securities
increased $835.5 million, or 56.2%, from $1.49 billion for the nine months ended
June 30, 1999 to $2.32 billion for the nine months ended June 30, 2000, while
the average yield for the nine months ended June 30, 2000 was 6.66%, up from
6.00% for the nine months ended June 30, 1999. Dividends earned on capital stock
of the FHLB was $5.4 million for the nine months ended June 30, 2000, compared
to $2.4 million for the same period in fiscal year 1999. The increase was due to
the larger balance of stock held by Capitol Federal Savings Bank in accordance
with the terms of advances from the FHLB, and in the average yield received on
the stock, from 6.98% for the nine months ended June 30, 1999 compared to 7.41%
for the same period ended June 30, 2000.
Interest Expense. Interest expense increased during the nine month period ended
June 30, 2000 to $248.0 million from $183.8 million for the nine months ending
June 30, 1999. Interest expense on deposits increased from $148.5 million for
the nine months ended June 30, 1999 to $151.1 million for the nine months ended
June 30, 2000, a $2.6 million increase, or 1.8%. The average cost of deposits
increased to 5.12% for the nine months ended June 30, 2000 from 5.04% for the
nine months ended June 30, 1999, or 8 basis points. The average balance of
deposits increased $1.04 million, from $3.92 billion for the nine months ended
June 30, 1999 to $3.93 billion for the nine months ended June 30, 2000. Interest
expense on borrowings increased to $96.8 million from $35.3 million, a $61.5
million increase, or 174.2%. The average balance of borrowings increased from
$819.9 million for the nine months ended June 30, 1999 to $2.15 billion for the
nine months ended June 30, 2000, primarily to fund the purchase of
mortgage-related securities and loan growth. The average cost of borrowings
increased from 5.67% for the nine months ended June 30, 1999 to 5.91% for the
nine months ended June 30, 2000.
Provision for Loan Losses. The provision for loan losses for the nine months
ended June 30, 2000 of $494,000 was derived from the assessment of the estimated
losses inherent in the loan portfolio resulting from the formula allowance,
experienced losses in the current economic environment, and specific allowances
for identified problem loans and portfolio segments. The provision for loan
losses for the nine months ended June 30, 1999 was $134,600.
Noninterest Income. Total noninterest income for the nine month period ended
June 30, 2000 was $10.7 million, up from the $9.9 million for the nine month
period ended June 30, 1999, primarily as a result of increased fees charged for
ATM usage.
16
<PAGE>
Noninterest Expense. Total noninterest expense decreased $26.0 million to $46.1
million for the nine months ended June 30, 2000, down from $72.1 million for the
nine months ended June 30, 1999. The decrease in noninterest expense was
primarily due to conversion related expenses during the nine-month period ended
June 30, 1999. However, exclusive of the conversion related expenses,
noninterest expense was up $6.9 million to $46.1 million for the nine months
ended June 30, 2000 compared to $39.2 million for the nine months ended June 30,
1999, or 17.6%. The increase was due to a $6.6 million increase in compensation
related expenses and a $754,000 increase in occupancy expense. Compensation
related expenses increased primarily from ESOP and RRP related charges,
operating new branch locations, and additional loan and support staff. The
increase in occupancy related expenses was primarily related to the cost of new
branch locations and upgrades to our computer systems.
Income Tax Expense. Income tax expense increased from $15.7 million for the nine
month period ended June 30, 1999 to $33.9 million for the nine months ended June
30, 2000. Excluding conversion related expenses and the associated tax benefit,
income tax expense increased from $28.2 million for the nine month period ended
June 30, 1999 to $33.9 million for the nine month ended June 30, 2000. The
increase was the result of an increase in pre-tax earnings.
17
<PAGE>
Liquidity and Commitments
The Bank's liquidity, represented by cash and cash equivalents and
mortgage-related securities available for sale, is a product of its operating,
investing and financing activities. The Bank's primary sources of funds are
deposits, FHLB advances, prepayments and maturities of outstanding loans and
mortgage-related securities, maturing 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, excess
funds are invested in short-term interest-earning assets, which provide
liquidity to meet lending opportunities. Repurchase agreements and FHLB advances
are utilized to provide funds for our lending and investment activities, as a
facet to implemen our capital management plan, and as an interest rate risk
management tool.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. agency securities. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-related securities and investment securities. At June 30,
2000 our commitments were:
o total approved loan origination and purchase commitments outstanding
of $480.5 million,
o unadvanced portion of construction loans of $20.5 million,
o unused home equity lines of credit of $171.8 million,
o and outstanding letters of credit of $960,000.
Certificates of deposit scheduled to mature in one year or less totaled $1.37
billion. Based on historical experience, management believes that a significant
portion of maturing deposits will remain with us. We anticipate that we will
continue to have sufficient funds, through deposits, borrowings, and repayments,
to meet our current commitments.
Capital
Consistent with our goals to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity was $1.02 billion at June 30,
2000, or 12.7% of total assets on that date. As of June 30, 2000, the Bank
exceeded all capital requirements of the Office of Thrift Supervision. The
Bank's regulatory capital ratios at June 30, 2000 were as follows: Tier I
(leverage) capital, 12.0%; Tier I risk-based capital, 12.0%; and total
risk-based capital, 27.8%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
During the quarter ended June 30, 2000, the Company repurchased 1,512,287 shares
of common stock after receiving shareholder approval on April 18, 2000 of the
Recognition and Retention Plan. There was a total of 1,280,000 shares granted
under the plan with 256,000 shares vesting immediately. Regulatory approval was
granted to repurchase up to 10%, or approximately 3.7 million shares of the
public shares in the open market, on June 30, 2000. Through June 30, 2000, the
Company has repurchased, i total, approximately 8.0 million shares at a cost of
$73.5 million.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio, see
18
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, Asset and Liability Management and Market Risk" in the Company's
Annual Report dated December 20, 1999.
19
<PAGE>
Part 2 - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Change in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Not applicable
20
<PAGE>
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL FEDERAL FINANCIAL
Date: August 14, 2000 By: /s/ John C. Dicus
----------------------------
John C. Dicus, Chairman and
Chief Executive Officer
Date: August 14, 2000 By: /s/ Neil F. M. McKay
----------------------------
Executive Vice President and
Chief Financial Officer
21
<PAGE>
Index to Exhibits
Sequentially
Numbered Page
Exhibit Where Attached
Number Exhibits are Located
27 Financial Data Schedule 23
22
