As filed
with the Securities and Exchange Commission on May 6, 2010
Registration No.
333-_________
| UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| FORM S-1 |
| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
| CAPITOL FEDERAL FINANCIAL, INC. |
| (Exact name of registrant as specified in its charter) |
|
Maryland
|
6035
|
Applied For
|
||
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer Identification No.)
|
| 700 S. 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 B. Dicus, President and Chief Executive Officer |
| 700 S. Kansas Avenue, Topeka, Kansas 66603 |
| (785) 235-1341 |
| (Name, address, including zip code, and telephone number, including area code, of agent for service) |
Copies to:
James
S. Fleischer, P.C.
Martin
L. Meyrowitz, P.C.
SILVER,
FREEDMAN & TAFF, L.L.P.
(a
limited liability partnership including professional
corporations)
3299
K Street, NW, Suite 100
Washington,
DC 20007
(202)
295-4500
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. [X]
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 registration statement for the same offering.
[ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier registration statement for the same offering.
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b2 of the
Exchange Act.
| Large accelerated filer [X] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [ ] |
| (Do not check if a smaller reporting company) | |||
CALCULATION OF REGISTRATION
FEE
|
Title
of Each Class
of
Securities to be Registered
|
Amount
to be
Registered
|
Proposed
Maximum
Offering
Price
Per
Unit
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee
|
||||
|
Common
Stock, par value $.01 per share
|
301,737,230
|
$10.00
|
$3,017,372,300
(1)
|
$215,138
|
(1) Estimated
solely for the purpose of calculating the registration
fee.
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBSCRIPTION
AND COMMUNITY
OFFERING
PROSPECTUS
Capitol
Federal Financial, Inc.
(Proposed
Holding Company for Capitol Federal Savings Bank)
Up
to 212,750,000 Shares of Common Stock
$10.00
per Share
Capitol
Federal Financial, Inc., a newly formed Maryland corporation is offering up to
212,750,000 shares
of common stock for sale at $10.00 per share in connection with the conversion
of Capitol Federal Savings Bank MHC from the mutual holding company to the stock
holding company form of organization. The shares being offered
represent the 70% ownership interest in Capitol Federal Financial currently
owned by Capitol Federal Savings Bank MHC. Capitol Federal
Financial’s common stock is currently traded on the Nasdaq Global Select Market
under the trading symbol CFFN. We expect that Capitol Federal
Financial, Inc.’s shares of common stock will trade on the Nasdaq Global Select
Market under the trading symbol CFFND for a period of 20 trading days following
the completion of this stock offering. Thereafter the trading symbol
will revert to CFFN. To avoid confusion, we will refer to Capitol
Federal Financial in this document as CFF and Capitol Federal Financial, Inc. as
Capitol Federal Financial, Inc.
We are
offering the common stock for sale on a best efforts basis. The
shares are first being offered in a subscription offering to eligible depositors
and tax-qualified employee benefit plans of Capitol Federal Savings Bank as
described in this prospectus, who have priority rights to buy all of the shares
offered. Shares not purchased in the subscription offering will
simultaneously be offered to the general public in a community offering, with a
preference given to residents of the communities served by Capitol Federal
Savings Bank and existing stockholders of CFF. We may also offer
shares of common stock not subscribed for in the subscription and community
offerings in a syndicated community offering through a syndicate of selected
dealers.
We must
sell a minimum of 157,250,000 shares in the offering in order to complete the
offering. Sandler O’Neill & Partners, L.P. will assist us in
selling the shares on a best efforts basis in the subscription and community
offerings and will serve as sole book-running manager for the syndicated
community offering. Neither Sandler O’Neill & Partners, L.P. nor
any member of the syndicate group is required to purchase any shares of common
stock in the offering.
In
addition to the shares we are selling in the offering, the remaining 30%
interest in CFF common stock currently held by the public will be exchanged for
shares of common stock of Capitol Federal Financial, Inc. using an exchange
ratio that will result in the existing public stockholders owning approximately
the same percentage of Capitol Federal Financial, Inc. common stock as they
owned of CFF common stock immediately prior to the completion of the
conversion. We will issue up to 88,987,230 shares of common stock in
the exchange. Capitol Federal Financial, Inc. also intends to
contribute to the Capitol Federal Foundation $40.0 million in cash.
The
minimum order is 25 shares. The subscription offering will expire at
4:00 p.m., Central Time, on [ ],
2010. We expect that the community offering will terminate at the
same time, although it may be extended without notice to you until [ ],
2010, unless the Office of Thrift Supervision approves a later
date. No single extension may exceed 90 days and the offering must be
completed by [ ],
2012. Once submitted, orders are irrevocable unless the offering is
terminated or is extended beyond [ ],
2010, or the number of shares of common stock to be sold is increased to more
than 212,750,000 shares or decreased to less than 157,250,000
shares. Funds received prior to the completion of the offering will
be held in a segregated account at Capitol Federal Savings Bank, or, at our
discretion, at another federally insured depository institution, and will earn
interest at Capitol Federal Savings Bank’s statement savings rate, which is
currently 0.25%. If the subscription and community offerings are
terminated, purchasers will have their funds returned promptly, with
interest. If the offering is extended beyond [ ],
2010, we will resolicit purchasers, and you will have the opportunity to
maintain, change or cancel your order. If you do not provide us with
a written indication of your intent, your order will be canceled and your funds
will be returned to you, with interest. If there is a change in the
offering range, we will promptly return all funds
with interest, and all subscribers will be provided with updated information and
given the opportunity to place a new order.
OFFERING
SUMMARY
Price: $10.00
per share
| Minimum |
Midpoint
|
Maximum
|
||||||||||
|
Number
of
shares
|
$ | 157,250,000 | $ | 185,000,000 | $ | 212,750,000 | ||||||
|
Gross
offering
proceeds
|
1,572,500,000 | 1,850,000,000 | 2,127,500,000 | |||||||||
|
Estimated
offering expenses excluding
selling agent commission
and expenses
|
5,255,000 | 5,255,000 | 5,255,000 | |||||||||
|
Estimated
selling agent commissions
and expenses(1)
|
52,581,375 | 61,863,750 | 71,146,125 | |||||||||
|
Net
proceeds
|
1,514,663,625 | 1,782,881,250 | 2,051,098,875 | |||||||||
|
Net
proceeds per
share
|
9.63 | 9.64 | 9.64 | |||||||||
(1) Includes:
(i) fees payable by us to Sandler O’Neill & Partners, L.P. in connection
with the subscription and community offerings equal to 0.75% of the aggregate
amount of common stock sold in the subscription and community offerings (net of
insider purchases and shares purchased by our employee stock ownership plan, and
(ii) a management fee payable by us of 1.00% of the aggregate dollar amount of
the common stock sold in the syndicated community offering, 75% of which will be
paid to Sandler O’Neill & Partners, L.P. and 25% of which will be paid to
Keefe, Bruyette & Woods, Inc., and a selling concession payable by us of
3.50% of the actual purchase price of each security sold in the syndicated
community offering, which will be allocated to dealers (including Sandler
O’Neill & Partners, L.P. and Keefe, Bruyette & Woods, Inc.) in
accordance with the actual number of shares of common stock sold by such
dealers, assuming that 30% of the offering is sold in the subscription and
community offerings and the remaining 70% of the offering will be sold in the
syndicated community offering. See “Pro Forma Data” on page [ ]
and “The Conversion and Offering – Marketing Arrangements” on page [ ].
This
investment involves a degree of risk, including the possible loss of
principal.
Please
read “Risk Factors” beginning on page
[ ].
These
securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. None of the Securities and Exchange Commission, the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation, or any state
securities regulator has approved or disapproved of these securities or
determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
SANDLER
O’NEILL + PARTNERS, L.P.
For
assistance, please contact the Stock Information Center at 1 (800) [ ]
- [ ].
The date
of this prospectus is [ ],
2010
[MAP
TO COME]
TABLE OF
CONTENTS
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| BUSINESS OF CFF | 73 | |
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F-1
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i
The following summary explains the
material aspects of the conversion, the offering and the exchange of existing
shares of CFF common stock for shares of Capitol Federal Financial,
Inc. common
stock. It may not contain all of the information that is important to
you. Before making an investment decision you should read the
remainder of this prospectus carefully, including the consolidated financial
statements, the notes to the consolidated financial statements and the section
entitled “Risk Factors.”
The
Companies
Capitol
Federal Financial, Inc.
Capitol
Federal Financial, Inc. is a newly formed
Maryland corporation that was incorporated in April 2010 to be the successor
corporation to CFF upon completion of the conversion. Capitol Federal
Financial, Inc. will own all of the outstanding shares of common stock of
Capitol Federal Savings Bank upon completion of the
conversion. Capitol Federal Financial, Inc.’s executive offices are
located at 700 South Kansas Avenue, Topeka, Kansas 66603. Our
telephone number at this address is (785) 235-1341.
Capitol
Federal Savings Bank MHC
Capitol
Federal Savings Bank MHC is the federally chartered mutual holding company of
CFF. Capitol Federal Savings Bank MHC’s principal business activity
is the ownership of 52,192,817 shares of common stock
of CFF, or 70% of the issued and outstanding shares as of the date of this
prospectus. After the completion of the conversion, Capitol Federal
Savings Bank MHC will cease to exist.
CFF
CFF is a
federally chartered stock holding company that owns all of the outstanding
common stock of Capitol Federal Savings Bank. At December 31, 2009,
CFF had consolidated assets of $8.37 billion, deposits of $4.23 billion and
stockholders’ equity of $942.0 million. After the completion of the
conversion, CFF will cease to exist, and will be succeeded by Capitol Federal
Financial, Inc. As of the date of this prospectus, CFF had 73,217,021
shares of common stock issued and outstanding, of which 52,192,817 shares were
owned by Capitol Federal Savings Bank MHC. The remaining 21,024,204
shares of CFF common stock outstanding as of the date of this prospectus were
held by the public.
Capitol
Federal Savings Bank
Capitol
Federal Savings Bank is a federally chartered stock savings bank headquartered
in Topeka, Kansas and the wholly owned subsidiary of CFF. Capitol
Federal Savings Bank was originally founded in 1893 as a mutual savings
institution. In 1999, Capitol Federal Savings Bank converted to stock
form and became the wholly owned subsidiary of CFF as part of a mutual holding
company reorganization and stock issuance. Capitol Federal Savings Bank provides
a full range of retail banking services through its 35 traditional and 10
in-store banking offices serving primarily the metropolitan areas of Topeka,
Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the
metropolitan area of greater Kansas City.
Our
Business Strategy
Our
strategy is to operate a retail-oriented financial institution dedicated to
serving the needs of customers in our market areas. Our commitment is to provide
qualified borrowers the broadest possible access to home ownership through our
mortgage lending programs and to offer a complete set of personal banking
products and services. We strive to enhance stockholder value while
maintaining a strong capital position. To achieve our strategy, we
focus on the following:
Portfolio
Lending. We are one of the
largest originators of one- to four-family loans in the state of
Kansas. We have primarily originated these loans for our own
portfolio, rather than for sale, and generally we service the loans we
originate. We provide retail customers with alternatives for their
borrowing needs by offering both fixed- and adjustable-rate products with
various terms to maturity and pricing alternatives. We offer special
programs to individuals who may be first time home buyers, have low or moderate
incomes or may have certain credit risk concerns in order to maximize our
ability to deliver home ownership opportunities. Through our
marketing efforts which reflect our reputation and pricing and strong
relationships with real estate agents, we attract mortgage loan business from
walk-in customers, customers that apply online and existing
customers. We also purchase one- to four-family loans from
correspondent lenders secured by property primarily located within our market
areas and select market areas in Missouri and from nationwide lenders. Following
completion of this offering, we intend to increase our emphasis on purchased
loans that meet our underwriting standards.
Retail Financial
Services. We offer a wide
array of deposit products and retail services for our
customers. These products include checking, savings, money market,
certificates of deposit and retirement accounts. These products and
services are provided through a branch network of 45 locations which includes
traditional branch and retail store locations, our call center which operates on
extended hours, telephone bill payment services and Internet-based transaction
services.
Cost
Control. We generally are very effective at controlling our
costs of operations. By using technology, we are able to centralize
our lending and deposit support functions for efficient
processing. We have located our branches to serve a broad range of
customers through relatively few branch locations. Our average
deposit base per traditional branch was $115.7 million at December 31,
2009. This large average deposit base helps to control
costs. Our one- to four-family lending strategy and our effective
management of credit risk allows us to service a large portfolio of loans at
efficient levels because it costs less to service a portfolio of performing
loans. At December 31, 2009, our efficiency ratio was
39.23%.
Asset
Quality. We utilize underwriting standards for our lending
products that are designed to limit our exposure to credit risk, and we have a
portfolio of predominately one- to four-family loans. At December 31,
2009, our ratio of non-performing assets to total assets was
0.47%.
Capital
Position. Our policy has
always been to protect the safety and soundness of Capitol Federal Savings Bank
through conservative credit and operational risk management, balance sheet
strength and sound operations. The end result of these activities is
a capital ratio in excess of the well-capitalized standards set by the Office of
Thrift Supervision. We believe that maintaining a strong capital
position safeguards the long-term interests of Capitol Federal Savings Bank, CFF
and our stockholders.
Stockholder
Value. We strive to
enhance stockholder value while maintaining a strong capital
position. One way that we continue to provide returns to stockholders
is through our dividend payments. Total dividends declared and paid
during fiscal year 2009 were $2.11 per public share. Our cash
dividend payout policy is reviewed quarterly by management and the board of
directors, and the ability to pay dividends under the policy depends upon a
number of factors, including CFF’s financial condition and results of
operations, Capitol Federal Savings Bank’s regulatory capital requirements,
regulatory limitations on Capitol Federal Savings Bank’s ability to make capital
distributions to CFF and the amount of cash at CFF. It is
management’s and the board of directors’ intention to continue to pay regular
quarterly dividends upon completion of the conversion, to the extent justified
by earnings and the capital needs of Capitol Federal Financial,
Inc. See “Our Policy Regarding Dividends.”
Interest Rate
Risk Management. Changes in interest rates are our primary
market risk as our balance sheet is almost entirely comprised of
interest-earning assets and interest-bearing liabilities. As such,
fluctuations in interest rates have a significant impact not only upon our net
income but also upon the cash flows related to those assets and liabilities and
the market value of our assets and liabilities. In order to maintain
acceptable levels of net interest income in varying interest rate environments,
we take on a moderate amount of interest rate risk consistent with board
policies.
2
Our
Current Organizational Structure
In 1999,
CFF became the mid-tier stock holding company of Capitol Federal Savings Bank,
owning 100% of its stock, and conducted an initial public offering by selling a
minority of its common stock to the public. The majority of the
outstanding shares of common stock of CFF are owned by Capitol Federal Savings
Bank MHC, which is a federally chartered mutual holding company with no
stockholders.
Pursuant
to the terms of the Plan of conversion and reorganization of Capitol Federal
Savings Bank MHC, which is referred to throughout this prospectus as the plan of
conversion and reorganization, Capitol Federal Savings Bank will convert from
the mutual holding company to the stock holding company corporate
structure. As part of the conversion, we are offering for sale in a
subscription offering, a community offering and possibly a syndicated community
offering, the majority ownership interest of CFF that is currently owned by
Capitol Federal Savings Bank MHC. In addition, we intend to make a
cash contribution to our existing charitable foundation. Upon
completion of the conversion, Capitol Federal Savings Bank MHC will cease to
exist, and we will complete the transition from partial to full public stock
ownership. In addition, as part of the conversion, existing public
stockholders of CFF will receive shares of common stock of Capitol Federal
Financial, Inc. in exchange for their shares of CFF common stock pursuant to an
exchange ratio that maintains their same percentage ownership in CFF (excluding
any new shares purchased by them in the offering, and their receipt of cash in
lieu of fractional exchange shares) that existing stockholders had in CFF
immediately prior to the completion of the conversion and offering.
The
following diagram shows our current organizational structure:
3
Our
Organizational Structure Following the Conversion
After the
conversion and offering are completed, we will be organized as a fully public
stock holding company, as follows:
Reasons
for the Conversion and the Offering
Our
primary reasons for converting and raising additional capital through the
offering are:
|
|
●
|
to
eliminate some of the uncertainties associated with proposed financial
regulatory reforms which may result in changes to our primary bank
regulator and holding company regulator as well as changes in regulations
applicable to us, including, but not limited to, capital requirements,
payment of dividends and conversion to full stock
form;
|
|
|
●
|
the
stock holding company structure is a more familiar form of organization,
which we believe will make our common stock more appealing to investors,
and will give us greater flexibility to access the capital markets through
possible future equity and debt offerings, although we have no current
plans, agreements or understandings regarding any additional securities
offerings;
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●
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to
improve the liquidity of our shares of common stock and provide more
flexible capital management strategies;
and
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●
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to
finance, where opportunities are presented, the acquisition of financial
institutions or their branches or other financial service companies
primarily in, or adjacent to, our market areas, although we do not
currently have any understandings or agreements regarding any specific
acquisition transaction.
|
Terms
of the Offering
We are
offering between 157,250,000 and 212,750,000 shares of common stock to eligible
depositors and borrowers of Capitol Federal Savings Bank, to our tax-qualified
employee benefit plan, consisting of our employee stock ownership plan, and, to
the extent shares remain available, to natural persons residing in the counties
and metropolitan statistical areas in which we have offices, to our existing
public stockholders and to the general public. Unless the number of
shares of common stock to be offered is increased to more than 212,750,000
shares or decreased to fewer than 157,250,000 shares, or the offering is
extended beyond [ ],
2010, purchasers will not have the opportunity to modify or cancel their stock
orders once submitted. If the number of shares of common stock to be
sold is increased to more than 212,750,000 shares or decreased to fewer than
157,250,000 shares, or if the offering is extended beyond [ ],
2010, purchasers will have the opportunity to maintain, cancel or change their
orders for shares of common stock during a designated resolicitation period or
have their funds returned promptly with interest. If, in that event,
you do not provide us with written indication of your intent, your stock order
will be canceled, your funds will be returned to you with interest calculated at
Capitol Federal Savings Bank’s statement savings rate and any deposit account
withdrawal authorizations will be canceled.
4
The
purchase price of each share of common stock to be offered for sale in the
offering is $10.00. All investors will pay the same purchase price
per share. Investors will not be charged a commission to purchase
shares of common stock in the offering. Sandler O’Neill &
Partners, L.P., our marketing agent in the offering, will use its best efforts
to assist us in selling shares of our common stock. Sandler O’Neill
& Partners, L.P. is not obligated to purchase any shares of common stock in
the offering.
We are
also offering for sale to the general public in a syndicated offering through a
syndicate of selected dealers shares of our common stock not purchased in the
subscription offering or the community offering. We may begin the
syndicated community offering at any time following the commencement of the
subscription offering. Sandler O’Neill & Partners, L.P. is acting
as sole book-running manager and Keefe, Bruyette & Woods, Inc. is acting as
co-manager for the syndicated community offering, which is also being conducted
on a best efforts basis. Neither Sandler O’Neill & Partners,
L.P., Keefe, Bruyette & Woods, Inc. nor any other member of
the syndicate is required to purchase any shares in the syndicated community
offering.
How
We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share
Stock Price
The
offering range and exchange ratio are based on an independent appraisal of the
estimated market value of Capitol Federal Financial, Inc., assuming the
conversion, the exchange and the offering are completed and the charitable
foundation is funded with a cash contribution. RP Financial, LC., an
appraisal firm experienced in appraisals of financial institutions, has
estimated that, as of April 16, 2010, this estimated pro forma market value was
$2.62 billion. Based on regulation, the market value is the midpoint
of a range with a minimum of $2.23 billion and a maximum of $3.02
billion. Based on this valuation, the regulatory established range,
the 70% ownership interest of Capitol Federal Savings Bank MHC being sold in the
offering and the $10.00 per share price, the number of shares of common stock
being offered for sale by Capitol Federal Financial, Inc. will range from
157,250,000 shares to 212,750,000 shares. The $10.00 per share price
was selected primarily because it is the price most commonly used in
mutual-to-stock conversions of financial institutions. The exchange
ratio will range from 3.0129 shares at the minimum of the offering range to
4.0762 shares at
the maximum of the offering range in order to approximately preserve the
existing percentage ownership of public stockholders of Capitol Federal
Financial, Inc. (excluding any new shares purchased by them in the offering and
their receipt of cash in lieu of fractional exchange shares).
The
independent appraisal is based primarily on CFF’s financial condition and
results of operations, the pro forma impact of the additional capital raised by
the sale of shares of common stock in the offering, and an analysis of a peer
group of 10 publicly traded savings bank and thrift holding companies that RP
Financial, LC. considered comparable to Capitol Federal Financial,
Inc.
The
appraisal peer group consists of the following companies. Total
assets are as of December 31, 2009.
5
|
Company
Name and Ticker Symbol
|
Exchange
|
Headquarters
|
Total
Assets
(in
millions)
|
|||||
|
Washington
Federal, Inc. (WFSL)
|
NASDAQ
|
Seattle,
WA
|
$ | 12,662 | ||||
|
NewAlliance
Bancshares (NAL)
|
NYSE
|
New
Haven, CT
|
$ | 8,434 | ||||
|
Flushing
Financial Corp. (FFIC)
|
NASDAQ
|
Lake
Success, NY
|
$ | 4,143 | ||||
|
Dime
Community Bancshares (DCOM)
|
NASDAQ
|
Brooklyn,
NY
|
$ | 3,952 | ||||
|
TrustCo
Bank Corp NY (TRST)
|
NASDAQ
|
Glenville,
NY
|
$ | 3,680 | ||||
|
Bank
Mutual Corp. (BKMU)
|
NASDAQ
|
Milwaukee,
WI
|
$ | 3,512 | ||||
|
First
Financial Holding Inc. (FFCH)
|
NASDAQ
|
Charleston,
SC
|
$ | 3,476 | ||||
|
Provident
NY Bancorp, Inc. (PBNY)
|
NASDAQ
|
Montebello,
NY
|
$ | 2,918 | ||||
|
Brookline
Bancorp, Inc. (BRKL)
|
NASDAQ
|
Brookline,
MA
|
$ | 2,616 | ||||
|
Danvers
Bancorp, Inc. (DNBK)
|
NASDAQ
|
Danvers,
MA
|
$ | 2,500 | ||||
The
independent appraisal does not indicate actual market value. Do not
assume or expect that the estimated pro forma market value as indicated above
means that, after the offering, the shares of our common stock will trade at or
above the $10.00 purchase price.
The
following table presents a summary of selected pricing ratios for the peer group
companies and Capitol Federal Financial, Inc. (on a pro forma
basis). The pricing ratios are based on earnings and other
information as of and for the twelve months ended December 31, 2009, stock price
information as of April 16, 2010, as reflected in RP Financial, LC.’s appraisal
report, dated April 16, 2010, and the number of shares outstanding as described
in “Pro Forma Data.” Compared to the average pricing of the peer
group, our pro forma pricing ratios at the maximum of the offering range
indicated a discount of 25.8% on a price-to-tangible book value basis and a
premium of 51.0% on a price-to-core earnings basis.
|
Price-to-core-
earnings
multiple(1)
|
Price-to-tangible
book
value
ratio
|
|||||||
|
Capitol
Federal Financial, Inc.
(on
a pro forma basis, assuming
completion
of the conversion)
|
||||||||
|
Minimum
|
28.24 | x | 95.42 | % | ||||
|
Midpoint
|
32.25 | x | 101.32 | % | ||||
|
Maximum
|
36.02 | x | 106.16 | % | ||||
|
Valuation
of peer group companies,
as
of April 16, 2010
|
||||||||
|
Average
|
23.86 | x | 143.10 | % | ||||
|
Median
|
23.80 | x | 146.60 | % | ||||
|
(1)
|
Information
is derived from the RP Financial, LC. appraisal report and is based upon
estimated core earnings for the twelve months ended December 31,
2009. These ratios are different from the ratios in “Pro Forma
Data.”
|
Our Board
of Directors, in reviewing and approving the independent appraisal, considered
the range of price-to-core earnings multiples and the range of price-to-tangible
book value ratios at the different ranges of shares of common stock to be sold
in the offering, and did not consider one valuation approach to be more
important than the other. Instead, in approving the independent
appraisal, the Board of Directors concluded that these ranges represented the
appropriate balance of these approaches to establishing our estimated valuation
range, and the number of shares of common stock to be sold, in comparison to the
peer group institutions. The estimated appraised value and the
resulting discounts and premiums took into consideration the potential financial
impact of the offering, the contribution to the charitable foundation and the
repayment of trust preferred securities.
The
independent appraisal also reflects the cash contribution to the Capitol Federal
Foundation. The cash contribution to the charitable foundation will
reduce our estimated pro forma market value. See “Comparison of
Valuation and Pro Forma Data With and Without the Charitable
Foundation.”
6
RP
Financial, LC. will update the independent appraisal prior to the completion of
the conversion. If the estimated appraised value changes to either
below $2.23 billion
or above $3.02 billion, then, after
consulting with the Office of Thrift Supervision, we may: set a new offering
range and resolicit persons who submitted stock orders; terminate the offering
and promptly return all funds; or take such other actions as may be permitted by
the Office of Thrift Supervision and the Securities and Exchange
Commission. See “The Conversion and Offering - Stock Pricing and
Number of Shares to be Issued.”
The Exchange of Existing Shares of
CFF Common Stock
At the
conclusion of the conversion, shares held by existing stockholders of CFF will
be canceled and exchanged for shares of common stock of Capitol Federal
Financial, Inc. The number of shares of common stock received will be
based on an exchange ratio determined as of the conclusion of the conversion,
which will depend upon the number of shares sold in the offering. The
number of shares received will not be based on the market price of our currently
outstanding shares. Instead, the exchange ratio will ensure that
existing public stockholders of CFF will retain the same percentage ownership of
our organization after the offering, exclusive of their purchase of any
additional shares of common stock in the offering and their receipt of cash in
lieu of fractional exchange shares. In addition, if options to
purchase shares of CFF common stock are exercised before consummation of the
conversion, there will be an increase in the percentage of shares of CFF held by
public stockholders, an increase in the number of shares of common stock issued
to public stockholders in the share exchange and a decrease in the exchange
ratio.
The
following table shows how the exchange ratio will adjust, based on the number of
shares of common stock issued in the offering and the shares of common stock
issued and outstanding as of December 31, 2009. The table also shows
the number of whole shares of Capitol Federal Financial, Inc. common stock a
hypothetical owner of CFF common stock would receive in exchange for 100 shares
of CFF common stock owned at the completion of the conversion, depending on the
number of shares of common stock sold in the offering.
|
New
Shares to be Sold
in
This Offering
|
New
Shares to be
Exchanged
for
Existing
Shares of
CFF
|
Total
Shares
of
Common
Stock
to be
Outstanding
After
the
Offering
|
Exchange
Ratio
|
New
Shares
That
Would
be
Received
for
100
Existing
Shares
|
||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||
|
Minimum
|
157,250,000 | 70.5 | % | 65,773,170 | 29.5 | % | 223,023,170 | 3.0129 | 301 | |||||||||||||||||||
|
Midpoint
|
185,000,000 | 70.5 | % | 77,380,200 | 29.5 | % | 262,380,200 | 3.5445 | 354 | |||||||||||||||||||
|
Maximum
|
212,750,000 | 70.5 | % | 88,987,230 | 29.5 | % | 301,737,230 | 4.0762 | 407 | |||||||||||||||||||
No
fractional shares of Capitol Federal Financial, Inc. common stock will be issued
to any public stockholder of CFF. For each fractional share that
would otherwise be issued, Capitol Federal Financial, Inc. will pay in cash an
amount equal to the product obtained by multiplying the fractional share
interest to which the holder would otherwise be entitled by the $10.00 per share
purchase price of the common stock in the offering.
Outstanding
options to purchase shares of CFF common stock also will convert into and become
options to purchase shares of Capitol Federal Financial, Inc. common
stock. The number of shares of common stock to be received upon
exercise of these options will be determined pursuant to the exchange
ratio. The aggregate exercise price, duration and vesting schedule of
these options will not be affected by the conversion. At December 31,
2009, there were 382,022 outstanding options to purchase shares of CFF common
stock, 278,022 of which have vested. Such options will be converted
into options to purchase 1,150,994 shares of common stock at the minimum of the
offering range and 1,557,198 shares of common stock at the maximum of the
offering range. Because Office of Thrift Supervision regulations
prohibit us from repurchasing our common stock during the first year following
the conversion unless compelling business reasons exist, we may use authorized
but unissued shares to fund option exercises that occur during the first year
following the conversion. If all existing options were exercised for
authorized but unissued shares of common stock following the conversion,
stockholders would experience dilution of approximately 0.51% at the minimum and
maximum of the offering range.
7
How
We Intend to Use the Proceeds From the Offering
Assuming
we sell 212,750,000 shares of common stock
in the stock offering, equal to the maximum of the offering range, and we have
net proceeds of $2.05 billion, we intend to
distribute the net proceeds as follows:
|
|
●
|
$1.03
billion (50.0% of the net proceeds) will be invested in Capitol Federal
Savings Bank;
|
|
|
●
|
$85.1 million (4.1% of
the net proceeds) will be loaned by Capitol Federal Financial, Inc. to the
employee stock ownership plan to fund its purchase of our shares of common
stock;
|
|
|
●
|
$40.0 million (2.0% of
the net proceeds) will be contributed by Capitol Federal Financial,
Inc. to the Capitol Federal
Foundation;
|
|
|
●
|
$53.6
million (2.6% of the net proceeds) will be used by Capitol Federal
Financial, Inc. to repay outstanding trust preferred securities;
and
|
|
|
●
|
$846.8 million (41.3% of
the net proceeds) will be retained by Capitol Federal Financial,
Inc.
|
We may
use the funds that we retain for investments, to pay cash dividends, to
repurchase shares of common stock and for other general corporate
purposes. Capitol Federal Savings Bank may use the proceeds it
receives to support increased lending and other products and
services. The net proceeds retained also may be used for future
business expansion through acquisitions of banks, thrifts and other financial
services companies, and opening or acquiring branch offices. We have
no current arrangements or agreements with respect to any such
acquisitions. Initially, a substantial portion of the net proceeds
will be invested in short-term investments and mortgage-backed securities
consistent with our investment policy.
Please
see “How We Intend to Use the Proceeds from the Offering” for more information
on the proposed use of the proceeds from the offering.
Our
Dividend Policy
As of
December 31, 2009, CFF paid a quarterly cash dividend of $.50 per share, which
equals $2.00 per share on an annualized basis. In addition, we generally
declare and pay a year end cash dividend if we have sufficient earnings as
determined by our board of directors. After the conversion, we intend
to continue to pay cash dividends on a quarterly basis, although at a reduced
level, the amount of which will be determined following completion of the
conversion. The dividend rate and the continued payment of dividends also
will depend on a number of factors, including our capital requirements, our
financial condition and results of operations, tax considerations, statutory and
regulatory limitations, and general economic conditions. No assurance can
be given that we will continue to pay dividends or that they will not be reduced
or eliminated in the future.
See
“Selected Consolidated Financial and Other Data of CFF and Subsidiary” and
“Market for the Common Stock” for information regarding our historical dividend
payments.
Purchases
and Ownership by our Executive Officers and Directors
We expect
our directors, executive officers and their associates to purchase approximately
205,000 shares of common stock in the offering. The purchase price
paid by them will be the same $10.00 per share price paid by all other persons
who purchase shares of common stock in the offering. After the
conversion, as a result of purchases in the offering and the shares they will
receive in exchange for shares of CFF common stock that they currently own, our
directors and executive officers, together with their associates, are expected
to beneficially own approximately 5,904,179 and 7,899,629 shares of common
stock, or 2.65% and 2.62% of our total outstanding shares of common stock, at
the minimum and the maximum of the offering range, respectively.
8
Benefits
to Management and Potential Dilution to Stockholders Resulting from the
Conversion
Employee Stock
Ownership Plan. Our tax-qualified employee stock ownership
plan expects to purchase up to 4.0% of the shares of common stock we sell in the
offering, or 8,510,000 shares of common stock assuming we sell the maximum
number of shares proposed to be sold. When these shares are combined
with the existing shares owned by the employee stock ownership plan, the plan
will own approximately 6.25% of the shares outstanding following the
conversion. If we receive orders for more shares of common stock than
the maximum of the offering range, the employee stock ownership plan will have
first priority to purchase shares over this maximum, up to a total of 10% of the
shares of common stock sold in the offering. We reserve the right to
purchase shares of common stock in the open market following the offering in
order to fund all or a portion of the employee stock ownership
plan. Assuming the employee stock ownership plan purchases 8,510,000
shares in the offering, 4.0% of the maximum of the offering range, we will
recognize additional compensation expense, after tax, of approximately $1.8
million annually over a 30-year period, assuming the loan to the employee stock
ownership plan has a 30-year term and an interest rate equal to the prime rate
as published in The Wall
Street Journal, and the shares of common stock have a fair market value
of $10.00 per share for the full 30-year period. If, in the future,
the shares of common stock have a fair market value greater or less than $10.00,
the compensation expense will increase or decrease accordingly. We
also reserve the right to have the employee stock ownership plan purchase more
than 4.0% of the shares of common stock sold in the offering if necessary to
complete the offering at the minimum of the offering range.
Stock-Based
Incentive Plan. We also intend to implement a new stock-based
incentive plan no earlier than six months after completion of the
conversion. Stockholder approval of this plan will be
required. The stock-based incentive plan may reserve a number of
shares up to 2.0% of the shares of common stock sold in the offering, or up to
4,255,000 shares of
common stock at the maximum of the offering range for awards of restricted stock
to key employees and directors, at no cost to the recipients, subject to
adjustment as may be required by Office of Thrift Supervision regulations or
policy to reflect restricted stock awards previously made by CFF. If
the shares of common stock awarded under the stock-based incentive plan come
from authorized but unissued shares of common stock, stockholders would
experience dilution of up to approximately 1.39% in their ownership interest in
Capitol Federal Financial, Inc. The stock-based incentive plan may
also reserve a number of shares equal to up to 5.0% of the shares of common
stock sold in the offering, or up to 10,637,500 shares of common stock
at the maximum of the offering range, for issuance pursuant to grants of stock
options to key employees and directors, subject to adjustment as may be required
by Office of Thrift Supervision regulations or policy to reflect stock options
previously granted by CFF. If the shares of common stock issued upon
the exercise of options come from authorized but unissued shares of common
stock, stockholders would experience dilution of up to 3.41% in their ownership
interest in Capitol Federal Financial, Inc. Restricted stock awards
and stock option grants made pursuant to a plan implemented within twelve months
following the completion of the conversion and the offering would be subject to
Office of Thrift Supervision regulations, including a requirement that stock
awards and stock options vest over a period of not less than five
years. If the stock-based incentive plan is adopted more than one
year after the completion of the conversion, awards of restricted stock or
grants of stock options under the plan would not be subject to regulatory
vesting requirements. For a description of our current stock-based
incentive plans, see “Management - Compensation Discussion and Analysis” and
“Note 10 of the Notes to Consolidated Financial Statements.”
The
following table summarizes the number of shares of common stock and the
aggregate dollar value of grants that are expected under the new stock-based
incentive plan as a result of the conversion. The table also shows
the dilution to stockholders if all such shares are issued from authorized but
unissued shares, instead of shares purchased in the open market. A
portion of the stock grants shown in the table below may be made to
non-management employees.
9
|
Number
of Shares to be Granted
or
Purchased(1)
|
Value
of Grants(2)
|
|||||||||||||||||||||||
|
At
Minimum
of
Offering
Range
|
At
Maximum
of
Offering
Range
|
As
a
Percentage
of
Common
Stock
to be
Sold
in the
Offering
|
Dilution
Resulting
From
Issuance
of
Shares
for
Stock-
Based
Incentive
Plans(3)
|
At
Minimum
of
Offering
Range
|
At
Maximum
of
Offering
Range
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Employee
stock ownership plan
|
6,290,000 | 8,510,000 | 4.00 | % | 0.00 | % | $ | 62,900 | $ | 85,100 | ||||||||||||||
|
Restricted
stock awards
|
3,145,000 | 4,255,000 | 2.00 | 1.39 | 31,450 | 42,550 | ||||||||||||||||||
|
Stock
options
|
7,862,500 | 10,637,500 | 5.00 | 3.41 | 26,968 | 36.487 | ||||||||||||||||||
|
Total
|
17,297,500 | 23,402,500 | 11.00 | % | 4.80 | % | $ | 121,318 | $ | 164,137 | ||||||||||||||
| (1) |
The
table assumes that the stock-based incentive plan awards a number of
options and restricted stock equal to 5.0% and 2.0% of the shares of
common stock sold in the offering, respectively.
|
| (2) |
The
actual value of restricted stock awards will be determined based on their
fair value as of the date grants are made. For purposes of this
table, fair value for stock awards is assumed to be the same as the
offering price of $10.00 per share. The fair value of stock
options has been estimated at $3.43 per option using
the Black-Scholes option pricing model with the following assumptions: a
grant-date share price and option exercise price of $10.00; an expected
option life of 10 years; a dividend yield of 3.0%; an interest rate of
3.85%; and a volatility rate of 36.45%. The actual value of
option grants will be determined by the grant-date fair value of the
options, which will depend on a number of factors, including the valuation
assumptions used in the option pricing model ultimately
adopted.
|
| (3) |
Represents
the dilution of stock ownership interest. No dilution is
reflected for the employee stock ownership plan because these shares are
assumed to be purchased in the
offering.
|
We may
fund our plans through open market purchases, as opposed to new issuances of
common stock; however, if any options previously granted under our existing
equity incentive plan are exercised during the first year following completion
of the offering, they will be funded with newly issued shares since Office of
Thrift Supervision regulations do not permit us to repurchase our shares during
the first year following the completion of this offering except to fund the
grants of restricted stock under the stock-based incentive plan or, with prior
regulatory approval, under extraordinary circumstances. The Office of
Thrift Supervision has previously advised that the exercise of outstanding
options and cancellation of treasury shares in the conversion will not
constitute an extraordinary circumstance or a compelling business purpose for
satisfying this test.
The
following table presents information as of December 31, 2009 regarding our
existing employee stock ownership plan, our existing equity incentive plan, our
proposed employee stock ownership plan purchases and our proposed stock-based
incentive plan. The table below assumes that shares are outstanding
after the offering, which includes the sale of 212,750,000 shares in the
offering at the maximum of the offering range, and the issuance of shares in
exchange for shares of CFF using an exchange ratio of 4.0762. It also
assumes that the value of the stock is $10.00 per share.
10
|
Percentage
of
|
||||||||||||
|
Shares
|
||||||||||||
|
Outstanding
|
||||||||||||
|
Existing
and New Stock-Based
|
Estimated Value of |
After
the
|
||||||||||
|
Incentive
Plans
|
Participants
|
Shares
|
Shares |
Conversion
|
||||||||
|
Existing employee stock ownership plan(1)
|
Employees
|
10,351,424
|
$ |
103,514,243
|
3.43
|
%
|
||||||
|
New
employee stock ownership plan
|
Employees
|
8,510,000
|
85,100,000
|
2.82
|
||||||||
|
Total
employee stock ownership plan
|
Employees
|
18,861,424
|
188,614,243
|
6.25
|
||||||||
|
Existing shares of restricted stock(2)
|
Directors,
Officers and Employees
|
666,406
|
6,664,057
|
0.22
|
||||||||
|
New
shares of restricted stock
|
Directors,
Officers and Employees
|
4,255,000
|
42,550,000
|
(3)
|
1.41
|
|||||||
|
Total
shares of restricted stock
|
Directors,
Officers and Employees
|
4,921,406
|
49,214,057
|
1.63
|
||||||||
|
Existing stock options(4)
|
Directors,
Officers and Employees
|
5,274,256
|
18,090,699
|
1.75
|
||||||||
|
New
stock options
|
Directors,
Officers and Employees
|
10,637,500
|
36,486,625
|
(5)
|
3.53
|
|||||||
|
Total
stock options
|
Directors,
Officers and Employees
|
15,911,756
|
54,577,324
|
5.27
|
||||||||
|
Total
of stock-based incentive plans
|
39,694,586
|
$ |
292,405,624
|
13.155
|
%
|
|||||||
|
(1)
|
As of December 31, 2009, CFF’s existing employee
stock ownership plan held 2,539,479 shares, 1,732,923 shares of which have
been allocated.
|
|
(2)
|
Represents shares of restricted stock authorized
for grant under our existing equity incentive
plan.
|
|
(3)
|
The
actual value of restricted stock awards will be determined based on their
fair value as of the date grants are made. For purposes of this table,
fair value is assumed to be the same as the offering price of $10.00 per
share.
|
|
(4)
|
Represents
shares authorized for grant under our existing equity incentive
plan.
|
|
(5)
|
The
fair value of stock options to be granted under the new stock-based
incentive plan has been estimated based on an index of publicly traded
thrift institutions at $3.43 per option using the Black-Scholes option
pricing model with the following assumptions; exercise price, $10.00;
trading price on date of grant, $10.00; dividend yield, 3.0%; expected
life, 10 years;
expected volatility, 36.45%; and interest rate,
3.85%.
|
The value
of the restricted shares awarded under the stock-based incentive plan will be
based on the market value of our common stock at the time the shares are
awarded. The stock-based incentive plan is subject to stockholder
approval, and cannot be implemented until at least six months after completion
of the offering. The following table presents the total value of all
restricted stock that would be available for award and issuance under the new
stock-based incentive plan, assuming the market price of our common stock ranges
from $8.00 per share to $14.00 per share.
|
Value
of Grants
|
||||||||||
|
3,145,000
Shares
Awarded
at Minimum of
|
3,700,000
Shares
Awarded
at Midpoint of
|
4,255,000
Shares
Awarded
at Maximum of
|
||||||||
|
Share
Price
|
Range |
Range
|
Range
|
|||||||
| $ | 8.00 | $ |
25,160,000
|
$ |
29,600,000
|
$ |
34,040,000
|
|||
| 10.00 |
31,450,000
|
37,000,000
|
42,550,000
|
|||||||
| 12.00 |
37,740,000
|
44,400,000
|
51,060,000
|
|||||||
| 14.00 |
44,030,000
|
51,800,000
|
59,570,000
|
|||||||
The
grant-date fair value of the options granted under the new stock-based incentive
plan will be based in part on the price of shares of common stock of Capitol
Federal Financial, Inc. at the time the options are granted. The
value will also depend on the various assumptions used in the option pricing
model ultimately adopted. The following table presents the total
estimated value of the options to be available for grant under the stock-based
incentive plan, assuming the market price and exercise price for the stock
options are equal and the range of market prices for the shares is $8.00 per
share to $14.00 per share.
11
|
Value
of Grants
|
|||||||||||||||||
|
Exercise
Price
|
Option
Value
|
7,862,500
Options
at
Minimum
or Range
|
9,250,000
Options
at
Midpoint
of Range
|
10,637,500
Options
at
Maximum
of Range
|
|||||||||||||
| $ |
8.00
|
$ | 2.74 | $ | 21,543,250 | $ | 25,345,000 | $ | 29,146,750 | ||||||||
|
10.00
|
3.43 | 26,968,375 | 31,727,500 | 36,486,625 | |||||||||||||
|
12.00
|
4.12 | 32,393,500 | 37,110,000 | 43,826,500 | |||||||||||||
|
14.00
|
4.80 | 37,740,000 | 44,400,000 | 51,060,000 | |||||||||||||
The
tables presented above are provided for informational purposes
only. Our shares of common stock may trade below $10.00 per
share. Before you make an investment decision, we urge you to read
this entire prospectus carefully, including, but not limited to, the section
entitled “Risk Factors” beginning on page
[ ].
Limits
on How Much Common Stock You May Purchase
The
minimum number of shares of common stock that may be purchased in the offering
is 25.
The
maximum number of shares of common stock that may be purchased by a person or
persons exercising subscription rights through a single qualifying deposit
account held jointly is 7,500,000 shares. If
any of the following persons purchase shares of common stock, their purchases,
in all categories of the offering combined, when aggregated with your purchases,
cannot exceed 7,500,000 shares ($75.0 million) of common stock:
|
|
●
|
your
spouse or relatives of you or your spouse living in your
house;
|
|
|
●
|
companies,
trusts or other entities in which you are a trustee, have a controlling
beneficial interest or hold a senior position;
or
|
|
|
●
|
other
persons who may be your associates or persons acting in concert with
you.
|
In
addition to the above purchase limitations, there is an ownership limitation for
stockholders other than our employee stock ownership plan. Shares of
common stock that you purchase in the offering individually and together with
persons described above,
plus any shares you and they receive in exchange for existing shares of
CFF common stock, may not exceed 5% of the total shares of common stock to be
issued and outstanding after the completion of the conversion and
offering.
Subject
to Office of Thrift Supervision approval, we may increase or decrease the
purchase and ownership limitations at any time. In the event that the
maximum purchase limitation is increased to 5% of the shares sold in the
offering, this limitation may be further increased to 9.99%, provided that
orders for Capitol Federal Financial, Inc. common stock exceeding 5% of the
shares sold in the offering shall not exceed in the aggregate 10% of the total
shares sold in the offering.
See the
detailed description of purchase limitations and definitions of acting in
concert and associate in “The Conversion and Offering — Additional Limitations
on Common Stock Purchases.”
Steps
We May Take if We Do Not Receive Orders for the Minimum Number of
Shares
If we do
not receive orders for at least 157,250,000 shares of common stock in the
subscription, community and/or syndicated community offering, we may take
several steps in order to issue the minimum number of shares of common stock in
the offering range. Specifically, we may:
|
|
●
|
increase
the purchase and ownership limitations;
and/or
|
|
|
●
|
seek
regulatory approval to extend the offering beyond [ ],
2010, provided that any such extension will require us to resolicit
subscriptions received in the subscription and community
offerings.
|
12
Alternatively,
we may terminate the offering, return funds with interest and cancel deposit
account withdrawal authorizations.
Conditions
to Completion of the Conversion
The
Office of Thrift Supervision has conditionally approved the plan of conversion
and reorganization; however, this approval does not constitute a recommendation
or endorsement of the plan of conversion and reorganization by that
agency.
We cannot
complete the conversion unless:
|
|
●
|
The
plan of conversion and reorganization is approved by at least a majority of votes eligible
to be cast by members of Capitol Federal Savings Bank MHC
(depositors of Capitol Federal Savings Bank as of [ ],
2010 and borrowers of Capitol Federal Savings Bank as of January 6, 1993
and the voting record date);
|
|
|
●
|
The
plan of conversion and reorganization is approved by a vote of at
least two-thirds of the
outstanding shares of common stock of CFF as of [ ],
2010, including shares held by Capitol Federal Savings Bank
MHC. (Because Capitol Federal Savings Bank MHC owns 70% of the
outstanding shares of CFF common stock, we expect that Capitol Federal
Savings Bank MHC and our directors and executive officers effectively will
control the outcome of this vote);
|
|
|
●
|
The
plan of conversion and reorganization is approved by a vote of at
least a majority of the
outstanding shares of common stock of CFF as of [ ],
2010, excluding those shares held by Capitol Federal Savings Bank
MHC;
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We
sell at least the minimum number of shares of common stock offered;
and
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We
receive the final approval of the Office of Thrift Supervision to complete
the conversion; however, this approval does not constitute a
recommendation or endorsement of the plan of conversion and reorganization
by that agency.
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Subject
to member, stockholder and regulatory approvals, we also intend to contribute
cash to our existing charitable foundation, the Capitol Federal Foundation, in
connection with the conversion. However, member and stockholder
approval of the funding of the charitable foundation is not a condition to the
completion of the conversion and offering.
Capitol
Federal Savings Bank MHC intends to vote its ownership interest in favor of the
plan of conversion and reorganization and of funding the charitable
foundation. At December 31, 2009, Capitol Federal Savings Bank MHC
owned 70% of the outstanding shares of common stock of CFF. The
directors and executive officers of CFF and their affiliates owned 1,898,104
shares of CFF, or 2.5% of the outstanding shares of common stock as of December
31, 2009. They have indicated their intention to vote those shares in
favor of the plan of conversion and reorganization and the funding of the
charitable foundation.
Market
for the Common Stock
Shares of
CFF common stock currently trade on the Nasdaq Global Select Market under the
symbol CFFN. Upon completion of the conversion, the shares of common
stock of Capitol Federal Financial, Inc. will replace CFF’s existing
shares. We expect that Capitol Federal Financial, Inc.’s shares of
common stock will trade on the Nasdaq Global Select Market under the trading
symbol CFFND for a period of 20 trading days following the completion of the
offering. Thereafter, the trading symbol will revert to
CFFN. In order to list our common stock on the Nasdaq Global Select
Market, we are required to have at least three broker-dealers who will make a
market in our common stock. CFF currently has 21 registered market
makers. Persons purchasing shares of common stock in the offering may
not be able to sell their shares at or above the $10.00 price per
share.
13
Our
Contribution of Cash to the Capitol Federal Foundation
To
further our commitment to the communities we serve and may serve in the future,
subject to our members’ and stockholders’ approval, we intend to contribute
funds to the Capitol Federal Foundation as part of the
conversion. Capitol Federal Financial, Inc. intends to contribute to
the charitable foundation $40.0 million in
cash. As a result of the cash contribution, we expect to record an
after-tax expense of approximately $24.7 million during the
quarter in which the conversion is completed.
Under the
Internal Revenue Code, a corporate entity is generally permitted to deduct up to
10% of its taxable income (taxable income before the charitable contributions
deduction) in any one year for charitable contributions. Any
contribution in excess of the 10% limit may generally be deducted for federal
income tax purposes over the five years following the year in which the
charitable contribution was made. Accordingly, a charitable
contribution by a corporate entity to a charitable foundation could, if
necessary, be deducted for federal income tax purposes over a six-year
period. Our overall charitable contribution deduction could be
limited if our future taxable income is insufficient to allow for the full
deduction within the 10% of taxable income limitation, which would result in an
increase to income tax expense.
The
Capitol Federal Foundation is governed by a board of trustees, which currently
consists of John C. Dicus, the former Chairman of the Board of Capitol Federal
Savings Bank and CFF, John B. Dicus, the Chairman, President and Chief Executive
Officer of Capitol Federal Savings Bank and CFF, and Rick C. Jackson, Executive
Vice President and Chief Lending Officer of Capitol Federal Savings Bank and two
individuals who are not affiliated with us. None of these individuals
will receive compensation for their service as a trustee of the charitable
foundation. In addition, some of our employees will serve as
executive officers of the charitable foundation. None of these
individuals will receive compensation for their service as an executive officer
of the charitable foundation.
The
Capitol Federal Foundation will continue to support charitable causes and
community development activities in the communities in which we operate or may
operate. During the three months ended December 31, 2009
and the years ended September 30, 2009 and 2008, the Capitol Federal Foundation
made charitable contributions of $1.6 million, $3.8 million and $3.7 million,
respectively. The charitable foundation emphasizes grants and
donations to four areas of focus: housing initiatives; education; United Way;
and traditional community projects.
The
contribution of cash to the charitable foundation has been approved by the board
of directors of Capitol Federal Savings Bank MHC, and must be approved by the
members of Capitol Federal Savings Bank MHC and the stockholders of CFF at their
special meetings being held to consider and vote upon the plan of conversion and
reorganization. If members or stockholders do not approve the
contribution to the charitable foundation, we will proceed with the conversion
without contributing to the foundation and subscribers for common stock will not
be resolicited (unless required by the Office of Thrift
Supervision). Without the contribution to the charitable foundation,
RP Financial, LC. estimates that our pro forma valuation would be greater and,
as a result, a greater number of shares of common stock would be issued in the
offering.
RP
Financial, LC. will update its appraisal of our estimated pro forma market value
at the conclusion of the offering. The pro forma market value
reflected in that updated appraisal will be based on the facts and circumstances
existing at that time, including, among other things, market and economic
conditions, as well as whether we will make the proposed contribution to the
charitable foundation.
See
“Risk Factors — The contribution to the charitable foundation will adversely
affect net income,” “Risk Factors — Our contribution to the charitable
foundation may not be tax deductible, which could reduce our profits,”
“Comparison of Valuation and Pro Forma Data With and Without the Charitable
Foundation” and “Capitol Federal Foundation.”
14
Tax
Consequences
As a
general matter, the conversion will not be a taxable transaction for federal or
state income tax purposes to Capitol Federal Savings Bank MHC, CFF, Capitol
Federal Savings Bank, Capitol Federal Financial, Inc., persons eligible to
subscribe in the subscription offering or existing stockholders of
CFF. The position stated above with respect to no tax consequences
arising from the issuance or receipt of subscription rights is based upon a
reasoned opinion by counsel that subscription rights do not have any
ascertainable value at the time of receipt and is supported by the opinion of RP
Financial LC. to the effect that the subscription rights have no value at the
time of receipt or exercise. See “The Conversion and Offering – Material Income
Tax Consequences.” Existing stockholders of CFF who receive cash in
lieu of fractional share interests in shares of Capitol Federal Financial, Inc.
common stock will recognize a gain or loss equal to the difference between the
cash received and the tax basis of the fractional share.
Persons
Who May Order Shares of Common Stock in the Offering
Subscription
rights to purchase shares of common stock in the subscription offering have been
granted in the following descending order of priority:
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(i)
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First,
to depositors with accounts at Capitol Federal Savings Bank with aggregate
balances of at least $50.00 at the close of business on March 31,
2009.
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(ii)
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Second,
to our tax-qualified employee benefit plans, including our employee stock
ownership plan, which will receive nontransferable subscription rights to
purchase in the aggregate up to 10% of the shares of common stock sold in
the offering. We expect our employee stock ownership plan to
purchase up to 4.0% of the shares of common stock sold in the
offering.
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(iii)
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Third,
to depositors with accounts at Capitol Federal Savings Bank with aggregate
balances of at least $50.00 at the close of business on [ ],
2010.
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(iv)
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Fourth,
to depositors of Capitol Federal Savings Bank at the close of business on
[ ],
2010 and borrowers of Capitol Federal Savings Bank as of January 6, 1993
and [ ],
2010.
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Shares of
common stock not purchased in the subscription offering will be offered for sale
to the general public in a community offering, with a preference given first to
natural persons residing in the counties and metropolitan statistical areas in
which we have offices; and then to CFF public stockholders as of [ ],
2010. The community offering will begin concurrently with the
subscription offering.
If we
receive orders for more shares than we are offering, we may not be able to fully
or partially fill your order. Shares will be allocated first to
categories in the subscription offering in accordance with the plan of
conversion and reorganization. A detailed description of share
allocation procedures can be found in the section of this prospectus entitled
“The Conversion and Offering.”
In
addition, any shares of our common stock not purchased in the subscription
offering or community offering are expected to be offered for sale to the
general public in a syndicated community offering through a syndicate of
selected dealers. We may begin the syndicated community offering at
any time following the commencement of the subscription
offering. Sandler O’Neill & Partners, L.P. will act as sole
book-running manager and Keefe, Bruyette & Woods, Inc. is acting as
co-manager for the syndicated community offering, which is also being conducted
on a best efforts basis. The syndicated community offering will
terminate no later than 45 days after the expiration of the subscription
offering, unless extended by us with approval of the Office of Thrift
Supervision. Neither Sandler O’Neill & Partners, L.P., Keefe,
Bruyette & Woods, Inc. nor any other member of
the syndicate is required to purchase any shares in the syndicated community
offering. Alternatively, we may sell any remaining shares in an
underwritten public offering, which would be conducted on a firm commitment
basis. See “The Conversion and Offering — Syndicated Community
Offering.”
How
You May Purchase Shares of Common Stock
In the
subscription and community offerings, you may pay for your shares only
by:
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(i)
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personal
check, bank check or money order made payable directly to Capitol Federal
Financial, Inc.; or
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(ii)
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authorizing
us to withdraw funds from the Capitol Federal Savings Bank deposit
accounts designated on the stock order
form.
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Capitol
Federal Savings Bank is not permitted to lend funds to anyone for the purpose of
purchasing shares of common stock in the offering. Additionally, you
may not use a Capitol Federal Savings Bank line of credit check or any type of
third party check or wire transfer to pay for shares of common
stock. Please do not submit cash.
You may
purchase shares of common stock in the offering by delivering a signed and
completed original stock order form, together with full payment payable to
Capitol Federal Financial, Inc. or authorization to withdraw funds from one or
more of your Capitol Federal Savings Bank deposit accounts, provided that
we receive the stock
order form before 4:00 p.m., Central Time, on [ ],
2010, which is the end of the subscription and community offering
period. Checks and money orders will be immediately deposited in a
segregated account with Capitol Federal Savings Bank or another insured
depository institution upon receipt. We will pay interest calculated
at Capitol Federal Savings Bank’s statement savings rate from the date funds are
processed until completion of the conversion, at which time a subscriber will be
issued a check for interest earned. On your stock order form, you may
not authorize direct withdrawal from a Capitol Federal Savings Bank retirement
account. If you wish to use funds in an individual or other
retirement account to purchase shares of our common stock, please see “— Using
Retirement Account Funds to Purchase Shares” below. You also may not
designate on your stock order form a withdrawal from Capitol Federal Savings
Bank accounts with check-writing privileges. Please provide a check
instead.
Withdrawals
from certificates of deposit to purchase shares of common stock in the offering
may be made without incurring an early withdrawal penalty. If a
withdrawal results in a certificate of deposit account with a balance less than
the applicable minimum balance requirement, the certificate of deposit will be
canceled at the time of withdrawal without penalty and the remaining balance
will earn interest at the current statement savings rate subsequent to the
withdrawal. All funds authorized for withdrawal from deposit accounts
at Capitol Federal Savings Bank must be available in the accounts at the time
the stock order is received. A hold will be placed on those funds
when your stock order is received, making the designated funds unavailable to
you during the offering period. Funds will not be withdrawn from an
account until the completion of the conversion and offering and will earn
interest within the account at the applicable deposit account rate until that
time.
We are
not required to accept copies or facsimiles of stock order forms. By
signing the stock order form, you are acknowledging both the receipt of this
prospectus and that the shares of common stock are not federally insured
deposits or savings accounts or otherwise guaranteed by Capitol Federal Savings
Bank, Capitol Federal Financial, Inc. or the federal or any state
governments.
Submitting
Your Order in the Subscription and Community Offerings
You may
submit your stock order form by mail using the stock order reply envelope
provided, by overnight courier to the indicated address on the stock order form,
or by hand delivery to our Stock Information Center, which is located at [ ],
Topeka, Kansas [ ]. Stock
order forms may not be delivered to Capitol Federal Savings Bank
offices. Once submitted, your order is irrevocable unless the
offering is terminated or extended beyond [ ],
2010, or the number of shares of common stock to be sold is increased to more
than 212,750,000 shares or decreased to fewer than 157,250,000
shares.
Deadline
for Orders of Common Stock in the Subscription or Community
Offerings
If you
wish to purchase shares of common stock, a properly completed and signed
original stock order form, together with full payment for the shares of common
stock, must be received (not postmarked) by the Stock Information Center no
later than 4:00 p.m., Central Time, on [ ],
2010.
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Once
submitted, your order is irrevocable unless the offering is terminated or
extended or the number of shares to be issued increases to more than 212,750,000
or decreases to less than 157,250,000. We may extend the [ ],
2010 expiration date, without notice to you, until [ ],
2010. If the offering is extended beyond [ ],
2010 or if the offering range is increased or decreased, we will be required to
resolicit purchasers before proceeding with the offering. In either
of these cases, purchasers will have the right to maintain, change or cancel
their orders. If, in the event of resolicitation, we do not receive a
written response from a purchaser regarding any resolicitation, the purchaser’s
order will be canceled and all funds received will be returned promptly with
interest, and deposit account withdrawal authorizations will be
canceled. No extension may last longer than
90 days. All extensions, in the aggregate, may not last beyond
[ ],
2012.
Although
we will make reasonable attempts to provide this prospectus and offering
materials to holders of subscription rights, the subscription offering and all
subscription rights will expire at 4:00 p.m., Central Time, on [ ],
2010, whether or not we have been able to locate each person entitled to
subscription rights.
Using
Retirement Account Funds to Purchase Shares
Persons
interested in purchasing common stock using funds currently in an individual
retirement account (IRA) or any other retirement account, whether held through
Capitol Federal Savings Bank or elsewhere, should contact our Stock Information
Center for guidance. Please contact the Stock Information Center as
soon as possible, preferably at least two weeks prior to the [ ],
2010 offering deadline, because processing such transactions takes additional
time, and whether such funds can be used may depend on limitations imposed by
the institution where the funds are currently held. Additionally, if
such funds are not currently held in a self-directed retirement account, then
before placing your stock order, you will need to establish an account with an
independent trustee or custodian, such as a brokerage firm. The new
trustee or custodian will hold the shares of common stock in a self-directed
account in the same manner as we now hold retirement account
funds. An annual administrative fee may be payable to the new trustee
or custodian. Assistance on how to transfer such retirement accounts
can be obtained from the Stock Information Center.
If you
wish to use some or all of your funds that are currently held in a Capitol
Federal Savings Bank IRA or other retirement account, you may not designate on
the stock order form that you wish funds to be withdrawn from the account(s) for
the purchase of common stock. Before you place your stock order, the
funds you wish to use must be transferred from those accounts to a self-directed
retirement account at an independent trustee or custodian, as described
above.
Delivery
of Stock Certificates
Information
regarding shares of common stock sold in the subscription and community
offerings will be mailed by regular mail to the persons entitled thereto at the
certificate registration address noted on the stock order form, as soon as
practicable following completion of the conversion and offering. It
is possible that, until this information is delivered, purchasers may not be
able to sell the shares of common stock that they ordered, even though the
common stock will have begun trading. All shares of Capitol
Federal Financial, Inc. common stock being sold will be in book entry form and
paper stock certificates will not be issued. If you are currently a
stockholder of CFF, see “The Conversion and Offering — Exchange of Existing
Stockholders’ Stock Certificates.”
You
May Not Sell or Transfer Your Subscription Rights
Office of
Thrift Supervision regulations prohibit you from transferring your subscription
rights. If you order shares of common stock in the subscription
offering, you will be required to state that you are purchasing the common stock
for yourself and that you have no agreement or understanding to sell or transfer
your subscription rights. We intend to take legal action, including
reporting persons to federal agencies, against anyone who we believe has sold or
transferred his or her subscription rights. We will not accept your
order if we have reason to believe that you have sold or transferred your
subscription rights. When registering your stock purchase on the
stock order form, you must register the stock in the same name as appearing on
the account. You should not add the name(s) of persons who do not
have subscription rights or who qualify only in a lower purchase priority than
you do. Doing so may jeopardize your subscription
rights. In addition, the stock order form requires that you list all
deposit accounts, giving all names on each account and the account number at the
applicable eligibility date.
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Failure
to provide this information, or providing incomplete or incorrect information,
may result in a loss of part or all of your share allocation, in the event of an
oversubscription.
How
You Can Obtain Additional Information — Stock Information Center
Our
banking office personnel may not, by law, assist with investment-related
questions about the offering. If you have any questions regarding the
conversion or offering, please call or visit our Stock Information Center,
located at [ ],
Topeka, Kansas [ ]. The
Stock Information Center is open Monday through Friday between 10:00 a.m.
and 4:00 p.m., Central Time. The Stock Information Center will be
closed weekends and bank holidays. The Stock Information Center’s
toll-free telephone number is 1-800-[ ]
-[ ].
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You
should consider carefully the following risk factors in evaluating an investment
in the shares of common stock. An investment in our common stock is
subject to risks inherent in our business. Before making an
investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included in this
prospectus. The value or market price of our common stock could
decline due to any of these identified or other risks, and you could lose all or
part of your investment.
Risks
Related to Our Business
The
United States economy remains weak and unemployment levels are
high. A prolonged economic downturn, especially one affecting our
geographic market area, will adversely affect our business and financial
results.
We are
particularly exposed to downturns in the U.S. housing market. Dramatic declines
in the housing market over the past two years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities, major commercial and investment banks and
regional financial institutions such as Capitol Federal Savings
Bank. Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and institutional
investors have reduced or ceased providing funding to borrowers, including to
other financial institutions. This market turmoil and tightening of credit have
led to an increased level of commercial and consumer delinquencies, lack of
consumer confidence, increased market volatility and widespread reduction of
business activity generally. A worsening of these conditions would
likely exacerbate the adverse effects of these difficult market conditions on us
and others in the financial institutions industry, and could result in a
material decrease in our interest income and/or a material increase in our loan
losses.
The
geographic concentration of our loan portfolio and lending activities makes us
vulnerable to a downturn in the local economy.
We are
currently one of the largest mortgage loan originators in the state of
Kansas. 72.1% of our loan portfolio is comprised of loans secured by
property located in Kansas, and 14.6% is comprised of loans secured by property
located in Missouri. This makes us vulnerable to a downturn in the
local economy and real estate markets. Adverse conditions in the
local economy such as inflation, unemployment, recession or other factors beyond
our control could impact the ability of our borrowers to repay their loans,
which could impact our net interest income. Decreases in local real
estate values could adversely affect the value of the property used as
collateral for our loans, which could cause us to realize a loss in the event of
a foreclosure. Currently there is not a single employer or industry
in the area on which the majority of our customers are
dependent.
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could decrease.
Our
borrowers may not repay their loans according to the terms of the loans, and the
collateral securing the payment of these loans may be insufficient to pay any
remaining loan balance. We may experience significant loan losses, which could
have a material adverse effect on our operating results. We make various
assumptions and judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of many of our loans.
In determining the amount of the allowance for loan losses, we rely on our loan
quality reviews, our experience and our evaluation of economic conditions, among
other factors. If our assumptions prove to be incorrect, our allowance for loan
losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to our allowance. Material additions to our allowance
would materially decrease our net income.
In
addition, bank regulators periodically review our allowance for loan losses and
may require us to increase our provision for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities could have a material
adverse effect on our results of operations and financial condition. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies – Allowance for loan losses” and
“Business – Asset Quality – Loans and REO.
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We
intend to increase our purchases of one- to four-family loans following
completion of the offering. We may not be able to purchase enough
loans meeting our underwriting criteria to effectively leverage our
capital. In addition, we will need to maintain a higher allowance for
loan losses on purchased loans than for one- to four-family loans we
originate.
In order
to utilize a portion of the proceeds raised in the conversion, Capitol Federal
Savings Bank intends to increase the amount of one- to four-family loans
purchased compared to its historical levels. There is no guarantee
that additional volumes of one- to four-family loans meeting Capitol Federal
Savings Bank’s underwriting criteria will be available for purchase at
acceptable prices. If they are not available, these funds will be
placed in MBS and other investment securities, which may generate a lower
yield.
In
addition, a portion of the one- to four-family loans purchased by Capitol
Federal Savings Bank in past years have not performed as well as loans
originated by Capitol Federal Savings Bank. As a result, our policies
currently require that we maintain a higher allowance for loan losses on loans
we purchase as compared to the allowance maintained on those we
originate. Assuming we are able to generate an increased volume of
purchased loans, this is expected to result in an increase in the allowance for
loan losses, through a provision for loan losses, which will have an adverse
effect on net income.
Changes
in interest rates could have an adverse impact on our results of operations and
financial condition.
Our
results of operations are primarily dependent on net interest income, which is
the difference between the interest earned on loans, mortgage backed securities
and investment securities, and the interest paid on deposits and
borrowings. Changes in interest rates could have an adverse impact on
our results of operations and financial condition because the majority of our
interest-earning assets are long-term, fixed-rate loans, while the majority of
our interest-bearing liabilities are shorter term, and therefore subject to a
greater degree of interest rate fluctuation. This type of risk is
known as interest rate risk, and is affected by prevailing economic and
competitive conditions.
The
impact of changes in interest rates on assets is generally observed on the
balance sheet and income statement in later periods than the impact of changes
on liabilities due to the duration of assets versus liabilities, and also to the
time lag between our commitment to originate or purchase a loan and the time we
fund the loan, during which time interest rates may
change. Interest-bearing liabilities tend to reflect changes in
interest rates closer to the time of market rate changes, so the difference in
timing may have an adverse effect on our net interest income.
Changes
in interest rates can also have an adverse effect on our financial condition, as
our available for sale securities are reported at their estimated fair value,
and therefore are impacted by fluctuations in interest rates. We
increase or decrease our stockholders’ equity by the amount of change in the
estimated fair value of the available for sale securities, net of deferred
taxes.
Changes
in interest rates, as they relate to customers, can also have an adverse impact
on our financial condition and results of operations. In times of
rising interest rates, default risk may increase among customers with adjustable
rate loans. Rising interest rate environments also entice
customers with adjustable rate loans to refinance into fixed-rate loans, further
exposing Capitol Federal Savings Bank to interest rate risk. If the
loan is refinanced externally, we could be unable to reinvest cash received from
the resulting prepayments at rates comparable to existing loans, which subjects
us to reinvestment risk. In decreasing interest rate environments,
payments received will likely be invested at the prevailing (decreased) market
rate. An influx of prepayments can result in an excess of liquidity, which could
impact our net interest income if profitable reinvestment opportunities are not
immediately available. Prepayment rates are based on demographics,
local economic factors and seasonality, with the main factors affecting
prepayment rates being prevailing interest rates and
competition. Fluctuations in interest rates also affect
customer demand for deposit products. Local competition for deposit
dollars could affect our ability to attract deposits, or could result in us
paying more for deposits.
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For
additional information about interest rate risk, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Quantitative and
Qualitative Disclosures About Market Risk.”
Our
strategies to modify our interest rate risk profile may be difficult to
implement.
Our asset
management strategies are designed to decrease our interest rate risk
sensitivity. One such strategy is increasing the amount of
adjustable-rate and/or short-term assets. We offer adjustable rate
loan products and work with correspondent lenders to purchase adjustable rate
loans as a means to achieve this strategy. However, lower interest
rates would generally create a decrease in borrower demand for adjustable-rate
assets, and there is no guarantee that any adjustable-rate assets obtained will
not prepay. Conventional mortgage loans may be sold on a bulk basis
for portfolio restructuring or on a flow basis as loans are originated, which
also subjects us to pricing risk in the secondary
market. Additionally, we attempt to invest in shorter-term assets in
the investment portfolio as a way to reduce our interest rate
sensitivity.
We are
also managing our liabilities to moderate our interest rate risk
sensitivity. Customer demand has recently been primarily for
short-term maturity certificates of deposit. Using short-term
liabilities to fund long-term fixed-rate assets will generally increase the
interest rate sensitivity of any financial institution. We are using
our maturing FHLB advances and repurchase agreements to mitigate the impact of
the customer demand for long-term fixed-rate mortgages in our local markets by
lengthening the maturities of these advances and repurchase agreements,
depending on the liquidity or investment opportunities at the time we undertake
additional FHLB advances or repurchase agreements. In fiscal year
2009, we prepaid $875.0 million of FHLB advances to decrease the interest rate
and extend the maturities of the advances. FHLB advances and
repurchase agreements will be entered into as liquidity is needed or to fund the
purchase of assets that provide for spreads at levels acceptable to
management.
If we are
unable to originate or purchase adjustable-rate assets at favorable rates or
fund loan originations or securities purchases with long-term funding, we may
have difficulty executing this asset management strategy and/or it may result in
a reduction in profitability.
We
may have unanticipated credit risk in our investment and mortgage-backed
securities portfolio.
At
December 31, 2009, $2.53 billion, or 30.2% of our assets, consisted of
investment and mortgage-backed securities, most of which were issued by, or have
principal and interest payments guaranteed by FNMA or FHLMC.
On
September 7, 2008, the Federal Housing Finance Agency placed FNMA and FHLMC into
federal conservatorship. Although the federal government has
committed substantial capital to FNMA and FHLMC, there can be no assurance that
these credit facilities and other capital infusions will be adequate for their
needs. If the financial support is inadequate, or if additional
support is not provided when needed, these companies could continue to suffer
losses and could fail to honor their guarantees and other
obligations. The U.S. Treasury Secretary has suggested that the
guarantee payment structure of FNMA and FHLMC should be
re-examined. The future roles of FNMA and FHLMC could be
significantly reduced and the nature of their guarantees could be eliminated or
considerably limited relative to historical measurements. Any changes
to the nature of the guarantees provided by FNMA and FHLMC could have a
significant adverse affect on the market value and cash flows of the investment
and mortgage-backed securities we hold, resulting in substantial
losses.
A
legislative proposal has been introduced that would eliminate the Office of
Thrift Supervision, Capitol Federal Savings Bank’s and CFF’s primary federal
regulator, which would require CFF to become a bank holding
company.
Legislation
has been introduced in the United States Senate and passed in the House of
Representatives that would implement sweeping changes to the current bank
regulatory structure. The House Bill (H.R. 4173) would eliminate
our current primary federal regulator, the Office of Thrift Supervision, by
merging it into the Comptroller of the Currency (the primary federal regulator
for national banks). The proposed legislation would authorize the
Comptroller of the Currency to charter mutual and stock savings banks and mutual
holding companies, which would be under the supervision of the Division of
Thrift Supervision of the Comptroller of the Currency. The proposed
legislation would also establish a Financial Services Oversight Council and
grant the Board of Governors of the Federal Reserve System exclusive authority
to regulate all bank and thrift holding companies. As a result, CFF
would become a holding company subject to supervision by the Federal Reserve
Board as opposed to the Office of Thrift Supervision, and would become subject
to the Federal Reserve’s regulations, including holding company capital
requirements, that CFF is not currently subject to as a savings and loan holding
company. In addition, compliance with new regulations and being
supervised by one or more new regulatory agencies could increase our
expenses.
21
Changes
in laws and regulations and the cost of regulatory compliance with new laws and
regulations may adversely affect our operations and our income.
We are
subject to extensive regulation, supervision and examination by the Office of
Thrift Supervision and the Federal Deposit Insurance
Corporation. These regulatory authorities have extensive discretion
in connection with their supervisory and enforcement activities, including the
ability to impose restrictions on a bank’s operations, reclassify assets,
determine the adequacy of a bank’s allowance for loan losses and determine the
level of deposit insurance premiums assessed. Because our business is
highly regulated, the laws and applicable regulations are subject to frequent
change. Any change in these regulations and oversight, whether in the
form of regulatory policy, new regulations or legislation or additional deposit
insurance premiums could have a material impact on
our operations.
In
response to the financial crisis of 2008 and early 2009, Congress has taken
actions that are intended to strengthen confidence and encourage liquidity in
financial institutions, and the Federal Deposit Insurance Corporation has taken
actions to increase insurance coverage on deposit accounts. In
addition, there have been proposals made by members of Congress and others that
would reduce the amount delinquent borrowers are otherwise contractually
obligated to pay under their mortgage loans and limit an institution’s ability
to foreclose on mortgage collateral.
The
potential exists for additional federal or state laws and regulations, or
changes in policy, affecting lending and funding practices and liquidity
standards. Moreover, bank regulatory agencies have been active in
responding to concerns and trends identified in examinations, and have issued
many formal enforcement orders requiring capital ratios in excess of regulatory
requirements. Bank regulatory agencies, such as the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation, govern the activities
in which we may engage, primarily for the protection of depositors, and not for
the protection or benefit of potential investors. In addition, new
laws and regulations may increase our costs of regulatory compliance and of
doing business, and otherwise affect our operations. New laws and
regulations may significantly affect the markets in which we do business, the
markets for and value of our loans and investments, the fees we can charge and
our ongoing operations, costs and profitability.
Higher
Federal Deposit Insurance Corporation insurance premiums and special assessments
will adversely affect our earnings.
In 2009,
the Federal Deposit Insurance Corporation levied a five basis point special
assessment on each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009. We recorded an expense of $3.8 million during
the quarter ended June 30, 2009, to reflect the special
assessment. In addition, the Federal Deposit Insurance Corporation
generally increased the base assessment rates effective April 1, 2009 and,
therefore, our Federal Deposit Insurance Corporation insurance premium expense
has increased compared to prior periods.
The
Federal Deposit Insurance Corporation also required all insured institutions to
prepay their estimated assessments for the fourth quarter of 2009, and for all
of 2010, 2011 and 2012. This pre-payment was due on December 30,
2009. The assessment rate for the fourth quarter of 2009 and for 2010
was based on each institution’s total base assessment rate for the third quarter
of 2009, modified to assume that the assessment rate in effect on September 30,
2009 had been in effect for the entire third quarter, and the assessment rate
for 2011 and 2012 was calculated as the modified third quarter assessment rate
plus an additional three basis points. In addition, every
institution’s base assessment rate for each period was calculated using its
third quarter assessment base, adjusted quarterly for an estimated 5% annual
growth rate in the assessment base through the end of 2012. We
recorded the pre-payment as a prepaid expense, which will be amortized to
expense over three years based upon actual balances insured. Our
prepayment amount for calendar years 2010, 2011 and 2012 was $25.7
million. Future increases in our assessment rate or special
assessments would decrease our earnings.
22
Strong
competition may limit growth and profitability.
While we
are one of the largest mortgage loan originators in the state of Kansas, we
compete in the same market areas as local, regional, and national banks, credit
unions, mortgage brokerage firms, investment banking firms, investment brokerage
firms and savings institutions. We must also compete with online
investment and mortgage brokerages and online banks that are not confined to any
specific market area. Many of these competitors operate on a national
or regional level, are a conglomerate of various financial services housed under
one corporation, or otherwise have substantially greater financial or
technological resources than Capitol Federal Savings Bank. We compete
primarily on the basis of the interest rates offered to depositors and the terms
of loans offered to borrowers. Should we face competitive pressure to
increase deposit rates or decrease loan rates, our net interest income could be
adversely affected. Additionally, our competitors may offer products
and services that we do not or cannot provide, as certain deposit and loan
products fall outside of our accepted level of risk. Our
profitability depends upon our ability to compete in our local market
areas.
Risks
Related to the Offering
We
have broad discretion to deploy our net proceeds and our failure to effectively
deploy the net proceeds may have an adverse impact on our financial performance
and the value of our common stock.
Capitol
Federal Financial, Inc. intends to contribute between $757.3 million and $1.03
billion of the net proceeds of the offering to Capitol Federal Savings
Bank. Capitol Federal Financial, Inc. may use the remaining net
proceeds to purchase investment securities, repurchase shares of common stock,
pay dividends or for other general corporate purposes. Capitol
Federal Financial, Inc. also expects to use a portion of the net proceeds it
retains to fund a loan for the purchase of shares of common stock in the
offering by the employee stock ownership plan, to fund the cash contribution to
the charitable foundation and to repay outstanding trust preferred
securities. Capitol Federal Savings Bank may use the net proceeds it
receives to fund new loans, purchase investment securities, increase the volume
of purchased loans, acquire financial institutions or financial
services companies, build new branches or acquire branches, repay debt or for
other general corporate purposes. With the exception of the loan to
the employee stock ownership plan, the cash contribution to the charitable
foundation and the repayment of outstanding trust preferred securities, we have
not allocated specific amounts of the net proceeds for any of these purposes,
and we will have significant flexibility in determining the amount of the net
proceeds we apply to different uses and the timing of such
applications. We have not established a timetable for reinvesting the
net proceeds, and we cannot predict how long reinvesting the net proceeds will
require.
The
future price of the shares of common stock may be less than the $10.00 purchase
price per share in the offering.
If you
purchase shares of common stock in the offering, you may not be able to sell
them later at or above the $10.00 purchase price in the offering. In
several cases, shares of common stock issued by newly converted savings
institutions or mutual holding companies have traded below the initial offering
price. The aggregate purchase price of the shares of common stock
sold in the offering will be based on an independent appraisal. The
independent appraisal is not intended, and should not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of common
stock. The independent appraisal is based on certain estimates,
assumptions and projections, all of which are subject to change from time to
time. After our shares begin trading, the trading price of our common
stock will be determined by the marketplace, and may be influenced by many
factors, including prevailing interest rates, the overall performance of the
economy, investor perceptions of Capitol Federal Financial, Inc. and the outlook
for the financial services industry in general. Price fluctuations
may be unrelated to the operating performance of particular
companies.
You
may not revoke your decision to purchase Capitol Federal Financial, Inc.
common stock in the subscription or community offering after you send us your
subscription.
Funds
submitted or automatic withdrawals authorized in the connection with a purchase
of shares of common stock in the subscription and community offerings will be
held by us until the completion or termination of the conversion and offering,
including any extension of the expiration date. Because completion of
the conversion and offering will be subject to regulatory approvals and an
update of the independent appraisal prepared by RP Financial, LC., among other
factors, there may be one or more delays in the completion of the conversion and
offering. Orders submitted in the subscription and community
offerings are irrevocable, and subscribers will have no access to subscription
funds unless the offering is terminated, or extended beyond [ ],
2010, or the number of shares to be sold in the offering is increased to more
than 212,750,000 shares or decreased to less than 157,250,000
shares.
23
Our
return on equity initially will be low compared to our historical
performance. A lower return on equity may negatively impact the
trading price of our common stock.
Net
income divided by average stockholders’ equity, known as return on average
equity is a ratio many investors use to compare the performance of a financial
institution to its peers. Our return on average equity ratio,
annualized, for the quarter ended December 31, 2009 was 8.82% compared to
an average return on equity of (1.01)% based on trailing twelve-month earnings
for all publicly traded fully converted savings institutions as of December 31,
2009. Although we expect that our net income will increase following
the offering, our return on average equity may decrease as a result of the
additional capital that we will raise in the offering. For example,
our pro forma return on equity for the quarter ended December 31, 2009 is 3.6%,
assuming the sale of shares at the maximum of the offering
range. Over time, we intend to use the net proceeds from the offering
to increase earnings per share and book value per share, without assuming undue
risk, with the goal of achieving a return on equity that is comparable to our
historical performance. This goal may take a number of years to
achieve, and we cannot assure you that we will be able to achieve
it. Consequently, you should not expect a return on equity similar to
our current return on equity in the near future. Failure to achieve a
competitive return on equity may make an investment in our common stock
unattractive to some investors and may cause our common stock to trade at lower
prices than comparable companies with higher returns on equity. See
“Pro Forma Data” for an illustration of the financial impact of the
offering.
The
ownership interest of management and employees could enable insiders to make
more difficult a merger that may provide stockholders a premium for their
shares.
The
shares of common stock that our directors and officers intend to purchase in the
offering, when combined with the shares that they will receive in exchange for
their existing shares of CFF common stock, are expected to result in management
and the board controlling approximately 2.63% of our outstanding shares of
common stock at the midpoint of the offering range. In addition, our
employee stock ownership plan is expected to purchase 4.0% of the shares of
common stock sold in the stock offering and receive 2.3% in
exchange for shares currently owned by the employee stock ownership
plan. Additional stock options and shares of common stock also would
be granted to our directors and employees if a stock-based incentive plan is
adopted in the future. This would result in management and employees
controlling a significant percentage of our shares of common
stock. If these individuals were to act together, they could have
influence over the outcome of any stockholder vote. This voting power
may discourage a potential sale of Capitol Federal Financial, Inc. that our
stockholders may desire.
The
implementation of the stock-based incentive plan may dilute your ownership
interest.
We intend
to adopt a new stock-based incentive plan following the offering, subject to
receipt of stockholder approval. This stock-based incentive plan may
be funded either through open market purchases or from the issuance of
authorized but unissued shares of common stock of Capitol Federal Financial,
Inc. While our intention is to fund this plan through open market
purchases, stockholders would experience a 4.80% reduction in ownership interest
at the maximum of the offering range in the event newly issued shares of our
common stock are used to fund stock options and shares of restricted common
stock under the plan in an amount equal to 5.0% and 2.0%, respectively, of the
shares sold in the offering.
Although
the implementation of the stock-based benefit plan will be subject to
stockholder approval, historically, the overwhelming majority of stock-based
benefit plans adopted by savings institutions and their holding companies
following mutual-to-stock conversions have been approved by
stockholders.
24
Additional
expenses following the conversion from the compensation and benefit expenses
associated with the implementation of the new stock-based incentive benefit plan
will adversely affect our profitability.
We intend
to adopt a new stock-based incentive plan after the offering, subject to
stockholder approval, pursuant to which plan participants would be awarded
restricted shares of our common stock (at no cost to them) and options to
purchase shares of our common stock.
Following
the offering, our non-interest expenses are likely to increase as we will
recognize additional annual employee compensation and benefit expenses related
to the shares granted to employees and executives under our stock-based
incentive plan. We cannot predict the actual amount of these new
stock-related compensation and benefit expenses because applicable accounting
practices require that expenses be based on the fair market value of the shares
of common stock at specific points in the future; however, we expect them to be
material. In addition, we will recognize expense for our employee
stock ownership plan when shares are committed to be released to participants’
accounts (i.e., as the loan used to acquire these shares is repaid), and we will
recognize expense for restricted stock awards and stock options over the vesting
period of awards made to recipients. The expense in the first year
following the offering has been estimated to be approximately $15.8 million
($11.8 million after tax), assuming all restricted shares are awarded and all
options are granted under the plan, at the maximum of the offering range as set
forth in the pro forma financial information under “Pro Forma Data,” assuming
the $10.00 per share purchase price as fair market value. Actual
expenses, however, may be higher or lower, depending on the price of our common
stock. For further discussion of our proposed stock-based plans, see
“Management — Compensation Discussion and Analysis” and “Note 10 of the Notes to
Consolidated Financial Statements.”
The
contribution to the charitable foundation will adversely affect net income.
Subject
to member and stockholder approval, we intend to provide additional funds to the
Capitol Federal Foundation in connection with the conversion. We will
make a contribution to the charitable foundation in the form of
$40.0 million in cash. The contribution will have an adverse
effect on our net income for the quarter and year in which we make the
contribution to the charitable foundation. The after-tax expense of
the contribution will reduce net income by approximately
$24.7 million. We had net income of $21.0 million for the
three months ended December 31, 2009 and $66.3 million for the year
ended September 30, 2009, respectively.
Various
factors may make takeover attempts more difficult to achieve.
Our Board
of Directors has no current intention to sell control of Capitol Federal
Financial, Inc. Provisions of our articles of incorporation and
bylaws, federal regulations, Maryland law and various other factors may make it
more difficult for companies or persons to acquire control of Capitol Federal
Financial, Inc. without the consent of our Board of Directors. You
may want a takeover attempt to succeed because, for example, a potential
acquiror could offer a premium over the then prevailing price of our common
stock. The factors that may discourage takeover attempts or make them
more difficult include:
|
|
●
|
Office
of Thrift Supervision Regulations. Office
of Thrift Supervision regulations prohibit, for three years following the
completion of a conversion, the direct or indirect acquisition of more
than 10% of any class of equity security of a savings institution or
holding company regulated by the Office of Thrift Supervision without the
prior approval of the Office of Thrift
Supervision.
|
|
|
●
|
Articles
of incorporation and statutory provisions. Provisions of
the articles of incorporation and bylaws of Capitol Federal Financial,
Inc. and Maryland law may make it more difficult and expensive to pursue a
takeover attempt that management opposes, even if the takeover is favored
by a majority of our stockholders. These provisions also would
make it more difficult to remove our current board of directors or
management, or to elect new directors. Specifically, under our
articles of incorporation, any person who acquires more than 10% of the
common stock of Capitol Federal Financial, Inc. without the prior approval
of its board of directors would be prohibited from engaging in any type of
business combination with Capitol Federal Financial, Inc. unless
such business combination was approved by a super-majority stockholder
vote or met minimum price requirements. Additional provisions
include limitations on voting rights of beneficial owners of more than 10%
of our common stock, the election of directors to staggered terms of three
years and not permitting cumulative voting in the election of
directors. Our bylaws also contain provisions regarding the
timing and content of stockholder proposals and nominations and
qualification for service on the board of
directors.
|
25
|
|
●
|
Articles
of incorporation of Capitol Federal Savings Bank. The
articles of incorporation of Capitol Federal Savings Bank provide that for
a period of five years from the closing of the conversion and offering, no
person other than Capitol Federal Financial, Inc. may offer directly or
indirectly to acquire the beneficial ownership of more than 10% of any
class of equity security of Capitol Federal Savings Bank. This
provision does not apply to any tax-qualified employee benefit plan of
Capitol Federal Savings Bank or Capitol Federal Financial, Inc. or to an
underwriter or member of an underwriting or selling group involving the
public sale or resale of securities of Capitol Federal Financial, Inc. 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, directly
or indirectly, of more than 10% of any class of equity securities of
Capitol Federal Savings Bank. In addition, during this
five-year period, all shares owned over the 10% limit may not be voted on
any matter submitted to stockholders for a
vote.
|
|
|
●
|
Issuance
of stock options and restricted stock. We
also intend to issue stock options and shares of restricted stock to key
employees and directors that will require payments to these persons in the
event of a change in control of Capitol Federal Financial,
Inc. These payments may have the effect of increasing the costs
of acquiring Capitol Federal Financial, Inc., thereby discouraging future
takeover attempts.
|
|
|
●
|
Change
of control severance agreements. Capitol
Federal Financial, Inc. has change of control severance agreements
with executive officers which will remain in effect following the
stock offering. These agreements may have the effect of
increasing the costs of acquiring Capitol Federal Financial, Inc., thereby
discouraging future takeover
attempts.
|
There
may be a decrease in stockholders’ rights for existing stockholders of
CFF.
As a
result of the conversion, existing stockholders of CFF will become stockholders
of Capitol Federal Financial, Inc. Some rights of stockholders of
Capitol Federal Financial, Inc. will be reduced compared to the rights
stockholders currently have in CFF. The reduction in stockholder
rights results from differences between the federal and Maryland charters and
bylaws, and from distinctions between federal and Maryland law. Many
of the differences in stockholder rights under the articles of incorporation and
bylaws of Capitol Federal Financial, Inc. are not mandated by Maryland law but
have been chosen by management as being in the best interests of Capitol Federal
Financial, Inc. and its stockholders. The articles of incorporation
and bylaws of Capitol Federal Financial, Inc. include the following provisions:
(i) approval by at least a majority of outstanding shares required to remove a
director for cause; (ii) greater lead time required for stockholders to submit
proposals for new business or to nominate directors; and (iii) approval by
at least 80% of outstanding shares of capital stock entitled to vote generally
is required to amend the bylaws and certain provisions of the articles of
incorporation. See “Comparison of Stockholders’ Rights For Existing
Stockholders of CFF” for a discussion of these differences.
26
OF
CFF
AND SUBSIDIARY
The
summary financial information presented below is derived in part from the
consolidated financial statements of CFF and its subsidiary. The
following is only a summary and you should read it in conjunction with the
consolidated financial statements and notes beginning on page
F-1. The information at December 31, 2009 and 2008 and for the
years ended September 30, 2009, 2008 and 2007 is derived in part from the
audited consolidated financial statements of CFF that appear in this
prospectus. The information at September 30, 2007, 2006 and 2005, and
for the years ended September 30, 2006 and 2005, is derived in part from audited
consolidated financial statements that do not appear in this
prospectus. The following information is only a summary and you
should read it in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the Consolidated Financial
Statements and notes thereto contained elsewhere in this
prospectus.
(footnotes begin on next page)
|
At
December
31,
|
At
Year Ended September 30,
|
|||||||||||||||||||||||
| 2009 | 2009 | 2008 | 2007 | 2006 |
2005
|
|||||||||||||||||||
| (Dollars and share counts in thousands, except per share amounts) | ||||||||||||||||||||||||
|
Selected
Balance Sheet Data:
|
||||||||||||||||||||||||
|
Total assets
|
$ | 8,374,762 | $ | 8,403,680 | $ | 8,055,249 | $ | 7,675,886 | $ | 8,199,073 | $ | 8,409,687 | ||||||||||||
|
Loans receivable,
net
|
5,423,923 | 5,603,965 | 5,320,780 | 5,290,071 | 5,221,117 | 5,464,130 | ||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||
|
Available-for-sale
(AFS)
|
234,001 | 234,784 | 49,586 | 102,424 | 189,480 | — | ||||||||||||||||||
|
Held-to-maturity
(HTM)
|
417,942 | 245,920 | 92,773 | 421,744 | 240,000 | 430,499 | ||||||||||||||||||
|
Mortgage-backed
securities (MBS):
|
||||||||||||||||||||||||
|
Trading
|
— | — | — | — | 396,904 | — | ||||||||||||||||||
|
AFS
|
1,305,096 | 1,389,211 | 1,484,055 | 402,686 | 556,248 | 737,638 | ||||||||||||||||||
|
HTM
|
572,873 | 603,256 | 750,284 | 1,011,585 | 1,131,634 | 1,407,616 | ||||||||||||||||||
|
Capital
stock of Federal Home Loan Bank (FHLB)
|
134,064 | 133,064 | 124,406 | 139,661 | 165,130 | 182,259 | ||||||||||||||||||
|
Deposits
|
4,227,252 | 4,228,609 | 3,923,883 | 3,922,782 | 3,900,431 | 3,960,297 | ||||||||||||||||||
|
Advances from
FHLB
|
2,394,214 | 2,392,570 | 2,447,129 | 2,732,183 | 3,268,705 | 3,426,465 | ||||||||||||||||||
|
Other
borrowings
|
713,609 | 713,609 | 713,581 | 53,524 | 53,467 | 53,410 | ||||||||||||||||||
|
Stockholders’
equity
|
941,999 | 941,298 | 871,216 | 867,631 | 863,219 | 865,063 | ||||||||||||||||||
|
Book value per
share
|
12.86 | 12.85 | 11.93 | 11.88 | 11.89 | 11.91 | ||||||||||||||||||
|
Three
Months Ended
December
31,
|
Year Ended September 30, | |||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
| (Dollars and share counts in thousands, except per share amounts) | ||||||||||||||||||||||||||||
|
Selected
Operations Data:
|
||||||||||||||||||||||||||||
|
Total
interest and dividend
income
|
$ | 98,887 | $ | 105,273 | $ | 412,786 | $ | 410,806 | $ | 411,550 | $ | 410,928 | $ | 400,107 | ||||||||||||||
|
Total
interest expense
|
54,033 | 64,055 | 236,144 | 276,638 | 305,110 | 283,905 | 244,201 | |||||||||||||||||||||
|
Net
interest and dividend income
|
44,854 | 41,218 | 176,642 | 134,168 | 106,440 | 127,023 | 155,906 | |||||||||||||||||||||
|
Provision
(recovery) for loan losses
|
3,115 | 549 | 6,391 | 2,051 | (225 | ) | 247 | 215 | ||||||||||||||||||||
|
Net
interest and dividend income after provision (recovery) for loan
losses
|
41,739 | 40,669 | 170,251 | 132,117 | 106,665 | 126,776 | 155,691 | |||||||||||||||||||||
|
Retail
fees and charges
|
4,723 | 4,530 | 18,023 | 17,805 | 16,120 | 17,007 | 16,029 | |||||||||||||||||||||
|
Other
income
|
505 | 644 | 10,571 | 12,222 | 7,846 | 7,788 | 7,286 | |||||||||||||||||||||
|
Total
other income
|
13,131 | 6,642 | 28,594 | 30,027 | 23,966 | 24,795 | 23,315 | |||||||||||||||||||||
|
Total
other expenses
|
22,749 | 22,187 | 93,621 | 81,989 | 77,725 | 72,868 | 73,631 | |||||||||||||||||||||
|
Income
before income tax expense
|
32,121 | 25,124 | 105,224 | 80,155 | 52,906 | 78,703 | 105,375 | |||||||||||||||||||||
|
Income
tax
expense
|
11,141 | 9,272 | 38,926 | 29,201 | 20,610 | 30,586 | 40,316 | |||||||||||||||||||||
|
Net
income
|
20,980 | 15,852 | 66,298 | 50,954 | 32,296 | 48,117 | 65,059 | |||||||||||||||||||||
|
Basic
earnings per share
|
$ | 0.29 | $ | 0.22 | $ | 0.91 | $ | 0.70 | $ | 0.44 | $ | 0.66 | $ | 0.90 | ||||||||||||||
|
Average
shares outstanding
|
73,267 | 73,063 | 73,144 | 72,939 | 72,849 | 72,595 | 72,506 | |||||||||||||||||||||
|
Diluted
earnings per share
|
$ | 0.29 | $ | 0.22 | $ | 0.91 | $ | 0.70 | $ | 0.44 | $ | 0.66 | $ | 0.89 | ||||||||||||||
|
Average
diluted shares outstanding
|
73,278 | 73,162 | 73,208 | 73,013 | 72,970 | 72,854 | 73,082 | |||||||||||||||||||||
27
|
At
or For the Three Months Ended December 31,
|
At
and for Year Ended September 30,
|
|||||||||||||||||||||||
|
2009
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Selected
Performance and Financial Ratios and Other Data:
|
||||||||||||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||||||||||
|
Return
on average assets
|
1.00 | % | 0.81 | % | 0.65 | % | 0.41 | % | 0.58 | % | 0.77 | % | ||||||||||||
|
Return
on average equity
|
8.82 | 7.27 | 5.86 | 3.72 | 5.58 | 7.62 | ||||||||||||||||||
|
Dividends
paid per public share (1)
|
$ | 0.79 | $ | 2.11 | $ | 2.00 | $ | 2.09 | $ | 2.30 | $ | 2.00 | ||||||||||||
|
Dividend
payout ratio
|
79.46 | 66.47 | % | 81.30 | % | 133.14 | % | 97.41 | % | 62.59 | % | |||||||||||||
|
Ratio of operating expense to average total assets
|
1.08 | 1.14 | 1.04 | 0.98 | 0.88 | 0.87 | ||||||||||||||||||
|
Efficiency
ratio(2)
|
39.23 | 45.62 | 49.93 | 59.60 | 48.03 | 41.19 | ||||||||||||||||||
|
Ratio
of average interest-earning assets to average
interest-bearing liabilities
|
1.12 | x | 1.12 | x | 1.12 | x | 1.12 | x | 1.11 | x | 1.10 | x | ||||||||||||
|
Interest
rate spread information:
|
||||||||||||||||||||||||
|
Average
during period
|
1.91 | % | 1.86 | % | 1.35 | % | 0.93 | % | 1.19 | % | 1.59 | % | ||||||||||||
|
End
of period
|
1.91 | 1.89 | 1.70 | 0.89 | 1.07 | 1.46 | ||||||||||||||||||
|
Net
interest margin
|
2.19 | 2.20 | 1.75 | 1.36 | 1.57 | 1.87 | ||||||||||||||||||
|
Asset
Quality Ratios:
|
||||||||||||||||||||||||
|
Non-performing
assets to total assets
|
0.47 | 0.46 | 0.23 | 0.12 | 0.10 | 0.08 | ||||||||||||||||||
|
Non-performing
loans to total loans
|
0.60 | 0.55 | 0.26 | 0.14 | 0.11 | 0.09 | ||||||||||||||||||
|
Allowance for loan losses to non-performing
loans
|
37.59 | 32.83 | 42.37 | 56.87 | 79.03 | 89.14 | ||||||||||||||||||
|
Allowance for loan losses to loans receivable,
net
|
0.23 | 0.18 | 0.11 | 0.08 | 0.08 | 0.08 | ||||||||||||||||||
|
Ratio
of net charge-offs during the period to average loans
outstanding
|
0.02 | % | 0.04 | % | * | * | * | * | ||||||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||||||||
|
Equity
to total assets at end of period (3)
|
11.25 | 11.20 | 10.82 | 11.30 | 10.53 | 10.29 | ||||||||||||||||||
|
Average
equity to average assets
|
11.33 | 11.08 | 11.05 | 10.91 | 10.47 | 10.05 | ||||||||||||||||||
|
Regulatory
Capital Ratios of Bank:
|
||||||||||||||||||||||||
|
Tangible
equity
|
10.1 | 10.0 | 10.0 | 10.3 | 9.5 | 9.1 | ||||||||||||||||||
|
Tier
1 (core) capital
|
10.1 | 10.0 | 10.0 | 10.3 | 9.5 | 9.1 | ||||||||||||||||||
|
Tier
1 (core) risk-based capital
|
23.8 | 23.2 | 23.1 | 22.9 | 22.6 | 21.3 | ||||||||||||||||||
|
Total
risk-based capital
|
24.0 | 23.3 | 23.0 | 22.8 | 22.5 | 21.3 | ||||||||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||
|
Number
of traditional offices
|
34 | 33 | 30 | 29 | 29 | 29 | ||||||||||||||||||
|
Number
of in-store offices
|
10 | 9 | 9 | 9 | 9 | 8 | ||||||||||||||||||
|
(1)
|
For
all periods shown, Capitol Federal Savings Bank MHC, which owns a majority
of the outstanding shares of Capitol Federal Financial common stock,
waived its right to receive dividends paid on the common stock with the
exception of the $0.50 per share dividend paid on 500,000 shares in
February 2005. Public shares exclude shares held by Capitol
Federal Savings Bank MHC, as well as unallocated shares held in the
employee stock ownership plan.
|
|
(2)
|
Non-interest
expense divided by net interest and dividend income plus non-interest
income.
|
|
(3)
|
CFF
has no intangible assets.
|
|
*
|
Less
than 0.01%
|
28
This
prospectus contains forward looking statements which are made in good faith by
us pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
These
forward-looking statements include statements about our beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions that
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond our control. The
words may, could, should, would, believe, anticipate, estimate, expect, intend,
plan and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause our future results
to differ materially from the plans, objectives, goals, expectations,
anticipations, estimates and intentions expressed in the forward-looking
statements:
| ● |
our
ability to continue to maintain overhead costs at reasonable
levels;
|
|
| ● |
our
ability to continue to originate a significant volume of one- to
four-family mortgage loans in our market area;
|
|
| ● |
our
ability to acquire funds from or invest funds in wholesale or secondary
markets;
|
|
| ● |
the
future earnings and capital levels of Capitol Federal Savings Bank, which
could affect the ability of Capitol Federal Financial, Inc. to pay
dividends in accordance with its dividend policies;
|
|
| ● |
fluctuations
in deposit flows, loan demand, and/or real estate values, which may
adversely affect our business;
|
|
| ● |
the
credit risks of lending and investing activities, including changes in the
level and direction of loan delinquencies and write-offs and changes in
estimates of the adequacy of the allowance for loan
losses;
|
|
| ● |
results
of examinations of Capitol Federal Savings Bank by its primary regulator,
the Office of Thrift Supervision, including the possibility that the
Office of Thrift Supervision may, among other things, require Capitol
Federal Savings Bank to increase its allowance for loan
losses;
|
|
| ● |
the
strength of the U.S. economy in general and the strength of the local
economies in which we conduct operations;
|
|
| ● |
the
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System;
|
|
| ● |
the
effects of, and changes in, foreign and military policies of the United
States government;
|
|
| ● |
inflation,
interest rate, market and monetary fluctuations;
|
|
| ● |
our
ability to access cost-effective funding;
|
|
| ● |
the
timely development of and acceptance of our new products and services and
the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors’
products and services;
|
|
| ● |
the
willingness of users to substitute competitors’ products and services for
our products and services;
|
29
| ● |
our
success in gaining regulatory approval of our products and services and
branching locations, when required;
|
|
| ● |
the
impact of changes in financial services laws and regulations, including
laws concerning taxes, banking securities and insurance and the impact of
other governmental initiatives affecting the financial services
industry;
|
|
| ● |
implementing
business initiatives may be more difficult or expensive than
anticipated;
|
|
| ● |
technological
changes;
|
|
| ● |
acquisitions
and dispositions;
|
|
| ● |
changes
in consumer spending and saving habits; and
|
|
| ● |
our
success at managing the risks involved in our
business.
|
Because
of these and other uncertainties, our actual future results may be materially
different from the results indicated by these forward-looking
statements. Please see “Risk Factors” beginning on page [ ].
Although
we cannot determine what the actual net proceeds from the sale of the shares of
common stock in the offering will be until the offering is completed, we
anticipate that the aggregate net proceeds will be between $1.51 billion and
$2.05 billion.
We intend
to distribute the net proceeds from the stock offering as follows:
| Based Upon the Sale at $10.00 Per Share of | ||||||||||||||||||||||||
|
157,250,000
Shares
|
185,000,000
Shares
|
212,750,000
Shares
|
||||||||||||||||||||||
| Amount | Percent
of
Net
Proceeds
|
Amount | Percent
of
Net
Proceeds
|
Amount |
Percent
of
Net
Proceeds
|
|||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
|
Offering
proceeds
|
$ | 1,572,500 | $ | 1,850,000 | $ | 2,127,500 | ||||||||||||||||||
|
Less
offering expenses
|
57,836 | 67,119 | 76,401 | |||||||||||||||||||||
|
Net
offering proceeds
|
$ | 1,514,664 | 100.0 | % | $ | 1,782,881 | 100.0 | % | $ | 2,051,099 | 100.0 | % | ||||||||||||
|
Distribution
of net proceeds:
|
||||||||||||||||||||||||
|
To
Capitol Federal Savings Bank
|
$ | 757,332 | 50.0 | % | $ | 891,441 | 50.0 | % | $ | 1,025,549 | 50.0 | % | ||||||||||||
|
To
fund the loan to employee stock
ownership plan
|
62,900 | 4.2 | 74,000 | 4.2 | 85,100 | 4.1 | ||||||||||||||||||
|
To
repay outstanding trust preferred securities
|
53,609 | 3.5 | 53,609 | 3.0 | 53,609 | 2.6 | ||||||||||||||||||
|
Cash
contributed to foundation
|
40,000 | 2.6 | 40,000 | 2.2 | 40,000 | 2.0 | ||||||||||||||||||
|
Retained
by Capitol Federal Financial, Inc.
|
$ | 600,823 | 39.7 | % | $ | 723,831 | 40.6 | % | $ | 846,841 | 41.3 | % | ||||||||||||
Payments
for shares of common stock made through withdrawals from existing deposit
accounts will not result in the receipt of new funds for investment but will
result in a reduction of Capitol Federal Savings Bank’s deposits. The
net proceeds may vary because total expenses relating to the offering may be
more or less than our estimates. For example, our expenses would
increase if a larger percentage of shares than we have assumed are sold in the
syndicated community offering rather than in the subscription and community
offerings.
30
Capitol Federal Financial, Inc.
May Use the Proceeds it Retains From the Offering:
| ● |
to
fund a loan to the employee stock ownership plan to purchase shares of
common stock in the offering;
|
|
| ● |
to
repay the outstanding trust preferred
securities;
|
|
| ● |
to
pay cash dividends to stockholders;
|
|
| ● |
to
repurchase shares of our common stock for, among other things, the funding
of our stock-based incentive plan;
|
|
| ● |
to
invest in securities;
|
|
| ● |
to
finance, where opportunities are presented, the acquisition of financial
institutions or other financial service companies primarily in, or
adjacent to, our market areas, although we do not currently have any
understandings or agreements regarding any specific acquisition
transaction; and
|
|
| ● |
for
other general corporate
purposes.
|
Capitol
Federal Financial, Inc. intends to make a $40.0 million
cash contribution to fund the Capitol Federal Foundation and repay outstanding
trust preferred securities totaling $53.6 million. Initially, a
substantial portion of the net proceeds will be invested in short-term
investments and government agency backed mortgage-backed securities, as well as
investment-grade debt obligations.
Under
current Office of Thrift Supervision regulations, we may not repurchase shares
of our common stock during the first year following the completion of the
conversion, except to fund certain stock-based plans or, with prior regulatory
approval, when extraordinary circumstances exist.
Capitol
Federal Savings Bank May Use the Net Proceeds it Receives From the Offering:
| ● |
to
increase our emphasis on loan purchases, subject to underwriting standards
and availability;
|
|
| ● |
to
support internal growth through lending in the communities we
serve;
|
|
| ● |
to
enhance existing products and services and support the development of new
products and services by investing, for example, in technology to support
growth and enhanced customer service;
|
|
| ● |
to
invest in securities;
|
|
| ● |
to
finance the acquisition of branches from other financial institutions or
build or lease new branch facilities primarily in, or adjacent to, the
State of Kansas although we do not currently have any agreements or
understandings regarding any specific acquisition transaction;
and
|
|
| ● |
for
other general corporate
purposes.
|
Initially,
a substantial portion of the net proceeds will be invested in short-term
investments and government agency backed mortgage-backed securities, as well as
investment-grade debt obligations. The use of proceeds may change
based on changes in interest rates, equity markets, laws and regulations
affecting the financial services industry, our relative position in the
financial services industry, the attractiveness of potential acquisitions and
overall market conditions. Our business strategy for the deployment
of the net proceeds raised in the offering is discussed in more detail in
“Summary — Reasons for the Conversion and the Offering.”
31
Our
return on equity may be relatively low unless and until we are able to
effectively reinvest the additional capital raised in the
offering. Until we can increase our non-interest income, our return
on equity may be below the industry average, which may negatively affect the
value of our common stock. See “Risk Factors — Our return on equity
will initially be low compared to our historical performance. A lower
return on equity may negatively impact the trading price of our common
stock.”
As of
December 31, 2009, CFF paid a quarterly cash dividend of $0.50 per share, which
equals $2.00 per share on an annualized basis. In addition, we generally
declare and pay a year end cash dividend if we have sufficient earnings as
determined by our board of directors. After the conversion, we intend to
continue to pay cash dividends on a quarterly basis, although at a reduced
level, the amount of which will be determined following completion of the
conversion. The dividend rate and the continued payment of dividends also
will depend on a number of factors, including our capital requirements, our
financial condition and results of operations, tax considerations, statutory and
regulatory limitations and general economic conditions. No assurance can
be given that we will continue to pay dividends or that they will not be reduced
or eliminated in the future.
Under the
rules of the Office of Thrift Supervision, Capitol Federal Savings Bank will not
be permitted to pay dividends on its capital stock to Capitol Federal Financial,
Inc., its sole stockholder, if Capitol Federal Savings Bank’s stockholder’s
equity would be reduced below the amount of the liquidation account established
in connection with the conversion. In addition, Capitol Federal
Savings Bank will not be permitted to make a capital distribution if, after
making such distribution, it would be undercapitalized. See “The
Conversion and Offering — Liquidation Rights.”
Capitol
Federal Financial, Inc.’s ability to pay dividends will depend on net proceeds
of the offering retained by us and earnings thereon, as well as dividends from
Capitol Federal Savings Bank. Our payment of dividends will also be
subject to state law limitations and the liquidation account established in
connection with the conversion. Maryland law generally limits
dividends to an amount equal to the excess of our capital surplus over payments
that would be owed upon dissolution to stockholders whose preferential rights
upon dissolution are superior to those receiving the dividend, and to an amount
that would not make us insolvent.
Finally,
pursuant to Office of Thrift Supervision regulations, during the three-year
period following the conversion, we will not take any action to declare an
extraordinary dividend to stockholders that would be treated by recipients as a
tax-free return of capital for federal income tax purposes.
See
“Selected Consolidated Financial and Other Data of CFF and Subsidiary” and
“Market for the Common Stock” for information regarding our historical dividend
payments.
CFF’s
common stock currently trades on the Nasdaq Global Select Market under the
symbol CFFN. Upon completion of the offering, the shares of common
stock of Capitol Federal Financial, Inc. will replace CFF’s shares of common
stock. We expect that Capitol Federal Financial, Inc.’s shares of
common stock will trade on the Nasdaq Global Select Market under the trading
symbol CFFND for a period of 20 trading days following the completion of the
offering. Thereafter, the trading symbol will revert to
CFFN. In order to list our common stock on the Nasdaq Global Select
Market, we are required to have at least three broker-dealers who will make a
market in our common stock. CFF currently has 21 registered market
makers.
The
following table sets forth the high and low trading prices for shares of CFF
common stock and cash dividends paid per share for the periods
indicated. As of December 31, 2009, there were 21,024,204 shares of
CFF common stock issued and outstanding (excluding shares held by Capitol
Federal Savings Bank MHC).
32
|
Year
Ending September 30, 2010
|
High
|
Low
|
Dividend
Paid
Per
Share
|
|||||||||
|
Third
quarter (through _____, 2010)
|
$ | [ ] | $ | [ ] | $ | [ ] | ||||||
|
Second
quarter
|
38.20 | 30.76 | .50 | |||||||||
|
First
quarter
|
33.36 | 28.19 | .79 | |||||||||
|
Year
Ending September 30, 2009
|
High
|
Low
|
Dividend
Paid
Per
Share
|
|||||||||
|
Fourth
quarter
|
$ | 39.29 | $ | 30.24 | $ | .50 | ||||||
|
Third
quarter
|
44.93 | 34.91 | .50 | |||||||||
|
Second
quarter
|
45.77 | 33.02 | .50 | |||||||||
|
First
quarter
|
47.64 | 33.06 | .61 | |||||||||
|
Year
Ending September 30, 2008
|
High
|
Low
|
Dividend
Paid
Per
Share
|
|||||||||
|
Fourth
quarter
|
$ | 51.56 | $ | 36.06 | $ | .50 | ||||||
|
Third
quarter
|
41.45 | 36.82 | .50 | |||||||||
|
Second
quarter
|
38.60 | 27.63 | .50 | |||||||||
|
First
quarter
|
36.09 | 30.47 | .50 | |||||||||
On May
5, 2010,
the business day immediately preceding the public announcement of the
conversion, the closing price of CFF common stock as reported on the Nasdaq
Global Select Market was $[ ]
per share. At [ ] 2010,
the closing price of CFF’s common stock was $[ ],
and there were approximately 9,395 stockholders
of record.
33
At
December 31, 2009, Capitol Federal Savings Bank exceeded all of the applicable
regulatory capital requirements. The table below sets forth the
historical equity capital and regulatory capital of Capitol Federal Savings Bank
at December 31, 2009, and the pro forma regulatory capital of Capitol Federal
Savings Bank, after giving effect to the sale of Capitol Federal Financial,
Inc.’s shares of common stock at a $10.00 per share purchase
price. Accordingly, the table assumes the receipt by Capitol Federal
Savings Bank of 50% of the net proceeds. See “How We Intend to Use
the Proceeds from the Offering.”
| Capitol
Federal Savings Bank
Historical
at
|
Pro
Forma at December 31, 2009 Based Upon the Sale at $10.00 Per
Share
|
|||||||||||||||||||||||||||||||
|
December
31, 2009
|
157,250,000 Shares | 185,000,000 Shares |
212,750,000
Shares
|
|||||||||||||||||||||||||||||
|
Amount
|
Percent
of
Assets(1)
|
Amount
|
Percent
of
Assets(1)
|
Amount
|
Percent
of
Assets(1)
|
Amount
|
Percent
of
Assets(1)
|
|||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||
|
Equity
capital
|
$ | 876,290 | 10.44 | % | $ | 1,539,272 | 16.82 | % | $ | 1,656,731 | 17.85 | % | $ | 1,774,189 | 18.84 | % | ||||||||||||||||
|
Core (leverage)
capital(2)
|
$ | 844,959 | 10.13 | % | $ | 1,507,941 | 16.57 | % | $ | 1,625,400 | 17.60 | % | $ | 1,742,858 | 18.60 | % | ||||||||||||||||
|
Core
(leverage) requirement
|
417,109 | 5.00 | 454,975 | 5.00 | 461,681 | 5.00 | 468,386 | 5.00 | ||||||||||||||||||||||||
|
Excess
|
$ | 427,850 | 5.13 | % | $ | 1,052,966 | 11.57 | % | $ | 1,163,719 | 12.60 | % | $ | 1,274,472 | 13.60 | % | ||||||||||||||||
|
Tier I risk-based
capital(2)(3)
|
$ | 844,959 | 23.79 | % | $ | 1,507,941 | 40.72 | % | $ | 1,625,400 | 43.57 | % | $ | 1,742,858 | 46.39 | % | ||||||||||||||||
|
Tier
I requirement
|
213,118 | 6.00 | 222,206 | 6.00 | 223,815 | 6.00 | 225,424 | 6.00 | ||||||||||||||||||||||||
|
Excess
|
$ | 631,841 | 17.79 | % | $ | 1,285,735 | 34.72 | % | $ | 1,401,585 | 37.57 | % | $ | 1,517,434 | 40.39 | % | ||||||||||||||||
|
Total risk-based
capital(2)(3)
|
$ | 853,139 | 24.02 | % | $ | 1,516,121 | 40.94 | % | $ | 1,633,580 | 43.79 | % | $ | 1,751,038 | 46.61 | % | ||||||||||||||||
|
Risk-based
requirement
|
355,196 | 10.00 | 370,343 | 10.00 | 373,025 | 10.00 | 375,707 | 10.00 | ||||||||||||||||||||||||
|
Excess
|
$ | 497,943 | 14.02 | % | $ | 1,145,778 | 30.94 | % | $ | 1,260,555 | 33.79 | % | $ | 1,375,331 | 36.61 | % | ||||||||||||||||
|
Reconciliation
of capital infused into Capitol Federal Savings Bank:
|
||||||||||||||||||||||||||||||||
|
Net
proceeds
|
$ | 757,332 | $ | 891,441 | $ | 1,025,549 | ||||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||
|
Common
stock acquired by employee stock ownership plan
|
(62,900 | ) | (74,000 | ) | (85,100 | ) | ||||||||||||||||||||||||||
|
Common
stock acquired by stock-based incentive plan
|
(31,450 | ) | (37,000 | ) | (42,550 | ) | ||||||||||||||||||||||||||
|
Pro forma increase
in GAAP and regulatory capital(3)
|
$ | 662,982 | $ | 780,441 | $ | 897,899 | ||||||||||||||||||||||||||
|
(1)
|
Core
capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Capital requirements of 4.0%, 5.0% and
10% for core (leverage), Tier I risk-based and Total risk-based capital
reflect “well capitalized” status under prompt corrective action
provisions.
|
|
(2)
|
Pro
forma capital levels assume that we fund the stock-based incentive plans
with purchases in the open market equal to 2.0% of
the shares of common stock sold in the stock offering at a price equal to
the price for which the shares of common stock are sold in the stock
offering, and that the employee stock ownership plan purchases 4.0% of the
shares of common stock sold in the stock offering with funds we
lend. Pro forma GAAP and regulatory capital have been reduced
by the amount required to fund both of these plans. See
“Management” for a discussion of the stock-based benefit plan and employee
stock ownership plan.
|
|
(3)
|
Pro
forma amounts and percentages assume net proceeds are invested in assets
that carry a 20% risk weighting.
|
34
The
following table presents the historical consolidated capitalization of CFF at
December 31, 2009 and the pro forma consolidated capitalization of Capitol
Federal Financial, Inc. after giving effect to the offering, based upon the
assumptions set forth in the “Pro Forma Data” section.
|
CFF
|
Capitol
Federal Financial, Inc.
$10.00
Per Share Pro Forma Based on the Sale of
|
|||||||||||||||
|
Historical
at
December
31, 2009
|
157,250,000
Shares
|
185,000,000
Shares
|
212,750,000
Shares
|
|||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Deposits(1)
|
$ | 4,227,252 | $ | 4,227,197 | $ | 4,227,197 | $ | 4,227,197 | ||||||||
|
Borrowed
funds
|
3,054,214 | 3,054,214 | 3,054,214 | 3,054,214 | ||||||||||||
|
Trust
preferred securities
|
53,609 | — | — | — | ||||||||||||
|
Total
deposits and borrowed funds
|
$ | 7,335,075 | $ | 7,281,411 | $ | 7,281,411 | $ | 7,281,411 | ||||||||
|
Stockholders’
equity:
|
||||||||||||||||
|
Preferred
stock, $0.01 par value, 100,000,000
shares authorized (post-conversion)(2)
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Common
stock $0.01 par value, 1,400,000,000
shares authorized (post-conversion);
shares to be issued
as reflected(2)(3)
|
915 | 2,230 | 2,624 | 3,017 | ||||||||||||
|
Paid-in
capital(2)
|
453,975 | 1,967,324 | 2,235,147 | 2,502,972 | ||||||||||||
|
Retained
earnings(4)
|
785,914 | 785,914 | 785,914 | 785,914 | ||||||||||||
|
Accumulated
other comprehensive
income
|
30,875 | 30,875 | 30,875 | 30,875 | ||||||||||||
|
Plus:
|
||||||||||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
— | 133 | 133 | 133 | ||||||||||||
|
Less:
|
||||||||||||||||
|
Treasury
stock, at
cost
|
(321,859 | ) | (321,859 | ) | (321,859 | ) | (321,859 | ) | ||||||||
|
After-tax
expense of contribution to charitable
foundation(5)
|
— | (24,672 | ) | (24,672 | ) | (24,672 | ) | |||||||||
|
Common
stock acquired by employee stock
ownership plan (6)
|
(7,561 | ) | (70,461 | ) | (81,561 | ) | (92,661 | ) | ||||||||
|
Common
stock acquired by the stock-based
incentive plan(7)
|
(260 | ) | (31,710 | ) | (37,260 | ) | (42,810 | ) | ||||||||
|
Total
stockholders’ equity
|
$ | 941,999 | $ | 2,337,774 | $ | 2,589,341 | $ | 2,840,909 | ||||||||
|
Shares
outstanding:
|
||||||||||||||||
|
Total
shares outstanding
|
74,023,577 | 223,023,170 | 262,380,200 | 301,737,230 | ||||||||||||
|
Exchange
shares issued
|
— | 65,773,170 | 77,380,200 | 88,987,230 | ||||||||||||
|
Shares
offered for sale
|
— | 157,250,000 | 185,000,000 | 212,750,000 | ||||||||||||
|
Total
stockholders’ equity as a
percentage
of total assets
|
11.25 | % | 24.06 | % | 25.98 | % | 27.80 | % | ||||||||
|
(1)
|
Does
not reflect withdrawals from deposit accounts for the purchase of shares
of common stock in the offering other than a deposit of $55 thousand of
Capitol Federal Savings Bank MHC held at Capitol Federal Savings
Bank. These withdrawals would reduce pro forma deposits by the
amount of the withdrawals. On a pro forma basis, it also
reflects a transfer to equity of $113 thousand from
Capitol Federal Savings Bank MHC consisting of the deposits held at
Capitol Federal Savings Bank and tax benefits held by Capitol Federal
Savings Bank MHC.
|
|
(2)
|
CFF
currently has 50,000,000 authorized shares of preferred stock and
450,000,000 authorized shares of common stock, par value $0.01 per
share. On a pro forma basis, Capitol Federal Financial, Inc.
common stock and additional paid-in capital have been revised to reflect
the number of shares of Capitol Federal Financial, Inc. common stock to be
outstanding, which is 223,023,170 shares, 262,380,200 shares and
301,737,230 shares at the minimum, midpoint and maximum of the offering
range, respectively.
|
|
(3)
|
No
effect has been given to the issuance of additional shares of Capitol
Federal Financial, Inc. common stock pursuant to stock options to be
granted under a stock-based incentive plan. An amount up to
5.0% of the shares of Capitol Federal Financial, Inc. common stock sold in
the offering may be reserved for issuance upon the exercise of
options. No effect has been given to the exercise of options
currently outstanding. See “Management - Benefits to be
Considered Following Completion of the
Conversion.”
|
|
(4)
|
The
retained earnings of Capitol Federal Savings Bank will be substantially
restricted after the conversion. See “The Conversion and
Offering - Liquidation Rights” and “Supervision and
Regulation.”
|
|
(5)
|
Represents
the expense of the contribution to the charitable foundation based on a
38.32% tax rate. The realization of the deferred tax benefit is limited
annually to a maximum deduction for charitable foundations equal to 10% of
our annual taxable income, subject to our ability to carry forward for
federal or state purposes any unused portion of the deduction for the five
years following the year in which the contribution is
made.
|
35
|
(6)
|
Assumes
that 4.0% of the shares sold in the offering will be acquired by the
employee stock ownership plan financed by a loan from Capitol Federal
Financial, Inc. The loan will have a term of 30 years and an
interest rate equal to the prime rate as published in The Wall Street
Journal, and be repaid principally from Capitol Federal Savings
Bank’s contributions to the employee stock ownership
plan. Since Capitol Federal Financial, Inc. will finance the
employee stock ownership plan debt, this debt will be eliminated through
consolidation and no liability will be reflected on Capitol Federal
Financial, Inc.’s consolidated financial
statements. Accordingly, the amount of shares of common stock
acquired by the employee stock ownership plan is shown in this table as a
reduction of total stockholders’
equity.
|
|
(7)
|
Assumes
at the minimum, midpoint and maximum of the offering range that a number
of shares of common stock equal to 2.0% of the shares of common stock to
be sold in the offering will be purchased by the stock-based incentive
plan in open market purchases. The stock-based incentive plan
will be submitted to a vote of stockholders following the completion of
the offering. The funds to be used by the stock-based incentive
plan to purchase the shares will be provided by Capitol Federal Financial,
Inc. The dollar amount of common stock to be purchased is based
on the $10.00 per share offering price and represents unearned
compensation. This amount does not reflect possible increases
or decreases in the value of common stock relative to the subscription
price in the offering. As Capitol Federal Financial, Inc.
accrues compensation expense to reflect the vesting of shares pursuant to
the stock-based incentive plan, the credit to capital will be offset by a
charge to operations. Implementation of the stock-based
incentive plan will require stockholder approval. If the shares
to fund the plan (restricted stock awards and stock options) are assumed
to come from authorized but unissued shares of Capitol Federal Financial,
Inc., the number of outstanding shares at the minimum, midpoint and
maximum of the offering range would be 234,030,670, 275,330,200 and
316,629,730 respectively, total stockholders’ equity would be $2.37
billion, $2.63 billion and $2.88 billion, respectively, and total
stockholders’ ownership in Capitol Federal Financial, Inc. would be
diluted by approximately 4.80% at the maximum of the offering
range.
|
36
The
following tables summarize historical data of CFF and pro forma data at and for
the three months ended December 31, 2009 and the year ended September 30,
2009. This information is based on assumptions set forth below and in
the tables, and should not be used as a basis for projections of market value of
the shares of common stock following the offering. Moreover, pro
forma stockholders’ equity per share does not give effect to the liquidation
account to be established in the conversion or, in the unlikely event of a
liquidation of Capitol Federal Savings Bank, to the recoverability of intangible
assets or the tax effect of the recapture of the bad debt
reserve. See “The Conversion and Reorganization — Liquidation
Rights.”
The net
proceeds in the tables are based upon the following assumptions:
|
|
(i)
|
30%
of all shares of common stock will be sold in the subscription and
community offerings, including shares purchased by insiders and the
employee stock ownership plan, with the remaining shares to be sold in the
syndicated community offering;
|
|
|
(ii)
|
250,000 shares
of common stock will be purchased by our executive officers and directors
and their associates;
|
|
|
(iii)
|
our
employee stock ownership plan will purchase 4.0% of the shares of common
stock sold in the offering, which will be funded with a loan from Capitol
Federal Financial, Inc. The loan will be repaid in
substantially equal payments of principal and interest over a period of 30
years;
|
|
|
(iv)
|
Sandler
O’Neill & Partners, L.P. will receive a fee equal to 0.75% of the
aggregate gross proceeds received on all shares of common stock sold in
the subscription and community offerings and we will pay (a) a management
fee of 1.00% of the aggregate dollar amount of the common stock sold in
the syndicated community offering, 75% of which will be paid to Sandler
O’Neill & Partners, L.P. and 25% of which will be paid to Keefe,
Bruyette & Woods, Inc., and (b) a selling concession of 3.50% of the
actual purchase price of each security sold in the syndicated community
offering, which will be allocated to dealers (including Sandler O’Neill
& Partners, L.P. and Keefe, Bruyette & Woods, Inc.) in accordance
with the actual number of shares of common stock sold by such dealers. No
fee will be paid with respect to shares of common stock purchased by our
qualified and non-qualified employee stock benefit plans, or stock
purchased by our officers, directors and employees and their immediate
families; and
|
|
|
(v)
|
total
expenses of the offering, including the marketing fees to be paid to
Sandler O’Neill & Partners, L.P. and other broker-dealers, will be
between $57.8 million
at the minimum of the offering range and $76.4 million
at the maximum of the offering
range.
|
We
calculated pro forma consolidated net income for the three months ended December
31, 2009 and for the year ended September 30, 2009 as if the estimated net
proceeds we received had been invested at the beginning of the period at an
assumed interest rate of 2.69% (1.66% on an
after-tax basis). This interest rate was calculated assuming that net
proceeds are placed into a mix of assets yielding the 5 year Treasury yield
prevailing as of December 31, 2009. We consider the resulting rate to
reflect more accurately the pro forma reinvestment rate than an arithmetic
average method in light of current market interest rates. The effect
of withdrawals from deposit accounts for the purchase of shares of common stock
has not been reflected. 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. No effect has been given
in the pro forma stockholders’ equity calculations for the assumed earnings on
the net proceeds.
The pro
forma tables give effect to the implementation of one or more stock-based
incentive plans. Subject to the receipt of stockholder approval, we
have assumed that the stock-based incentive plans will acquire for restricted
stock awards a number of shares of common stock equal to 2.0% of the shares of
common stock sold in the stock offering at the same price for which they were
sold in the stock offering. We assumed that shares of common stock
are granted under the plans in awards that vest over a five-year
period.
37
We have
also assumed that the stock-based incentive plans will grant options to acquire
shares of common stock equal to 5.0% of the shares of common stock sold in the
stock offering. In preparing the tables below, we assumed that
stockholder approval was obtained, that the exercise price of the stock options
and the market price of the stock at the date of grant were $10.00 per share and
that the stock options had a term of ten years and vested over five
years. We applied the Black-Scholes option pricing model to estimate
a grant-date fair value of $3.43 for each option. In addition to the
terms of the options described above, the Black-Scholes option pricing model
assumed an estimated volatility rate of 36.45% for the shares of common stock, a
dividend yield of 3.0%, an expected option life of 10 years and a risk-free
interest rate of 3.85%.
As
discussed under “How We Intend to Use the Proceeds from the Offering,” we intend
to contribute 50% of the net proceeds from the stock offering to Capitol Federal
Savings Bank, and we will retain the remainder of the net proceeds from the
stock offering. We will use a portion of the proceeds we retain for
the purpose of making a loan to the employee stock ownership plan, to make the
contribution to the charitable foundation and to repay outstanding trust
preferred securities, and retain the rest of the proceeds for future
use.
The pro
forma table does not give effect to:
|
|
●
|
withdrawals
from deposit accounts for the purpose of purchasing shares of common stock
in the stock offering;
|
|
|
●
|
our
results of operations after the stock offering;
or
|
|
|
●
|
changes
in the market price of the shares of common stock after the stock
offering.
|
The
following pro forma information may not represent the financial effects of the
stock offering at the date on which the stock offering actually occurs and you
should not use the table to indicate future results of
operations. Pro forma stockholders’ equity represents the difference
between the stated amount of our assets and liabilities, computed in accordance
with GAAP. We did not increase or decrease stockholders’ equity to
reflect the difference between the carrying value of loans and other assets and
their market value. Pro forma stockholders’ equity is not intended to
represent the fair market value of the shares of common stock and may be
different than the amounts that would be available for distribution to
stockholders if we liquidated. Per share figures have been calculated
based on shares of CFF issued and outstanding as of the date of the
prospectus.
38
|
At
or for the Three Months Ended December 31, 2009
Based
Upon the Sale at $10.00 Per Share of
|
||||||||||||
|
157,250,000
Shares
|
185,000,000
Shares
|
212,750,000
Shares
|
||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||
|
Gross
proceeds of offering
|
$ | 1,572,500 | $ | 1,850,000 | $ | 2,127,500 | ||||||
|
Market
value of shares issued in the exchange
|
657,732 | 773,802 | 889,872 | |||||||||
|
Pro
forma market capitalization
|
$ | 2,230,232 | $ | 2,623,802 | $ | 3,017,372 | ||||||
|
Gross
proceeds of offering
|
$ | 1,572,500 | $ | 1,850,000 | $ | 2,127,500 | ||||||
|
Less:
Expenses
|
57,836 | 67,119 | 76,401 | |||||||||
|
Estimated net proceeds
|
1,514,664 | 1,782,881 | 2,051,099 | |||||||||
|
Less:
Common stock purchased by employee stock ownership plan
|
(62,900 | ) | (74,000 | ) | (85,100 | ) | ||||||
|
Less:
Cash contribution to charitable foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Less:
Common stock purchased by the stock-based incentive plan
|
(31,450 | ) | (37,000 | ) | (42,550 | ) | ||||||
|
Estimated
net proceeds, as adjusted
|
$ | 1,380,314 | $ | 1,631,881 | $ | 1,883,449 | ||||||
|
For
the Three Months Ended December 31, 2009
|
||||||||||||
|
Consolidated
net income:
|
||||||||||||
|
Historical
|
$ | 20,980 | $ | 20,980 | $ | 20,980 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
5,726 | 6,769 | 7,813 | |||||||||
|
Employee
stock ownership plan(1)
|
(323 | ) | (380 | ) | (437 | ) | ||||||
|
Shares
granted under the stock based incentive plan(2)
|
(970 | ) | (1,141 | ) | (1,312 | ) | ||||||
|
Options
granted under the stock-based incentive plan(3)
|
(1,219 | ) | (1,434 | ) | (1,650 | ) | ||||||
|
Pro
forma net income
|
$ | 24,194 | $ | 24,794 | $ | 25,394 | ||||||
|
Net
income per share(4):
|
||||||||||||
|
Historical
|
$ | 0.09 | $ | 0.08 | $ | 0.07 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
0.03 | 0.03 | 0.03 | |||||||||
|
Employee
stock ownership plan(1)
|
— | — | — | |||||||||
|
Shares
granted under the stock-based incentive plan(2)
|
— | — | — | |||||||||
|
Options
granted under the stock-based incentive plan(3)
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
|
Pro
forma net income per share(4)(5)
|
$ | 0.11 | $ | 0.10 | $ | 0.09 | ||||||
|
Offering
price to pro forma net income per share (annualized)
|
22.73 | 25.00 | 27.78 | |||||||||
|
Number
of shares used in net income per share calculations(4)
|
214,548,313 | 252,409,780 | 290,271,247 | |||||||||
|
At
December 31, 2009
|
||||||||||||
|
Stockholders’
equity:
|
||||||||||||
|
Historical
|
$ | 941,999 | $ | 941,999 | $ | 941,999 | ||||||
|
Estimated net proceeds
|
1,514,664 | 1,782,881 | 2,051,099 | |||||||||
|
Capitol Federal Savings Bank MHC capital
contribution
|
133 | 133 | 133 | |||||||||
|
Tax benefit of contribution to charitable
foundation
|
15,328 | 15,328 | 15,328 | |||||||||
|
Less: Common stock acquired by employee stock ownership
plan(1)
|
(62,900 | ) | (74,000 | ) | (85,100 | ) | ||||||
|
Less: Common stock acquired by the stock-based incentive plan(2)
|
(31,450 | ) | (37,000 | ) | (42,550 | ) | ||||||
|
Less: Expense of contribution to charitable
foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Pro
forma stockholders’ equity
|
$ | 2,337,774 | $ | 2,589,341 | $ | 2,840,909 | ||||||
|
Stockholders’
equity per share(6):
|
||||||||||||
|
Historical
|
$ | 4.22 | $ | 3.58 | $ | 3.12 | ||||||
|
Estimated net proceeds
|
6.79 | 6.80 | 6.80 | |||||||||
|
Capitol Federal Savings Bank MHC capital contribution
|
— | — | — | |||||||||
|
Tax benefit of contribution to charitable
foundation
|
0.07 | 0.06 | 0.05 | |||||||||
|
Less:
Common stock acquired by employee stock ownership plan(1)
|
(0.28 | ) | (0.28 | ) | (0.28 | ) | ||||||
|
Less:
Common stock acquired by the stock-based incentive plan(2)
|
(0.14 | ) | (0.14 | ) | (0.14 | ) | ||||||
|
Less:
Expense of contribution to charitable
foundation
|
(0.18 | ) | (0.15 | ) | (0.13 | ) | ||||||
|
Pro
forma stockholders’ equity per share(6)
|
$ | 10.48 | $ | 9.87 | $ | 9.42 | ||||||
|
Offering
price as percentage of pro forma stockholders’ equity per
share
|
95.42 | % | 101.32 | % | 106.16 | % | ||||||
|
Number
of shares outstanding for pro forma book value per share calculations(7)
|
223,023,170 | 262,380,200 | 301,737,2300 | |||||||||
|
(1)
|
Assumes
that 4.0% of shares of common stock sold in the offering will be purchased
by the employee stock ownership plan. For purposes of this
table, the funds used to acquire these shares are assumed to have been
borrowed by the employee stock ownership plan from Capitol Federal
Financial, Inc. The loan will have a term of 30 years and an
interest rate equal to the prime
rate as published in The
Wall Street Journal. Capitol Federal Savings Bank
intends to make annual contributions to the employee stock ownership plan
in an amount at least equal to the required principal and interest
payments on the debt. Capitol Federal Savings Bank’s total
annual payments on the employee stock ownership plan debt are based upon
30 equal annual installments of principal and interest. Current
accounting guidance requires that an employer record compensation expense
in an amount equal to the fair value of the shares committed to be
released to employees. The pro forma adjustments assume that:
(i) the employee stock ownership plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to
be paid by Capitol Federal Savings Bank; (ii) the fair value of the common
stock remains equal to the $10.00 subscription price; and (iii) the
employee stock ownership plan expense reflects an effective combined
federal and state tax rate of 38.32%. The unallocated employee
stock ownership plan shares are reflected as a reduction of stockholders’
equity. No reinvestment is assumed on proceeds contributed to
fund the employee stock ownership plan. The pro forma net
income further assumes that 52,417, 61,667 and 70,917 shares were
committed to be released during the period at the minimum, midpoint and
maximum of the offering range, respectively, and in accordance with ASC
718, only the employee stock ownership plan shares committed to be
released during the period were considered outstanding for purposes of net
income per share
calculations.
|
39
|
(2)
|
Gives
effect to the grant of stock awards pursuant to the stock-based incentive
plan expected to be adopted by Capitol Federal Financial, Inc. following
the offering and presented to stockholders for approval not earlier than
six months after the completion of the offering. We have
assumed that at the minimum, midpoint and maximum of the offering range
this plan acquires a number of shares of restricted common stock equal to
2.0% of the shares sold in the offering, either through open market
purchases, from authorized but unissued shares of common stock or treasury
stock of Capitol Federal Financial, Inc. Funds used by the
stock-based incentive plan to purchase the shares of common stock will be
contributed by Capitol Federal Financial, Inc. In calculating
the pro forma effect of the stock-based incentive plan, it is assumed that
the shares of common stock were acquired by the plan in open market
purchases at the beginning of the period presented for a purchase price
equal to the price for which the shares are sold in the offering, and that
5% of the amount contributed was an amortized expense (based upon a
five-year vesting period) during the three months ended December 31,
2009. There can be no assurance that the actual purchase price
of the shares of common stock granted under the stock-based incentive plan
will be equal to the $10.00 subscription price. If shares are
acquired from authorized but unissued shares of common stock or from
treasury shares of Capitol Federal Financial, Inc., our net income per
share and stockholders’ equity per share may change. This will
also have a dilutive effect of approximately 1.39% on the
ownership interest of stockholders. The impact on pro forma net
income per share and pro forma stockholders’ equity per share is not
material. The following table shows pro forma net income per
share for the three months ended December 31, 2009 and pro forma
stockholders’ equity per share at December 31, 2009, based on the sale of
the number of shares indicated, assuming all the shares of common stock to
fund the stock awards are obtained from authorized but unissued
shares.
|
|
At or for the Three Months Ended December 31,
2009
|
157,250,000 | 185,000,000 | 212,750,000 | |||||||||
|
Pro
forma net income per share
|
$ | 0.11 | $ | 0.10 | $ | 0.09 | ||||||
|
Pro
forma stockholders’ equity per share
|
$ | 10.48 | $ | 9.87 | $ | 9.42 | ||||||
|
(3)
|
Gives
effect to the granting of options pursuant to the stock-based incentive
plan, which is expected to be adopted by Capitol Federal Financial, Inc.
following the offering and presented to stockholders for approval not
earlier than six months after the completion of the
offering. We have assumed that options will be granted to
acquire shares of common stock equal to 5.0% of the shares sold in the
offering. In calculating the pro forma effect of the stock
options, it is assumed that the exercise price of the stock options and
the trading price of the stock at the date of grant were $10.00 per share,
and the estimated grant-date fair value pursuant to the application of the
Black-Scholes option pricing model was $3.43 for each option,
which was determined using the Black-Scholes option pricing formula using
the following assumptions: (i) the trading price on date of grant was
$10.00 per share; (ii) exercise price is equal to the trading price
on the date of grant; (iii) dividend yield of 3.0%;
(iv) expected life of 10 years; (v)
expected volatility of 36.45%; and (vi) risk-free interest rate of
3.85%. If the fair market value per share on the date of grant
is different than $10.00, or if the assumptions used in the option pricing
formula are different from those used in preparing this pro forma data,
the value of options and the related expense recognized will be
different. The aggregate grant date fair value of the stock
options was amortized to expense on a straight-line basis over a five-year
vesting period of the options. There can be no assurance that
the actual exercise price of the stock options will be equal to the $10.00
price per share. If a portion of the shares to satisfy the
exercise of options under the stock-based incentive plan is obtained from
the issuance of authorized but unissued shares of common stock, our net
income and stockholders’ equity per share will decrease. This
also will have a dilutive effect of up to 3.41% on the ownership interest
of persons who purchase shares of common stock in the
offering.
|
|
(4)
|
The
number of shares used to calculate pro forma net income per share is equal
to the estimated weighted average shares outstanding as of December 31,
2009, multiplied by the exchange ratio at the minimum, midpoint and
maximum, and subtracting the employee stock ownership plan shares which
have not been committed for release during the respective periods in
accordance with current accounting guidance. See
footnote 1, above.
|
|
(5)
|
The
retained earnings of Capitol Federal Savings Bank will be substantially
restricted after the conversion. See “Our Policy Regarding
Dividends,” “The Conversion and Offering - Liquidation Rights” and
“Supervision and Regulation.”
|
|
(6)
|
Per
share figures include publicly held shares of CFF common stock that will
be exchanged for shares of Capitol Federal Financial, Inc. common stock in
the conversion. Stockholders’ equity per share calculations are
based upon the sum of the (i) number of subscription shares assumed
to be sold in the offering; and (ii) shares to be issued in exchange for
publicly held shares.
|
|
(7)
|
The
number of shares used to calculate pro forma stockholders’ equity per
share is equal to the total number of shares to be outstanding upon
completion of the offering.
|
40
|
At
or for the Year Ended September 30, 2009
Based
Upon the Sale at $10.00 Per Share of
|
||||||||||||
|
157,250,000
Shares
|
185,000,000
Shares
|
212,750,000
Shares
|
||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||
|
Gross
proceeds of offering
|
$ | 1,572,500 | $ | 1,850,000 | $ | 2,127,500 | ||||||
|
Market
value of shares issued in the exchange
|
657,732 | 773,802 | 889,872 | |||||||||
|
Pro
forma market capitalization
|
$ | 2,230,232 | $ | 2,623,802 | $ | 3,017,372 | ||||||
|
Gross
proceeds of offering
|
$ | 1,572,500 | $ | 1,850,000 | $ | 2,127,500 | ||||||
|
Less:
Expenses
|
57,836 | 67,119 | 76,401 | |||||||||
|
Estimated
net proceeds
|
1,514,664 | 1,782,881 | 2,051,099 | |||||||||
|
Less:
Common stock purchased by employee stock
ownership plan
|
(62,900 | ) | (74,000 | ) | (85,100 | ) | ||||||
|
Less:
Cash contribution to the
charitable foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Less:
Common stock purchased by the stock-based incentive
plan
|
(31,450 | ) | (37,000 | ) | (42,550 | ) | ||||||
|
Estimated
net proceeds, as adjusted
|
$ | 1,380,314 | $ | 1,631,881 | $ | 1,883,449 | ||||||
|
For
the Year Ended September 30, 2009
|
||||||||||||
|
Consolidated
net income:
|
||||||||||||
|
Historical
|
$ | 66,298 | $ | 66,298 | $ | 66,298 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
22,902 | 27,076 | 31,250 | |||||||||
|
Employee
stock ownership plan(1)
|
(1,293 | ) | (1,521 | ) | (1,750 | ) | ||||||
|
Shares
granted under the stock based incentive plan(2)
|
(3,880 | ) | (4,564 | ) | (5,249 | ) | ||||||
|
Options
granted under the stock-based incentive plan(3)
|
(4,877 | ) | (5,738 | ) | (6,598 | ) | ||||||
|
Pro
forma net income
|
$ | 79,150 | $ | 81,551 | $ | 83,951 | ||||||
|
Net
income per share(4):
|
||||||||||||
|
Historical
|
$ | 0.31 | $ | 0.26 | $ | 0.23 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
0.11 | 0.11 | 0.11 | |||||||||
|
Employee
stock ownership plan(1)
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
|
Shares
granted under the stock-based incentive plan(2)
|
(0.02 | ) | (0.02 | ) | (0.02 | ) | ||||||
|
Options
granted under the stock-based incentive plan(3)
|
(0.02 | ) | (0.02 | ) | (0.02 | ) | ||||||
|
Pro
forma net income per share(4)(5)
|
$ | 0.37 | $ | 0.32 | $ | 0.29 | ||||||
|
Offering
price to pro forma net income per share
|
27.03 | x | 31.25 | x | 34.48 | x | ||||||
|
Number
of shares used in net income per share calculations(4)
|
214,345,203 | 252,170,827 | 289,996,451 | |||||||||
|
At
September 30, 2009
|
||||||||||||
|
Stockholders’
equity:
|
||||||||||||
|
Historical
|
$ | 941,298 | $ | 941,298 | $ | 941,298 | ||||||
|
Estimated
net proceeds
|
1,514,664 | 1,782,881 | 2,051,099 | |||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
133 | 133 | 133 | |||||||||
|
Tax
benefit of contribution to
charitable foundation
|
15,328 | 15,328 | 15,328 | |||||||||
|
Less:
Common stock acquired by employee stock ownership plan(1)
|
(62,900 | ) | (74,000 | ) | (85,100 | ) | ||||||
|
Less:
Common stock acquired by the stock-based incentive plan(2)
|
(31,450 | ) | (37,000 | ) | (42,550 | ) | ||||||
|
Less: Expense
of contribution to charitable foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Pro
forma stockholders’ equity
|
$ | 2,337,073 | $ | 2,588,640 | $ | 2,840,208 | ||||||
|
Stockholders’
equity per share(6):
|
||||||||||||
|
Historical
|
$ | 4.22 | $ | 3.58 | $ | 3.11 | ||||||
|
Estimated
net proceeds
|
6.79 | 6.80 | 6.80 | |||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
— | — | — | |||||||||
|
Tax
benefit of contribution to charitable
foundation
|
0.07 | 0.06 | 0.05 | |||||||||
|
Less:
Common stock acquired by employee stock ownership plan(1)
|
(0.28 | ) | (0.28 | ) | (0.28 | ) | ||||||
|
Less:
Common stock acquired by the stock-based incentive plan(2)
|
(0.14 | ) | (0.14 | ) | (0.14 | ) | ||||||
|
Less:
Expense of contribution to charitable foundation
|
(0.18 | ) | (0.15 | ) | (0.13 | ) | ||||||
|
Pro
forma stockholders’ equity per share(6)
|
$ | 10.48 | $ | 9.87 | $ | 9.41 | ||||||
|
Offering
price as percentage of pro forma stockholders’ equity per
share
|
95.42 | % | 101.32 | % | 106.27 | % | ||||||
|
Number
of shares outstanding for pro forma book value per
share calculations(7)
|
223,023,170 | 262,380,200 | 301,737,230 | |||||||||
|
(1)
|
Assumes
that 4.0% of shares of common stock sold in the offering will be purchased
by the employee stock ownership plan. For purposes of this
table, the funds used to acquire these shares are assumed to have been
borrowed by the employee stock ownership plan from Capitol Federal
Financial, Inc. The loan will have a term of 30 years and an
interest rate equal to the prime rate as published in The Wall Street
Journal. Capitol Federal Savings Bank intends to make
annual contributions to the employee stock ownership plan in an amount at
least equal to the required principal and interest payments on the
debt. Capitol Federal Savings Bank’s total annual payments on
the employee stock ownership plan debt are based upon 30 equal annual
installments of principal and interest. Current accounting
guidance requires that an employer record compensation expense in an
amount equal to the fair value of the shares committed to be released to
employees. The pro forma adjustments assume that: (i) the
employee stock ownership plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to
be paid by Capitol Federal Savings Bank; (ii) the fair value of the common
stock remains equal to the $10.00 subscription price; and (iii) the
employee stock ownership plan expense reflects an effective combined
federal and state tax rate of 38.32%. The unallocated employee
stock ownership plan shares are reflected as a reduction of stockholders’
equity. No reinvestment is assumed on proceeds contributed to
fund the employee stock ownership plan. The pro forma net
income further assumes that 209,667, 246,667 and 283,667 shares were
committed to be released during the period at the minimum, midpoint and
maximum of the offering range, respectively, and in accordance with ASC
718, only the employee stock ownership plan shares committed to be
released during the period were considered outstanding for purposes of net
income per share calculations.
|
41
|
(2)
|
Gives
effect to the grant of stock awards pursuant to the stock-based incentive
plan expected to be adopted by Capitol Federal Financial, Inc. following
the offering and presented to stockholders for approval not earlier than
six months after the completion of the offering. We have
assumed that at the minimum, midpoint and maximum of the offering range
this plan acquires a number of shares of restricted common stock equal to
2.0% of the shares sold in the offering, either through open market
purchases, from authorized but unissued shares of common stock or treasury
stock of Capitol Federal Financial, Inc. Funds used by the
stock-based incentive plan to purchase the shares of common stock will be
contributed by Capitol Federal Financial, Inc. In calculating
the pro forma effect of the stock-based incentive plan, it is assumed that
the shares of common stock were acquired by the plan in open market
purchases at the beginning of the period presented for a purchase price
equal to the price for which the shares are sold in the offering, and that
20% of the amount contributed was an amortized expense (based upon a
five-year vesting period) during the year ended September 30,
2009. There can be no assurance that the actual purchase price
of the shares of common stock granted under the stock-based incentive plan
will be equal to the $10.00 subscription price. If shares are
acquired from authorized but unissued shares of common stock or from
treasury shares of Capitol Federal Financial, Inc., our net income per
share and stockholders’ equity per share may change. This will
also have a dilutive effect of approximately 1.39% (at the maximum of the
offering range) on the ownership interest of stockholders. The
impact on pro forma net income per share and pro forma stockholders’
equity per share is not material. The following table shows pro
forma net income per share for the year ended September 30, 2009 and pro
forma stockholders’ equity per share at September 30, 2009, based on the
sale of the number of shares indicated, assuming all the shares of common
stock to fund the stock awards are obtained from authorized but unissued
shares.
|
|
At or for the Year Ended September 30,
2009
|
157,250,000 | 185,000,000 | 212,750,000 | |||||||||
|
Pro
forma net income per share
|
$ | 0.37 | $ | 0.32 | $ | 0.29 | ||||||
|
Pro
forma stockholders’ equity per share
|
$ | 10.48 | $ | 9.87 | $ | 9.41 | ||||||
|
(3)
|
Gives
effect to the granting of options pursuant to the stock-based incentive
plan, which is expected to be adopted by Capitol Federal Financial, Inc.
following the offering and presented to stockholders for approval not
earlier than six months after the completion of the
offering. We have assumed that options will be granted to
acquire shares of common stock equal to 5.0% of the shares sold in the
offering. In calculating the pro forma effect of the stock
options, it is assumed that the exercise price of the stock options and
the trading price of the stock at the date of grant were $10.00 per share,
and the estimated grant-date fair value pursuant to the application of the
Black-Scholes option pricing model was $3.43 for each option, which was
determined using the Black-Scholes option pricing formula using the
following assumptions: (i) the trading price on date of grant was
$10.00 per share; (ii) exercise price is equal to the trading price
on the date of grant; (iii) dividend yield of 3.0%;
(iv) expected life of 10 years; (v) expected volatility of 36.45%;
and (vi) risk-free interest rate of 3.85%. If the fair market
value per share on the date of grant is different than $10.00, or if the
assumptions used in the option pricing formula are different from those
used in preparing this pro forma data, the value of options and the
related expense recognized will be different. The aggregate
grant date fair value of the stock options was amortized to expense on a
straight-line basis over a five-year vesting period of the
options. There can be no assurance that the actual exercise
price of the stock options will be equal to the $10.00 price per
share. If a portion of the shares to satisfy the exercise of
options under the stock-based incentive plan is obtained from the issuance
of authorized but unissued shares of common stock, our net income and
stockholders’ equity per share will decrease. This also will
have a dilutive effect of up to 3.41% on the ownership interest of persons
who purchase shares of common stock in the
offering.
|
|
(4)
|
The
number of shares used to calculate pro forma net income per share is equal
to the estimated weighted average shares outstanding for the year ended
September 30, 2009, multiplied by the exchange ratio at the minimum,
midpoint and maximum and subtracting the employee stock ownership plan
shares which have not been committed for release during the respective
periods in accordance with current accounting guidance. See
footnote 1, above.
|
|
(5)
|
The
retained earnings of Capitol Federal Savings Bank will be substantially
restricted after the conversion. See “Our Policy Regarding
Dividends,” “The Conversion and Offering - Liquidation Rights” and
“Supervision and Regulation.”
|
|
(6)
|
Per
share figures include publicly held shares of CFF common stock that will
be exchanged for shares of Capitol Federal Financial, Inc. common stock in
the conversion. Stockholders’ equity per share calculations are
based upon the sum of the (i) number of subscription shares assumed
to be sold in the offering; (ii) shares to be issued in exchange for
publicly held shares.
|
|
(7)
|
The
number of shares used to calculate pro forma stockholders’ equity per
share is equal to the total number of shares to be outstanding upon
completion of the offering.
|
42
COMPARISON
OF VALUATION AND PRO FORMA DATA WITH
AND
WITHOUT THE CHARITABLE FOUNDATION
As
reflected in the table below, if the charitable foundation is not funded as part
of the stock offering, RP Financial, LC. estimates that our pro forma valuation
would be greater and, as a result, a greater number of shares of common stock
would be issued in the stock offering. At the minimum, midpoint and
maximum of the valuation range, our pro forma valuation is $1.57 billion, $1.85
billion and $2.13 billion with the charitable foundation, as compared to
$1.61 billion, $1.90 billion and $2.18 billion, respectively,
without the charitable foundation. There is no assurance that in the
event the charitable foundation were not funded, the appraisal prepared at that
time would conclude that our pro forma market value would be the same as that
estimated in the table below. Any appraisal 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 and for the three months ended December 31, 2010 at
the minimum, midpoint and maximum of the offering range, assuming the stock
offering was completed at the beginning of the three-month period, with and
without the charitable foundation.
|
Minimum
of Offering Range
|
Midpoint
of Offering Range
|
Maximum
of Offering Range
|
||||||||||||||||||||||
|
With
|
Without
|
With
|
Without
|
With
|
Without
|
|||||||||||||||||||
|
Foundation
|
Foundation
|
Foundation
|
Foundation
|
Foundation
|
Foundation
|
|||||||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Estimated
stock offering amount
|
$
|
1,572,500
|
$
|
1,615,000
|
$
|
1,850,000
|
$
|
1,900,000
|
$
|
2,127,500
|
$
|
2,185,000
|
||||||||||||
|
Estimated
full value
|
2,230,232
|
2,290,508
|
2,623,802
|
2,694,716
|
3,017,372
|
3,098,923
|
||||||||||||||||||
|
Total
assets
|
9,716,795
|
9,779,995
|
9,968,362
|
10,038,362
|
10,219,930
|
10,296,729
|
||||||||||||||||||
|
Total
liabilities
|
7,379,154
|
7,379,154
|
7,379,154
|
7,379,154
|
7,379,154
|
7,379,154
|
||||||||||||||||||
|
Pro
forma stockholders’ equity
|
2,337,774
|
2,400,974
|
2,589,341
|
2,659,341
|
2,840,909
|
2,917,708
|
||||||||||||||||||
|
Pro
forma net income
|
24,194
|
24,451
|
24,794
|
25,067
|
25,394
|
25,684
|
||||||||||||||||||
|
Pro
forma stockholders’ equity per share
|
10.48
|
10.48
|
9.87
|
9.87
|
9.42
|
9.42
|
||||||||||||||||||
|
Pro
forma net income per share
|
0.11
|
0.11
|
0.10
|
0.10
|
0.09
|
0.09
|
||||||||||||||||||
|
Pro
forma pricing ratios:
|
||||||||||||||||||||||||
|
Offering
price as a percentage of pro
forma
stockholders’ equity per share |
95.42
|
%
|
95.42
|
%
|
101.32
|
%
|
101.32
|
%
|
106.16
|
%
|
106.16
|
%
|
||||||||||||
|
Offering
price to pro forma net income per share
|
22.73
|
x
|
22.73
|
x
|
25.00
|
x
|
25.00
|
x
|
27.78
|
x
|
27.78
|
x
|
||||||||||||
|
Pro
forma financial ratios:
|
||||||||||||||||||||||||
|
Return
on assets (annualized)
|
1.00
|
%
|
1.00
|
%
|
0.99
|
%
|
1.00
|
%
|
0.99
|
%
|
1.00
|
%
|
||||||||||||
|
Return
on equity (annualized)
|
4.14
|
4.07
|
3.83
|
3.77
|
3.58
|
3.52
|
||||||||||||||||||
|
Equity
to assets
|
24.06
|
24.55
|
25.98
|
26.49
|
27.80
|
28.34
|
||||||||||||||||||
43
Executive
Summary
The
following summary should be read in conjunction with our Management’s Discussion
and Analysis of Financial Condition and Results of Operations in its
entirety.
Our
principal business consists of attracting deposits from the general public and
investing those funds primarily in permanent loans secured by first mortgages on
owner-occupied, one- to four-family residences. To a much lesser
extent, we also originate consumer loans, loans secured by first mortgages on
non-owner-occupied one- to four-family residences and commercial properties,
construction loans secured by one- to four-family residences, commercial real
estate loans, and multi-family real estate loans. While our primary
business is the origination of one- to four-family loans funded through retail
deposits, we also purchase whole loans and invest in certain investment
securities and mortgage backed securities (which we call MBS), and use Federal
Home Loan Bank (FHLB) advances, repurchase agreements and other borrowings as
additional funding sources.
CFF is
significantly affected by prevailing economic conditions including federal
monetary and fiscal policies and federal regulation of financial
institutions. Deposit balances are influenced by a number of factors,
including interest rates paid on competing personal investment products, the
level of personal income, and the personal rate of savings within our market
areas. Lending activities are influenced by the demand for housing
and other loans, changing loan underwriting guidelines, as well as interest rate
pricing competition from other lending institutions. The primary
sources of funds for lending activities include deposits, loan repayments,
investment income, borrowings, and funds provided from operations.
CFF’s
results of operations are primarily dependent on net interest income, which is
the difference between the interest earned on loans, MBS, investment securities
and cash, and the interest paid on deposits and borrowings. On a
weekly basis, management reviews deposit flows, loan demand, cash levels, and
changes in several market rates to assess all pricing strategies. We
generally price our loan and deposit products based upon an analysis of our
competition and changes in market rates. Capitol Federal Savings Bank
generally prices its first mortgage loan products based on secondary market and
competitor pricing. Generally, deposit pricing is based upon a survey
of competitors in Capitol Federal Savings Bank’s market areas, and the need to
attract funding and retain maturing deposits. The majority of our
loans are fixed-rate products with maturities up to 30 years, while the majority
of our deposits have maturity or reprice dates of less than two
years.
During
the first quarter of fiscal year 2010, the economy began to show signs of
recovery, as evidenced by an increase in consumer spending and stabilization of
the labor market, the housing sector, and financial markets. However,
unemployment levels remained elevated, housing prices remained depressed and
demand for housing was weak, due to distressed sales and tightened lending
standards. In an effort to support mortgage lending and housing
market recovery, and to help improve credit conditions overall, the Federal Open
Market Committee of the Federal Reserve maintained the overnight lending rate
between zero and 25 basis points during the first quarter of fiscal year
2010. The Federal Reserve also announced its intention to conclude
its purchase of up to $1.25 trillion of agency MBS by March 31,
2010.
Due to
strong capital levels, prudent underwriting, and relative economic stability in
Capitol Federal Savings Bank’s local market areas, Capitol Federal Savings Bank
has not experienced the same magnitude of adverse operational impacts
experienced by many financial institutions since fiscal 2008. We have
experienced an increase in the balance of delinquent and non-performing loans
and losses on foreclosed property transactions, primarily related to our
purchased loan portfolio; however, the amounts continue to remain at low levels
relative to the size of our loan portfolio.
CFF
recognized net income of $21.0 million for the quarter ended December 31, 2009,
compared to net income of $15.9 million for the quarter ended December 31,
2008. The $5.1 million increase in net income between the periods was
primarily due to a decrease of $10.1 million in interest expense and an increase
of $6.5 million in other income, partially offset by a $6.4 million decrease in
interest and dividend income, a $2.6 million increase in the provision for loan
losses, and a $1.8 million increase in income taxes due to higher
earnings. The decrease in interest expenses was due to a decrease in
the rate on our FHLB advances due to the refinancing of $875.0 million of
advances during the second and third quarters of fiscal year 2009 and a decrease
in interest expense on deposits due to the continued decline in the cost of our
certificate of deposit and money market portfolios as a result of lower
short-term market rates. The $6.5 million increase in other income
was primarily due to the gain on the sale of trading securities received in
conjunction with a loan swap transaction during the current
quarter. The decrease in interest and dividend income was primarily a
result of a decrease in the average yield on the MBS and loans receivable
portfolios due to prepayments of MBS and mortgage loans with higher yields than
the average portfolio yield, adjustable-rate MBS and mortgage loans adjusting to
lower market rates on their reprice dates, refinances and modifications of
mortgage loans, and the origination of new mortgage loans at rates lower than
the overall portfolio rate. The $2.6 million increase in the
provision for loan losses primarily reflected increases in the level of certain
qualitative factors in our general valuation allowance model to account for
continuing negative economic conditions.
44
During
the first quarter of fiscal year 2010, Capitol Federal Savings Bank swapped
$194.8 million of originated fixed-rate mortgage loans with FHLMC for trading
MBS. The trading MBS were sold at a gain of $6.5 million and the
proceeds were reinvested into assets with an average life shorter than that of
Capitol Federal Savings Bank’s remaining assets in an effort to reduce future
interest rate risk sensitivity that could occur as a result of the high volume
of refinances and modifications and likely increases in interest
rates. Since December 2008, mortgage interest rates have been
historically low, prompting increased demand for refinances and loan
modifications.
CFF
recognized net income of $66.3 million for the fiscal year ended September 30,
2009, compared to net income of $51.0 million for the fiscal year ended
September 30, 2008. The increase in net income between the periods
was primarily due to a decrease of $40.5 million in interest expense partially
offset by a $9.7 million increase in income tax expense due to higher pre-tax
income, an increase of $6.8 million in Federal Deposit Insurance Corporation
(FDIC) insurance premium expense and an increase of $4.3 million in the
provision for loan losses. Capitol Federal Savings Bank’s overall
cost of funds decreased during fiscal year 2009 due primarily to a reduction in
the rate of our certificate of deposit and money market portfolios as a result
of lower short-term market rates and our FHLB advances due to the
refinance. The increase in FDIC premium expense was a result of an
increase in deposit insurance premiums and a special assessment at June 30,
2009. The $4.3 million increase in the provision for loan losses
reflected an increase in specific valuation allowances on purchased loans, an
increase in the balance of non-performing purchased loans, an increase in
general valuation allowances primarily related to purchased loans 30 to 89 days
delinquent, and an increase in charge-offs, also primarily relate to purchased
loans. See “– Critical
Accounting Policies – Allowance for Loan Losses” and “Business of CFF –
Asset Quality.”
Total
assets decreased slightly from $8.40 billion at September 30, 2009 to $8.37
billion at December 31, 2009. Total liabilities remained relatively
unchanged from $7.46 billion at September 30, 2009 to $7.43 billion at December
31, 2009. Total assets increased $348.4 million from $8.06 billion at
September 30, 2008 to $8.40 billion at September 30, 2009. The
increase in assets was primarily attributable to a $283.2 million increase in
loans receivable, substantially due to loan purchases, which was primarily
funded by deposit growth. Deposits increased from $3.92 billion at
September 30, 2008 to $4.23 billion at September 30, 2009. The $304.7
million increase was primarily in the certificate of deposit and money market
portfolios. We believe the turmoil in the credit and equity markets
has made deposit products in well-capitalized financial institutions, like
Capitol Federal Savings Bank, desirable for many
customers. Households have increased their personal savings rate
which we believe has also contributed to our growth in deposits.
Capitol
Federal Savings Bank opened three new branches in our Kansas City and Wichita
market areas in fiscal year 2009, and has opened two new branches in our Kansas
City market area since the beginning of fiscal year 2010. We also
opened a new branch in the Wichita market area in the second quarter of fiscal
2010. Capitol Federal Savings Bank continues to consider expansion
opportunities in all its market areas.
Critical
Accounting Policies
Our most
critical accounting policies are the methodologies used to determine the
allowance for loan losses (ALLL), other-than-temporary declines in the value of
securities and fair value measurements. These policies are important
to the presentation of our financial condition and results of operations,
involve a high degree of complexity, and require management to make difficult
and subjective judgments that may require assumptions or estimates about highly
uncertain matters. The use of different judgments, assumptions, and
estimates could cause reported results to differ materially. These
critical accounting policies and their application are reviewed at least
annually by our audit committee. The following is a description of
our critical accounting policies and an explanation of the methods and
assumptions underlying their application.
45
Allowance for
Loan Losses. Management
maintains an ALLL to absorb known and inherent losses in the loan portfolio
based upon ongoing quarterly assessments of the loan portfolio. Our
methodology for assessing the appropriateness of the ALLL consists of a formula
analysis for general valuation allowances and specific valuation allowances for
identified problem loans and impaired loans. The ALLL is maintained
through provisions for loan losses which are charged to income. The
methodology for determining the ALLL is considered a critical accounting policy
by management because of the high degree of judgment involved, the subjectivity
of the assumptions used, and the potential for changes in the economic
environment that could result in changes to the amount of the recorded
ALLL.
Our
primary lending emphasis is the origination and purchase of one- to four-family
mortgage loans on residential properties and, to a lesser extent, home equity
and second mortgages on one- to four-family residential properties resulting in
a loan concentration in residential first mortgage loans. As a result
of our lending practices, we also have a concentration of loans secured by real
property located primarily in Kansas and Missouri. At December 31,
2009, approximately 70% and approximately 15% of Capitol Federal Savings Bank’s
loans were secured by real property located in Kansas, and Missouri,
respectively. Based on the composition of our loan portfolio, we
believe the primary risks inherent in our portfolio are the continued weakened
economic conditions due to the recent U.S. recession, continued high levels of
unemployment or underemployment, the potential for rising mortgage interest
rates in the markets we lend and a continuing decline in real estate
values. Any one or a combination of these events may adversely affect
borrowers’ ability to repay their loans, resulting in increased delinquencies,
non-performing assets, loan losses and future levels of loan loss
provisions. Although management believes that Capitol Federal Savings
Bank has established and maintained the ALLL at appropriate levels, additions
may be necessary if future economic and other conditions differ substantially
from the current operating environment.
Management
considers quantitative and qualitative factors when determining the
appropriateness of the ALLL. Such factors include changes in
underwriting standards, the trend and composition of delinquent and
non-performing loans, results of foreclosed property and short sale
transactions, historical charge-offs, the current status and trends of local and
national economies, specifically levels of unemployment, changes in mortgage
interest rates and loan portfolio growth and concentrations. Since our loan
portfolio is primarily concentrated in one- to four-family real estate, we
monitor one- to four-family real estate market value trends in our local market
areas and geographic sections of the U.S. by reference to various industry and
market reports, economic releases and surveys, and our general and specific
knowledge of the real estate markets in which we lend, in order to determine
what impact, if any, such trends may have on the level of our
ALLL. We also use ratio analyses as a supplemental tool for
evaluating the overall reasonableness of the ALLL. We consider the
observed trends in the ratios, taking into consideration the composition of our
loan portfolio compared to our peers, in combination with our historical loss
experience. We also review the actual performance and charge-off
history of our portfolio and compare that to our previously determined allowance
coverage percentages and specific valuation allowances. In addition,
the Office of Thrift Supervision reviews the adequacy of CFF’s ALLL during its
examination process. We consider any comments from the Office of
Thrift Supervision when assessing the appropriateness of our
ALLL. Reviewing these quantitative and qualitative factors assists
management in evaluating the overall reasonableness of the ALLL and whether
changes need to be made to our assumptions. Our ALLL methodology is
applied in a consistent manner; however, the methodology can be modified in
response to changing conditions.
Each
quarter, the loan portfolio is segregated into categories in the formula
analysis based on certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.), interest payments (fixed-rate,
adjustable-rate), loan source (originated or purchased), loan-to-value ratios,
borrower’s credit score and payment status (i.e. current or number of days
delinquent). Consumer loans, such as second mortgages and home equity
lines of credit, with the same underlying collateral as a one- to four-family
loan are combined with the one- to four-family loan in the formula analysis to
calculate a combined loan-to-value ratio. Loss factors are assigned
to each category in the formula analysis based on management’s assessment of the
potential risk inherent in each category. The greater the risks
associated with a particular category, the higher the loss
factor. Loss factors increase as individual loans become classified
or delinquent, the foreclosure process begins or as economic and market
conditions and trends warrant. All loans that are not impaired are
included in a formula analysis. Impaired loans are defined as
non-accrual loans and troubled debt restructurings (TDRs) that have not been
performing under the restructured terms for 12 consecutive months.
46
The loss
factors applied in the formula analysis are reviewed quarterly by management to
assess whether the factors adequately cover probable and estimable losses
inherent in the loan portfolio. The review considers
such qualitative and quantitative factors as the trends and
composition of delinquent and non-performing loans, the results of foreclosed
property and short sale transactions, and the status and trends of the local and
national economies and housing markets. Our ALLL methodology permits
modifications to any loss factor used in the computation of the formula analysis
in the event that, in management’s judgment, significant factors which affect
the collectability of the portfolio or any category of the loan portfolio, as of
the evaluation date, are not reflected in the current loss
factors. Management’s evaluation of the qualitative factors with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with a specific problem loan or portfolio
segments. During the current quarter, management increased the level
of certain qualitative factors in our formula analysis to account for continued
negative economic conditions.
Specific
valuation allowances are established in connection with individual loan reviews
of specifically identified problem and impaired loans. Since the
majority of our loan portfolio is composed of one- to four-family real estate,
determining the estimated fair value of the underlying collateral is critical in
evaluating the amount of specific valuations required for problem and impaired
loans. Estimated fair value of the underlying collateral is based on
current appraisals, real estate broker values or listing prices. It
sometimes takes several months for a loan to work through the foreclosure
process. For purchased loans, the estimated fair values received from
servicers when a loan becomes 90 days delinquent is not always an accurate
representation of the fair value once the collateral has been sold, due to the
continued decline in real estate values between the two points in
time. To account for the declines in fair value on purchased loans,
management applies a market value adjustment to non-performing purchased loans
to more accurately estimate the fair values of the underlying
collateral. The adjustments are determined based on the geographic
location of the underlying collateral, recent losses recognized on foreclosed
property and short sale transactions and trends of non-performing purchased
loans entering foreclosure in the various geographic areas. Specific
valuation allowances are established if the adjusted estimated fair value, less
estimated selling costs, is less than the current loan balance.
Loans
with an outstanding balance of $1.5 million or more are individually reviewed
annually if secured by property in one of the following
categories: multi-family (five or more units) property, unimproved
land, other improved commercial property, acquisition and development of land
projects, developed building lots, office building, single-use building, or
retail building. Specific valuation allowances are established if the
individual loan review determines a quantifiable impairment.
Assessing
the adequacy of the allowance for loan losses is inherently
subjective. Actual results could differ from our estimates as a
result of changes in economic or market conditions. Changes in
estimates could result in a material change in the allowance for loan
losses. In the opinion of management, the allowance for loan losses,
when taken as a whole, is adequate to absorb reasonable estimated losses
inherent in our loan portfolio. However, future adjustments may be
necessary if portfolio performance or economic or market conditions differ
substantially from the conditions that existed at the time of the initial
determinations.
Securities
Impairment. Management monitors the securities portfolio for
other-than-temporary impairments (OTTI) on an ongoing basis and performs a
formal review quarterly. The process involves monitoring market
events and other items that could impact issuers’ ability to
perform. The evaluation includes, but is not limited to such factors
as: the nature of the investment, the length of time the security has
had a fair value less than the amortized cost basis, the cause(s) and severity
of the loss, expectation of an anticipated recovery period, recent events
specific to the issuer or industry including the issuer’s financial condition
and the current ability to make future payments in a timely manner, external
credit ratings and recent downgrades in such ratings, CFF’s intent to sell and
whether it is more likely than not CFF would be required to sell prior to
recovery for debt securities.
Management
determines whether OTTI losses should be recognized for impaired securities by
assessing all known facts and circumstances surrounding the
securities. If CFF intends to sell an impaired security or if it is
more likely than not that CFF will be required to sell an impaired security
before recovery of its amortized cost basis, an OTTI will be recognized and the
difference between amortized cost and fair value will be recognized as a loss in
earnings. At December 31, 2009, no securities had been identified as
other-than-temporarily impaired.
Fair Value
Measurements. CFF uses fair value measurements to record fair
value adjustments to certain assets and to determine fair value disclosures, per
the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and
Disclosures. CFF’s AFS securities are recorded at fair value
on a recurring basis. Changes in the fair value of AFS securities are
recorded, net of tax, in accumulated other comprehensive income, which is a
component of stockholders’ equity. CFF did not have any liabilities
that were measured at fair value at December 31, 2009. Additionally,
from time to time, CFF may be required to record at fair value other assets or
liabilities on a non-recurring basis, such as REO and impaired
loans. These non-recurring fair value adjustments involve the
application of lower-of-cost-or-fair value accounting or write-downs of
individual assets.
47
In accordance with ASC 820, CFF groups
its assets at fair value in three levels, based on the markets in which the
assets are traded and the reliability of the underlying assumptions used to
determine fair value, with Level 1 (quoted prices for identical assets in an
active market) being considered the most reliable, and Level 3 having the most
unobservable inputs and therefore being considered the least
reliable. CFF bases its fair values on the price that would be
received to sell an asset in an orderly transaction between market participants
at the measurement date. As required by ASC 820, CFF maximizes the
use of observable inputs and minimizes the use of unobservable inputs when
measuring fair value.
Recent Accounting
Pronouncements. For a discussion
of Recent Accounting Pronouncements, see “Notes to Consolidated Financial
Statements - Note 1- Summary of Significant Accounting Policies.”
Management
Strategy
Our
strategy is to operate a retail-oriented financial institution dedicated to
serving the needs of customers in our market areas. Our commitment is to provide
qualified borrowers the broadest possible access to home ownership through our
mortgage lending programs and to offer a complete set of personal banking
products and services. We strive to enhance stockholder value while
maintaining a strong capital position. To achieve our strategy, we
focus on the following:
Portfolio
Lending. We are one of the
largest originators of one- to four-family loans in the state of
Kansas. We have primarily originated these loans for our own
portfolio, rather than for sale, and generally we service the loans we
originate. We provide retail customers with alternatives for their
borrowing needs by offering both fixed- and adjustable-rate products with
various terms to maturity and pricing alternatives. We offer special
programs to individuals who may be first time home buyers, have low or moderate
incomes or may have certain credit risk concerns in order to maximize our
ability to deliver home ownership opportunities. Through our
marketing efforts that reflect our reputation and pricing, and strong
relationships with real estate agents, we attract mortgage loan business from
walk-in customers, customers that apply online, and existing
customers. We also purchase one- to four-family loans from
correspondent lenders secured by property primarily located within our market
areas and select market areas in Missouri and from nationwide lenders. Following
completion of this offering, we intend to increase our emphasis on purchased
loans that meet our underwriting standards.
Retail Financial
Services. We offer a wide
array of deposit products and retail services for our
customers. These products include checking, savings, money market,
certificates of deposit and retirement accounts. These products and
services are provided through a branch network of 45 locations which includes
traditional branch and retail store locations, our call center which operates on
extended hours, telephone bill payment services and Internet-based transaction
services.
Cost
Control. We generally are very effective at controlling our
costs of operations. By using technology, we are able to centralize
our lending and deposit support functions for efficient
processing. We have located our branches to serve a broad range of
customers through relatively few branch locations. Our average
deposit base per traditional branch at December 31, 2009, September 30, 2009 and
2008 was approximately $115.7 million, $117.5 million and $119.5 million,
respectively. This large average deposit base per branch helps to
control costs. Our one- to four-family lending strategy and our
effective management of credit risk allows us to service a large portfolio of
loans at efficient levels because it costs less to service a portfolio of
performing loans. At December 31, 2009, our efficiency ratio was
39.23%.
Asset
Quality. We utilize underwriting standards for our lending
products that are designed to limit our exposure to credit risk, and we have a
portfolio of predominately one- to four-family loans. At December 31,
2009, our ratio of non-performing assets to total assets was 0.47%. See
“Business of CFF — Asset Quality.”
Capital
Position. Our policy has
always been to protect the safety and soundness of Capitol Federal Savings Bank
through conservative credit and operational risk management, balance sheet
strength, and sound operations. The end result of these activities is
a capital ratio in excess of the well-capitalized standards set by the Office of
Thrift Supervision. We believe that maintaining a strong capital
position safeguards the long-term interests of Capitol Federal Savings Bank, CFF
and our stockholders.
48
Stockholder
Value. We strive to
enhance stockholder value while maintaining a strong capital position. One
way that we continue to provide returns to stockholders through our dividend
payments. Total dividends declared and paid during the quarter end
December 31, 2009 were $0.79 per public share, which consisted of the regular
quarterly dividend of $0.50 per public share and a special year end dividend of
$0.29 per public share. Total dividends declared and paid during
fiscal year 2009 were $2.11 per public share. CFF’s cash dividend
payout policy is reviewed quarterly by management and the board of directors,
and the ability to pay dividends under the policy depends upon a number of
factors, including CFF’s financial condition and results of operations, Capitol
Federal Savings Bank’s regulatory capital requirements, regulatory limitations
on Capitol Federal Savings Bank’s ability to make capital distributions to CFF
and the amount of cash at the holding company. It is the board of
directors’ intention to continue to pay regular quarterly cash dividends after
completion of the offering, but at a reduced rate. See “Dividend
Policy.”
Interest Rate
Risk Management. Changes in interest rates are our primary
market risk as our balance sheet is almost entirely comprised of
interest-earning assets and interest-bearing liabilities. As such,
fluctuations in interest rates have a significant impact not only upon our net
income but also upon the cash flows related to those assets and liabilities and
the market value of our assets and liabilities. In order to maintain
acceptable levels of net interest income in varying interest rate environments,
we take on a moderate amount of interest rate risk consistent with board
policies.
Quantitative
and Qualitative Disclosure about Market Risk
Asset and
Liability Management and Market Risk. The rates of interest
Capitol Federal Savings Bank earns on assets and pays on liabilities generally
are established contractually for a period of time. Fluctuations in
interest rates have a significant impact not only upon our net income, but also
upon the cash flows of those assets and liabilities and the market value of our
assets and liabilities. Our results of operations, like those of
other financial institutions, are impacted by these changes in interest rates
and the interest rate sensitivity of our interest-earning assets and
interest-bearing liabilities. The risk associated with changes in
interest rates on the earnings of Capitol Federal Savings Bank and the market
value of its financial assets and liabilities is known as interest rate
risk. Interest rate risk is our most significant market risk and our
ability to adapt to these changes is known as interest rate risk
management.
The
general objective of our interest rate risk management is to determine and
manage an appropriate level of interest rate risk while maximizing net interest
income, in a manner consistent with our policy to reduce, to the extent
possible, the exposure of our net interest income to changes in market interest
rates. Our asset and liability committee (ALCO) regularly reviews the
interest rate risk exposure of Capitol Federal Savings Bank by forecasting the
impact of hypothetical, alternative interest rate environments on net interest
income and market value of portfolio equity (MVPE) at various
dates. The MVPE is defined as the net of the present value of the
cash flows of an institution’s existing assets, liabilities and off-balance
sheet instruments. The present values are determined in alternative
interest rate environments providing potential changes in net interest income
and MVPE under those alternative interest rate environments. Capitol Federal
Savings Bank’s analysis of its MVPE at December 31, 2009 indicates a general
decrease in its risk exposure compared to September 30, 2009 primarily due to
the loan swap transaction that resulted in a reduction in amount of long-term
mortgage assets outstanding at December 31, 2009. Capitol Federal
Savings Bank’s analysis of the sensitivity of its net interest income to
parallel changes in interest rates at December 31, 2009 indicates an increase in
sensitivity since September 30, 2009.
Based
upon management’s recommendations, the board of directors sets the asset and
liability management policies of Capitol Federal Savings Bank. These
policies are implemented by ALCO. The purpose of ALCO is to
communicate, coordinate and control asset and liability management consistent
with the business plan and board-approved policies. ALCO sets goals
for 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 the highest profitability balanced against liquidity, capital adequacy
and risk management objectives. At each monthly meeting, ALCO
recommends appropriate strategy changes. The Chief Financial Officer,
or his designee, is responsible for executing, reviewing and reporting on the
results of the policy recommendations and strategies to the board of directors,
generally on a monthly basis.
49
The
ability to maximize net interest income is dependent largely upon the
achievement of a positive interest rate spread that can be sustained despite
fluctuations in prevailing interest rates. The asset and liability
repricing gap is a measure of the difference between the amount of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference 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-earning assets exceeds the amount of
interest-bearing liabilities, maturing or repricing during the same period. A
gap is considered negative when the amount of interest-bearing liabilities
exceeds the amount of interest-earning assets maturing or repricing during the
same period. Generally, during a period of rising interest rates, a
negative gap within shorter repricing periods adversely affects net interest
income, while a positive gap within shorter repricing periods results in an
increase in net interest income. During a period of falling interest
rates, the opposite would generally be true. As of December 31, 2009,
the ratio of our one-year gap to total assets was a positive
1.75%.
Management
recognizes that dramatic changes in interest rates within a short period of time
can cause an increase in our interest rate risk relative to the balance
sheet. At times, ALCO may recommend increasing our interest rate risk
position in an effort to increase our net interest margin, while maintaining
compliance with established board limits for interest rate risk
sensitivity. Management believes that maintaining and improving
earnings is the best way to preserve a strong capital
position. Management recognizes the need, in certain interest rate
environments, to limit Capitol Federal Savings Bank’s exposure to changing
interest rates and may implement strategies to reduce our interest rate risk
which could, as a result, reduce earnings in the short-term. To
minimize the potential for adverse effects of material and prolonged changes in
interest rates on our results of operations, we have adopted asset and liability
management policies to better balance the maturities and repricing terms of our
interest-earning assets and interest-bearing liabilities based on existing local
and national interest rates.
During
periods of economic uncertainty, rising interest rates or extreme competition
for loans, Capitol Federal Savings Bank’s ability to originate or purchase loans
may be adversely affected. In such situations, Capitol Federal
Savings Bank alternatively may invest its funds into investments or
MBS. These alternate investments may have rates of interest lower
than rates we could receive on loans, if we were able to originate or purchase
them, potentially reducing Capitol Federal Savings Bank’s interest
income.
Qualitative
Disclosure about Market Risk. For each period end presented in
the following table, the estimated percentage change in Capitol Federal Savings
Bank’s net interest income based on the indicated instantaneous, parallel and
permanent change in interest rates is presented. The percentage
change in each interest rate environment represents the difference between
estimated net interest income in the zero basis point interest rate environment
(base case, assumes the forward market and product interest rates implied by the
yield curve are realized) and estimated net interest income in each alternative
interest rate environment (assumes market and product interest rates have a
parallel shift in rates across all maturities by the indicated change in
rates). At December 31, 2009, the three-month Treasury bill yield was
less than one percent, so the -100 and -200 basis point scenarios are not
presented. Estimations of net interest income used in preparing the
table below are based upon the assumptions that the total composition of
interest-earning assets and interest-bearing liabilities does not change
materially and that any repricing of assets or liabilities occurs at anticipated
product and market rates for the alternative rate environments as of the dates
presented. The estimation of net interest income does not include any
projected gain or loss related to the sale of loans or securities, or income
derived from non-interest income sources, but does include the use of different
prepayment assumptions in the alternative interest rate
environments. Although certain assets and liabilities may have
similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Assumptions may not reflect how
actual yields and costs respond to market changes. 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
may lag behind changes in market interest rates. Certain assets, such
as adjustable-rate mortgage (ARM) loans, have features that 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. It is important to consider that the changes in estimated
net interest income are for a cumulative four-quarter period. These
do not reflect the earnings expectations of management.
50
Percentage
Change in Net Interest Income
|
Change
(in
Basis Points)
in
Interest Rates (1)
|
At
December 31,
2009
|
At
September 30,
2009
|
||||||
| -100 | bp |
N/A
|
|
N/A |
|
|||
| 000 | bp |
—
|
|
—
|
|
|||
| +100 | bp | -0.65 |
%
|
0.84 |
%
|
|||
| +200 | bp | -2.95 |
%
|
-0.54 |
%
|
|||
| +300 | bp | -6.22 |
%
|
-2.41 |
%
|
|||
(1) Assumes
an instantaneous, permanent and parallel change in interest rates at all
maturities.
At
September 30, 2009, the projected net interest income increased in the +100
basis point scenario before declining in the +200 and +300 basis point
scenarios. At December 31, 2009, the net interest income projections
declined in all interest rate shock scenarios presented. The primary
reason for the change in the net interest income projections between the two
periods was driven by the increase in interest rates during this time and the
resulting change in the cashflow projections of Capitol Federal Savings Bank’s
mortgage-related assets. Prepayment assumptions for mortgage-related
assets change under various interest rate environments because many borrowers
look to obtain financing at the lowest cost available. Generally,
there is no penalty to prepay a mortgage loan. If interest rates
decrease, the borrower has an economic incentive to lower their mortgage payment
(through a lower interest rate) with only the fees associated on the new
mortgage or loan modification. This results in an increase in
prepayments, and the average life a mortgage loan shortens compared to higher
interest rate environments. When interest rates increase, the
economic incentive for borrowers to refinance or modify their mortgage payment
is reduced, resulting in lower prepayment assumptions and longer average
lives.
With
interest rates increasing between September 30, 2009 and December 31, 2009, the
prepayment expectations decreased at December 31, 2009 compared to September 30,
2009. As a result, there are fewer assets expected to reprice during
the upcoming year. The amount of liabilities expected to reprice in
the rising interest rate scenarios presented is greater than the amount of
assets repricing, which results in a reduction in Capitol Federal Savings Bank’s
net interest margin and thus lower net interest income projections in all
scenarios. At September 30, 2009 the amount of assets expected to
reprice remained greater than the amount of liabilities in the +100 basis point
scenario. As prepayment expectations continued to decrease in the
+200 and +300 basis point scenario, the amount of liabilities repricing exceeded
the amount of assets repricing, reducing the net interest income projections in
these scenarios.
The
following table sets forth the percentage change in estimated MVPE at each
period presented based on the indicated instantaneous, parallel and permanent
change in interest rates. The MVPE is defined as the net of the
present value of the cash flows of an institution’s existing assets, liabilities
and off-balance sheet instruments. The percentage change in each
interest rate environment represents the difference between MVPE in the base
case and MVPE in each alternative interest rate environment. The
estimations of MVPE used in preparing the table below are based upon the
assumptions that the total composition of interest-earning assets and
interest-bearing liabilities does not change, that any repricing of assets or
liabilities occurs at current product or market rates for the alternative rate
environments as of the dates presented and that different prepayment rates are
used in each alternative interest rate environment. The estimated
MVPE results from the valuation of cash flows from financial assets and
liabilities over the anticipated lives of each for each interest rate
environment. The table presents the effects of the change in interest
rates on our assets and liabilities as they mature, repay or reprice, as shown
by the change in the MVPE in changing interest rate environments.
51
Percentage
Change in MVPE
|
Change
(in
Basis Points)
in
Interest Rates (1)
|
At
December 31,
2009
|
At
September 30,
2009
|
||||||
| -100 | bp |
N/A
|
|
N/A |
|
|||
| 000 | bp |
—
|
|
—
|
|
|||
| +100 | bp | -5.66 |
%
|
-4.92 |
%
|
|||
| +200 | bp | -16.55 |
%
|
-18.11 |
%
|
|||
| +300 | bp | -30.26 |
%
|
-34.32 |
%
|
|||
(1) Assumes
an instantaneous, permanent and parallel change in interest rates at all
maturities.
Changes
in the estimated market values of our financial assets and liabilities drive
changes in the estimates of MVPE. The market value of shorter
term-to-maturity financial instruments is less sensitive to changes in interest
rates than the market value of longer term-to-maturity financial
instruments. Because of this, our certificates of deposit (which have
relatively short average lives) tend to display less sensitivity to changes in
interest rates than do our mortgage-related assets (which have relatively long
average lives). However, the average life expected on our
mortgage-related assets varies under different interest rate environments
because borrowers have the ability to prepay their mortgage loans, as discussed
above.
Capitol
Federal Savings Bank’s MVPE declines in the rising interest rate
environments. As rates increase, the estimated fair values of the
liabilities with short average lives do not respond to rates in the same manner
as the longer maturity assets, such as our fixed-rate loans, which have longer
average lives. The prepayment assumptions on the fixed-rate loans in
particular, and all mortgage-related assets in general, anticipate prepayment
rates in the increasing rate environments that would likely only be realized
through normal changes in borrowers lives, such as divorce, death, job-related
relocations, and other life changing events. The lower prepayment
assumptions extend the expected average lives on these assets, relative to
assumptions in the base case, thereby increasing their sensitivity to changes in
interest rates. The net effect of these characteristics of
short-lived liabilities and long-lived assets is to increase the sensitivity of
Capitol Federal Savings Bank to changes in interest rates the more rates
increase.
The MVPE
decreased in all interest rate shock scenarios presented at December 31, 2009
and became more sensitive to changes in interest rates in the +100 basis point
scenario compared to September 30, 2009. The changes from September
30, 2009 were primarily driven by an increase in interest rates from September
30, 2009 to December 31, 2009. This resulted in a significant
increase in the WAL of all mortgage-related assets as borrowers have less
economic incentive to refinance or modify their mortgage loan, which increased
the price sensitivity of all mortgage-related assets and, as a result, assets as
a whole. The sensitivity in the +200 and +300 basis point scenarios
decreased from September 30, 2009 as a result of the loan swap transaction
during the current quarter. The loan swap transaction reduced the
amount of 30-year mortgage loans outstanding at December 31,
2009. Thirty-year mortgage assets are the assets with the greatest
amount of interest rate sensitivity for Capitol Federal Savings
Bank. The reduction of these assets helped to reduce the overall
level of interest rate risk at December 31, 2009 as compared to September 30,
2009.
General
assumptions used by management to evaluate the sensitivity of our financial
performance to changes in interest rates presented in the tables above are
utilized in, and set forth under, the gap table and related notes
below. Although management finds these assumptions reasonable given
the constraints described above, the interest rate sensitivity of our assets and
liabilities and the estimated effects of changes in interest rates on our net
interest income and MVPE indicated in the above tables could vary substantially
if different assumptions were used or actual experience differs from these
assumptions.
52
Gap Table: The
following gap table summarizes the anticipated maturities or repricing of our
interest-earning assets and interest-bearing liabilities as of December 31,
2009, based on the information and assumptions set forth in the notes below.
Cash flow projections for mortgage loans and MBS are calculated based on current
interest rates. Prepayment projections are subjective in nature,
involve uncertainties and assumptions and, therefore, cannot be determined with
a high degree of accuracy. Although certain assets and liabilities may have
similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Assumptions may not reflect how
actual yields and costs respond to market changes. 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
may lag behind changes in market interest rates. Certain assets, such
as ARM loans, have features that 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 likely would
deviate significantly from those assumed in calculating the gap
table. For additional information regarding the impact of changes in
interest rates, see the “Percentage Change in Net Interest Income” and
“Percentage Change in MVPE” tables above.
|
Within
Three
Months
|
Three
to
Twelve
Months
|
More
Than
One
Year to
Three
Years
|
More
Than
Three
Years
to
Five
Years
|
Over
Five
Years
|
Total
|
|||||||||||||||||||
|
Interest-earning
assets:
|
(Dollars
in thousands)
|
|||||||||||||||||||||||
|
Loans
receivable (1):
|
||||||||||||||||||||||||
|
Mortgage
loans:
|
||||||||||||||||||||||||
|
Fixed
|
$
|
210,343
|
$
|
479,397
|
$
|
858,370
|
$
|
606,868
|
$
|
2,017,014
|
$
|
4,171,992
|
||||||||||||
|
Adjustable
|
92,394
|
608,662
|
252,229
|
73,694
|
19,123
|
1,046,102
|
||||||||||||||||||
|
Other
loans
|
137,984
|
15,952
|
21,835
|
15,142
|
11,735
|
202,648
|
||||||||||||||||||
|
Investment
securities (2)
|
99,459
|
93,713
|
167,564
|
265,366
|
26,340
|
652,442
|
||||||||||||||||||
|
MBS (3)
|
220,651
|
614,024
|
421,116
|
243,759
|
328,281
|
1,827,831
|
||||||||||||||||||
|
Other
interest-earning assets
|
73,792
|
—
|
—
|
—
|
—
|
73,792
|
||||||||||||||||||
|
Total
interest-earning assets
|
834,623
|
1,811,748
|
1,721,114
|
1,204,829
|
2,402,493
|
7,974,807
|
||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Savings (4)
|
97,768
|
8,504
|
19,608
|
15,208
|
84,295
|
225,383
|
||||||||||||||||||
|
Checking (4)
|
11,104
|
35,729
|
121,381
|
68,054
|
255,351
|
491,619
|
||||||||||||||||||
|
Money
market (4)
|
39,078
|
108,124
|
215,196
|
167,831
|
357,902
|
888,131
|
||||||||||||||||||
|
Certificates
|
472,775
|
978,088
|
1,009,708
|
160,572
|
976
|
2,622,119
|
||||||||||||||||||
|
Borrowings (5)
|
53,609
|
695,000
|
776,000
|
1,120,000
|
495,000
|
3,139,609
|
||||||||||||||||||
|
Total
interest-bearing liabilities
|
674,334
|
1,825,445
|
2,141,893
|
1,531,665
|
1,193,524
|
7,366,861
|
||||||||||||||||||
|
Excess
(deficiency) of interest-earning assets over interest-bearing
liabilities
|
$
|
160,289
|
$
|
(13,697
|
) |
$
|
(420,779
|
) |
$
|
(326,836
|
) |
$
|
1,208,969
|
$
|
607,946
|
|||||||||
|
|
||||||||||||||||||||||||
|
Cumulative
excess (deficiency) of interest-earning assets over
interest-bearing liabilities
|
$
|
160,289
|
$
|
146,592
|
$
|
(274,187
|
) |
$
|
(601,023
|
) |
$
|
607,946
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Cumulative
excess (deficiency) of interest-earning assets over interest-bearing
liabilities as a percent of total assets
at:
|
||||||||||||||||||||||||
|
December 31,
2009
|
1.91
|
%
|
1.75
|
%
|
(3.27
|
)%
|
(7.18
|
)%
|
7.26
|
%
|
||||||||||||||
|
September 30,
2009
|
0.81
|
6.78
|
4.60
|
(2.48
|
) |
8.11
|
||||||||||||||||||
|
(1)
|
Adjustable-rate
loans are included in the period in which the rate is next scheduled to
adjust or in the period in which repayments are expected to occur prior to
their next rate adjustment, rather than in the period in which the loans
are due. Fixed-rate loans are included in the periods in which
they are scheduled to be repaid, based on scheduled amortization and
prepayment assumptions. Balances have been reduced for
non-performing loans, which totaled $32.5 million at December 31,
2009.
|
|
(2)
|
Based
on contractual maturities, or terms to call date or pre-refunding dates as
of December 31, 2009, and excludes the unrealized loss adjustment of
$499 thousand on AFS investment
securities.
|
|
(3)
|
Reflects
estimated prepayments of MBS in our portfolio, and excludes the unrealized
gain adjustment of $50.1 million on AFS
MBS.
|
|
(4)
|
Although
our checking, savings and money market 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 (the assumed rate at which the
balance of existing accounts would decline) used on these accounts are
based on assumptions developed based upon our actual experience with these
accounts. If all of our checking, savings and money market
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 $1.16 billion, for a cumulative one-year gap
of (13.8)% of total assets.
|
|
(5)
|
Borrowings
exclude $32.5 million of deferred prepayment penalty costs and $756
thousand of deferred gain on the terminated interest rate
swaps.
|
53
The
change in the one-year gap to 1.75% at December 31, 2009 from 6.78%
at September 30, 2009 was a result of an increase in interest
rates, particularly mortgage interest rates. The increase in mortgage
interest rates decreased projected cash flows from mortgage loan prepayments
which resulted in longer average lives and slower repricing of interest-earning
assets at December 31, 2009 compared to September 30,
2009.
Financial
Condition
Total
assets decreased slightly from $8.40 billion at September 30, 2009 to $8.37
billion at December 31, 2009. Management may continue to maintain
interest-earning assets at current levels or below until market conditions
provide profitable growth opportunities that are consistent with interest rate
risk management policies.
Total
assets increased $348.4 million from $8.06 billion at September 30, 2008 to
$8.40 billion at September 30, 2009. The increase in assets was
primarily attributed to an increase in investment securities of $338.3 million
and an increase in loans receivable of $283.2 million, partially offset by a
decrease in MBS of $241.9 million. The increase in the investment securities
portfolio was a result of cash flows from the MBS portfolio being used to
purchase investment securities. The increase in loans receivable was
due substantially to purchases.
Total
liabilities increased $278.3 million from $7.18 billion at September 30, 2008 to
$7.46 billion at September 30, 2009. The increase in liabilities was
a result of an increase of $304.7 million in deposits, primarily in the
certificate of deposit portfolio. We believe the turmoil in the
credit and equity markets has made deposit products in well-capitalized
financial institutions, like Capitol Federal Savings Bank, desirable for many
customers. In response to the economic recession, households
increased their personal savings rate which we believe also contributed to our
growth in deposits during this period.
Loans
Receivable. The loans receivable portfolio decreased $180.0
million from $5.60 billion at September 30, 2009 to $5.42 billion at December
31, 2009. The decrease in the portfolio was the result of a loan swap
transaction that took place during the quarter, where $194.8 million of
originated fixed-rate mortgage loans were swapped for MBS as a means of reducing
future interest rate risk sensitivity. Capitol Federal Savings Bank will
continue to service these loans. The MBS were classified as trading securities
and sold during the current quarter for a gain. The proceeds from the
sale were primarily reinvested into investment securities with terms shorter
than that of the loans swapped.
Capitol
Federal Savings Bank purchased $37.6 million of loans from nationwide lenders
during the quarter ended December 31, 2009, the majority of which were
adjustable-rate. These loans had an average credit score of 725 at
origination and a weighted average loan to value ratio of 46%, based upon the
loan balance at the time of purchase and the lower of the purchase price or
appraisal at origination. At December 31, 2009, loans purchased from
nationwide lenders represented 13% of our loan portfolio and were secured by
properties located in 47 of the continental United States and Washington,
D.C. As of December 31, 2009, the average balance of a purchased
nationwide mortgage loan was approximately $350 thousand, the average balance of
a purchased correspondent loan was approximately $250 thousand, and the average
balance of an originated mortgage loan was approximately $125 thousand. By
purchasing loans from nationwide lenders, Capitol Federal Savings Bank is able
to attain some geographic diversification in its loan portfolio and help
mitigate Capitol Federal Savings Bank’s interest rate risk exposure as the
purchased loans are predominately adjustable-rate or 15-year fixed-rate
loans. Although at the time these loans were purchased they met our
underwriting standards, as a result of the continued elevated levels of
unemployment and the declines in real estate values in some of the states where
we have purchased loans, we have experienced an increase in non-performing
purchased loans. See the additional discussion regarding
non-performing purchased loans in “Asset Quality – Loans and
REO.”
The loan
portfolio increased $283.2 million from $5.32 billion at September 30, 2008 to
$5.60 billion at September 30, 2009. The increase in loans receivable
was due to originations and purchases of $1.45 billion, partially offset by
principal repayments of $1.08 billion. The increase was primarily a
result of $191.8 million of loan purchases from nationwide
lenders. The loans purchased from nationwide lenders during fiscal
year 2009 had an average credit score of 745 at the time of origination and a
weighted average loan to value ratio of 50% at the time of
purchase. The majority of the loans were originated in years outside
of the years with peak real estate values and non-traditional underwriting
standards. Approximately 80% were originated in 2004 or earlier and
approximately 20% were originated in 2008. Additionally, states that
experienced historically high foreclosure rates were
avoided.
54
Included
in the loan portfolio at December 31, 2009 were $243.7 million of interest-only
ARM loans, the majority of which were purchased from nationwide lenders during
fiscal year 2005. These loans do not typically require principal
payments during their initial term, and have initial interest-only terms of
either five or ten years. The interest-only loans purchased had an
average credit score of 737 and an average loan to value ratio of 80% or less at
the time of purchase. Capitol Federal Savings Bank has not purchased
any interest-only ARM loans since 2006 and discontinued offering the product in
its local markets during 2008 to reduce future credit risk. At
December 31, 2009, $233.3 million, or 96% of interest-only loans were still in
their interest-only payment term. As of December 31, 2009, $110.7
million will begin to amortize principal within two years, $16.4 million will
begin to amortize principal within two-to-five years, $89.7 million will begin
to amortize principal within five-to-seven years and the remaining $16.4 million
will begin amortizing in seven-to-ten years. At December 31, 2009,
$15.7 million or approximately 50% of non-performing loans were interest-only
and $2.8 million was reserved in the ALLL for these
loans. Non-performing interest-only loans represented approximately
6% of the total interest-only portfolio at December 31, 2009. See the
additional discussion regarding non-performing loans in “Asset
Quality.”
Historically,
Capitol Federal Savings Bank’s underwriting guidelines have provided Capitol
Federal Savings Bank with loans of high quality and low delinquencies, and low
levels of non-performing assets compared to national levels. Of
particular importance is the complete documentation required for each loan
Capitol Federal Savings Bank originates and purchases. This allows
Capitol Federal Savings Bank to make an informed credit decision based upon a
thorough assessment of the borrower’s ability to repay the loan, compared to
underwriting methodologies that do not require full
documentation. Non-performing loans increased $17.2 million from $13.7
million at September 30, 2008 to $30.9 million at September 30, 2009 and $1.6
million to $32.5 million at December 31, 2009. Non-performing loans
are at historically high levels due to the continued elevated level of
unemployment coupled with the decline in real estate values, particularly in
some of the states in which we have purchased loans. Our ratio of
non-performing loans to total loans increased from 0.26% at September 30, 2008
to 0.55% at September 30, 2009 and to 0.60% at December 31, 2009. At
December 31, 2009, our allowance for loan losses was $12.2 million or 0.23% of
the total loan portfolio and 38% of total non-performing loans. This
compares with an allowance for loan losses of $10.2 million or 0.18% of the
total loan portfolio and 33% of total non-performing loans as of September 30,
2009 and $5.8 million or 0.11% of the total loan portfolio and 42% of total
non-performing loans as of September 30, 2008. See “Business –
Asset Quality.”
Capitol
Federal Savings Bank generally prices its one- to four-family loan products
based upon prices available in the secondary market. During the three
months ended December 31, 2009, the average rate offered on Capitol Federal
Savings Bank’s 30-year fixed-rate one- to four-family loans, with no points paid
by the borrower, was approximately 160 basis points above the average 10-year
Treasury rate, while the average rate offered on Capitol Federal Savings Bank’s
15-year fixed-rate one- to four-family loans was approximately 100 basis points
above the average 10-year Treasury rate.
Conventional
one- to four-family loans may be sold on a bulk basis for portfolio
restructuring or on a flow basis as loans are originated to reduce interest rate
risk and/or maintain a certain liquidity position. Capitol Federal
Savings Bank generally retains the servicing on these sold
loans. ALCO determines which conventional one- to four-family loans
are to be originated as held for sale or held for
investment. Conventional loans originated as held for sale are to be
sold in accordance with policies set forth by ALCO. Conventional
loans originated as held for investment are generally not eligible for sale
unless a specific segment of the portfolio qualifies for asset restructuring
purposes.
The
following table summarizes the activity in the loan portfolio for the periods
indicated, excluding changes in loans in process, deferred fees, and allowance
for loan losses. Loans that were paid-off as a result of refinances
are included in repayments. Loan modification activity is not
included in the activity in the following table because a new loan is not
generated at the time of modification. During the quarter ended
December 31, 2009, Capitol Federal Savings Bank modified $139.7 million of loans
with a weighted average rate decrease of 83 basis points. During
fiscal year 2009, Capitol Federal Savings Bank modified $1.14 billion loans with
a weighted average decrease in rate of 87 basis points. The modified
balances and rates are included in the ending loan portfolio balance and
rate. The weighted average contractual life (WAL) of our real estate
loan portfolio was 23 years at December 31, 2009 and September 30, 2009 and
2008.
55
|
For
the Three Months Ended
|
||||||||||||||||||||||||||||||||
|
December
31, 2009
|
September
30, 2009
|
June
30, 2009
|
March
31, 2009
|
|||||||||||||||||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Beginning
balance
|
$ | 5,646,950 | 5.29 | % | $ | 5,587,130 | 5.36 | % | $ | 5,422,798 | 5.50 | % | $ | 5,506,352 | 5.63 | % | ||||||||||||||||
|
Originations
and refinances:
|
||||||||||||||||||||||||||||||||
|
Fixed
|
156,507 | 4.95 | 255,441 | 5.07 | 325,640 | 4.96 | 276,888 | 5.06 | ||||||||||||||||||||||||
|
Adjustable
|
37,885 | 4.57 | 37,948 | 4.75 | 32,652 | 4.78 | 25,269 | 4.83 | ||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||||||||||
|
Fixed
|
20,149 | 5.09 | 24,670 | 5.08 | 37,912 | 5.11 | 33,226 | 5.18 | ||||||||||||||||||||||||
|
Adjustable
|
44,930 | 3.69 | 11,662 | 4.82 | 9,544 | 5.04 | 70,349 | 4.90 | ||||||||||||||||||||||||
|
Repayments
|
(245,838 | ) | (266,362 | ) | (322,104 | ) | (311,733 | ) | ||||||||||||||||||||||||
|
Transfer
of modified loans to LHFS (1)
|
(194,759 | ) | — | 81,190 | (175,862 | ) | ||||||||||||||||||||||||||
|
Other
(2)
|
(2,080 | ) | (3,539 | ) | (502 | ) | (1,691 | ) | ||||||||||||||||||||||||
|
Ending
balance
|
$ | 5,463,744 | 5.23 | % | $ | 5,646,950 | 5.29 | % | $ | 5,587,130 | 5.36 | % | $ | 5,422,798 | 5.50 | % | ||||||||||||||||
|
For
the Year Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Beginning
balance
|
$ | 5,379,845 | 5.66 | % | $ | 5,346,626 | 5.68 | % | ||||||||
|
Originations
and
refinances
|
||||||||||||||||
|
Fixed
|
988,375 | 5.12 | 652,011 | 5.87 | ||||||||||||
|
Adjustable
|
131,306 | 4.91 | 168,824 | 6.16 | ||||||||||||
|
Purchases:
|
||||||||||||||||
|
Fixed
|
109,813 | 5.21 | 47,795 | 5.82 | ||||||||||||
|
Adjustable
|
223,619 | 5.01 | 71,836 | 5.67 | ||||||||||||
|
Repayments
|
(1,083,731 | ) | (899,178 | ) | ||||||||||||
|
Transfer
of modified loans to LHFS
|
(94,672 | ) | — | |||||||||||||
|
Other
(2)
|
(7,605 | ) | (8,069 | ) | ||||||||||||
|
Ending
balance
|
$ | 5,646,950 | 5.29 | % | $ | 5,379,845 | 5.66 | % | ||||||||
|
(1)
|
Transfer
of modified loans to LHFS in the December 31, 2009 quarter includes loans
with a principal balance of $194.8 million related to the loan swap
transaction.
|
|
(2)
|
Other
consists of transfers to REO and modification fees
advanced.
|
Mortgage-Backed
Securities. The
balance of MBS, which primarily consists of securities of U.S.
government-sponsored enterprises, decreased $241.9 million from $2.23 billion at
September 30, 2008 to $1.99 billion at September 30, 2009 and an additional
$114.5 million to $1.88 billion at December 31, 2009. The decreases
were a result of some cash flows from the MBS portfolio being reinvested into
investment securities.
During
the quarter ended December 31, 2009, MBS with a fair value of $192.7 million
were received in conjunction with the loan swap transaction. As
previously discussed, the related MBS were sold for a $6.5 million
gain. The proceeds from the sale were primarily used to purchase
investment securities with terms shorter than that of the mortgage loans that
were swapped. The loan swap transaction was primarily undertaken for
interest rate risk management purposes.
56
The
following tables provide a summary of the activity in our portfolio of MBS for
the periods presented. The yields and WAL for purchases are presented
as recorded at the time of purchase. The yields for the beginning and
ending balances are as of the period presented and are generally derived from
recent prepayment activity on the securities in the portfolio as of the dates
presented. The weighted average yield of the MBS portfolio decreased
between December 31, 2009 and September 30, 2009 primarily due to the maturity
and repayment of securities with higher yields than the overall portfolio and
adjustable-rate MBS resetting to lower coupons due to a decline in related
indices. The beginning and ending WAL is the estimated remaining maturity
after projected prepayment speeds have been applied. The increase in
the WAL at December 31, 2009 compared to September 30, 2009 was due to a
slowdown in projected prepayment speeds due to an increase in mortgage interest
rates. The weighted average yield of the MBS portfolio decreased
between September 30, 2008 and September 30, 2009 due to the maturity and
repayment of securities with higher yields, the purchase of MBS with yields
lower than the existing portfolio and adjustable-rate MBS resetting to lower
coupons due to a decline in related indices. The beginning and ending
WAL is the estimated remaining maturity after projected prepayment speeds have
been applied. The decrease in the WAL at September 30, 2009 compared
to September 30, 2008 was due to principal repayments, the purchase of new MBS
with a shorter WAL than the existing portfolio and an increase in the assumed
prepayment speeds.
57
|
For
the Three Months Ended
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
December
31, 2009
|
September
30, 2009
|
June
30, 2009
|
March
31, 2009
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
|||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Beginning
balance
|
$ | 1,992,467 | 4.42 | % | 4.67 | $ | 2,100,998 | 4.59 | % | 4.55 | $ | 2,204,369 | 4.72 | % | 5.55 | $ | 2,176,302 | 4.82 | % | 5.81 | ||||||||||||||||||||||||||||
|
Maturities
and repayments
|
(112,380 | ) | (142,182 | ) | (155,168 | ) | (107,388 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Sale
of securities, net of gains
|
(192,690 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Net
amortization of premiums (discounts)
|
(392 | ) | (366 | ) | (189 | ) | 46 | |||||||||||||||||||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
|
2,990 | 4.10 | 7.48 | 18,539 | 2.80 | 3.03 | 3,217 | 4.34 | 8.49 | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Adjustable
|
— | — | — | — | — | — | 50,983 | 2.83 | 3.58 | 118,469 | 2.68 | 1.90 | ||||||||||||||||||||||||||||||||||||
|
Fair
value of securities received in loan swap
transaction
|
192,690 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Change
in valuation on AFS securities
|
(4,716 | ) | 15,478 | (2,214 | ) | 16,940 | ||||||||||||||||||||||||||||||||||||||||||
|
Ending
balance
|
$ | 1,877,969 | 4.34 | % | 5.09 | $ | 1,992,467 | 4.42 | % | 4.67 | $ | 2,100,998 | 4.59 | % | 4.55 | $ | 2,204,369 | 4.72 | % | 5.55 | ||||||||||||||||||||||||||||
|
For
the Year Ended September 30,
|
||||||||||||||||||||||||
|
2009
|
2008 | |||||||||||||||||||||||
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Beginning
balance
|
$ | 2,234,339 | 4.82 | % | 5.05 | $ | 1,414,271 | 4.46 | % | 4.04 | ||||||||||||||
|
Maturities
and repayments
|
(494,932 | ) | (500,078 | ) | ||||||||||||||||||||
|
Net
amortization of premiums (discounts)
|
(482 | ) | (747 | ) | ||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||
|
Fixed
|
21,756 | 3.03 | 3.84 | 785,181 | 4.94 | 4.62 | ||||||||||||||||||
|
Adjustable
|
169,452 | 2.72 | 2.41 | 545,174 | 4.81 | 4.91 | ||||||||||||||||||
|
Change
in valuation on AFS securities
|
62,334 | (9,462 | ) | |||||||||||||||||||||
|
Ending
balance
|
$ | 1,992,467 | 4.42 | % | 4.67 | $ | 2,234,339 | 4.82 | % | 5.05 | ||||||||||||||
58
Investment
Securities. Investment securities, which consist primarily of
U.S. government-sponsored enterprise debt securities (primarily issued by FNMA,
FHLMC, or FHLB) and municipal investments, increased $171.2 million from $480.7
million at September 30, 2009 to $651.9 million at December 31,
2009. The increase in the balance was a result of purchases of $173.4
million of investment securities. Investment securities increased $338.3
million from $142.4 million at September 30, 2008 to $480.7 million at September
30, 2009. The increase in the balance was primarily a result of
purchases of $448.6 million in short-term securities, partially offset by
maturities and calls of $109.8 million.
The
following tables provide a summary of the activity of investment securities for
the periods presented. The yields for the beginning and ending
balances are as of the first and last days of the periods
presented. The increase in the yield at December 31, 2009 compared to
September 30, 2009 was a result of purchases of securities with yields higher
than the overall portfolio yield. The decrease in the yield at
September 30, 2009 compared to September 30, 2008 was a result of calls and/or
maturities of securities with yields higher than the overall portfolio yield and
to purchases of investment securities with yields lower than the existing
portfolio. The beginning and ending WAL represent the estimated
remaining maturity of the securities after projected call dates have been
considered, based upon market rates at each date presented. The WAL
at December 31, 2009 increased slightly from September 30, 2009 due to an
increase in interest rates, which extended the WAL. The decrease in the WAL at
September 30, 2009 compared to September 30, 2008 was due to issuers of certain
securities in the portfolio exercising their option to call the security, to
maturing securities and to purchases of investment securities with WALs shorter
than the portfolio.
59
|
For
the Three Months Ended
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
December
31, 2009
|
September
30, 2009
|
June
30, 2009
|
March
31, 2009
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
|||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Beginning
balance
|
$ | 480,704 | 1.93 | % | 1.53 | $ | 322,166 | 1.84 | % | 2.02 | $ | 214,410 | 2.16 | % | 2.32 | $ | 105,965 | 3.34 | % | 3.64 | ||||||||||||||||||||||||||||
|
Maturities
and calls
|
(1,033 | ) | (25,128 | ) | (25,036 | ) | (22,168 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Net
amortization of premiums (discounts)
|
(1,061 | ) | (901 | ) | (685 | ) | (329 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
|
173,431 | 2.39 | 1.25 | 183,391 | 1.95 | 2.17 | 133,047 | 1.41 | 1.10 | 131,229 | 1.62 | 1.04 | ||||||||||||||||||||||||||||||||||||
|
Adjustable
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Change
in valuation on AFS securities
|
(98 | ) | 1,176 | 430 | (287 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Ending
balance
|
$ | 651,943 | 2.05 | % | 1.65 | $ | 480,704 | 1.93 | % | 1.53 | $ | 322,166 | 1.84 | % | 2.02 | $ | 214,410 | 2.16 | % | 2.32 | ||||||||||||||||||||||||||||
|
For
the Year Ended September 30,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Amount
|
Yield
|
WAL
|
Amount
|
Yield
|
WAL
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Beginning
balance
|
$ | 142,359 | 3.94 | % | 6.06 | $ | 524,168 | 4.52 | % | 1.66 | ||||||||||||||
|
Maturities
and calls
|
(109,760 | ) | (614,018 | ) | ||||||||||||||||||||
|
Net
amortization of premiums (discounts)
|
(2,162 | ) | 30 | |||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||
|
Fixed
|
448,553 | 1.70 | 1.53 | 230,512 | 3.96 | 1.07 | ||||||||||||||||||
|
Adjustable
|
— | — | — | 3,874 | 6.58 | 28.98 | ||||||||||||||||||
|
Change
in valuation on AFS securities
|
1,714 | (2,207 | ) | |||||||||||||||||||||
|
Ending
balance
|
$ | 480,704 | 1.93 | % | 1.53 | $ | 142,359 | 3.94 | % | 6.06 | ||||||||||||||
60
Liabilities. Total
liabilities remained relatively unchanged from $7.46 billion at September 30,
2009 to $7.43 billion at December 31, 2009. Liabilities increased
from $7.18 billion at September 30, 2008 to $7.46 billion at September 30,
2009. The $278.3 million increase in liabilities was due primarily to
an increase in deposits of $304.7 million. We believe the turmoil in
the credit and equity markets made deposit products in well-capitalized
financial institutions, like Capitol Federal Savings Bank, desirable for many
customers. Households increased their personal savings rate, which we
believe also contributed to our growth in deposits during this
period.
During
fiscal year 2009, Capitol Federal Savings Bank prepaid $875.0 million of
fixed-rate FHLB advances with a weighted average contractual rate of
5.65%. The prepaid FHLB advances were replaced with $875.0 million of
fixed-rate FHLB advances with a weighted average contractual interest rate of
3.41%. Capitol Federal Savings Bank paid a $38.4 million prepayment
penalty to the FHLB. The prepayment penalty is being deferred as an
adjustment to the carrying value of the new advances and will be recognized as
expense over the life of the new advances, which effectively increased the
interest rate on the new advances 96 basis points. See “Notes to Consolidated
Financial Statements - Note 7 - Borrowed Funds.”
The
following table presents the amount, average rate and percentage of total
deposits for checking, savings, money market and certificates at December 31,
2009, September 30, 2009 and 2008.
|
At December
31, 2009 |
At September
30, 2009 |
At September
30, 2008 |
||||||||||||||||||||||||||||||||||
| Amount |
Average
Rate
|
%
of Total |
Amount | Average
Rate
|
%
of Total |
Amount |
Average
Rate
|
%
of Total |
||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
|
Checking
|
$ | 491,619 | 0.13 | % | 11.7 | % | $ | 439,975 | 0.17 | % | 10.4 | % | $ | 400,461 | 0.21 | % | 10.2 | % | ||||||||||||||||||
|
Savings
|
225,383 | 0.56 | 5.3 | 226,396 | 0.66 | 5.4 | 232,103 | 1.51 | 5.9 | |||||||||||||||||||||||||||
|
Money
market
|
888,131 | 0.73 | 21.0 | 848,157 | 0.82 | 20.1 | 772,323 | 1.48 | 19.7 | |||||||||||||||||||||||||||
|
Certificates
|
2,622,119 | 2.83 | 62.0 | 2,714,081 | 3.09 | 64.1 | 2,518,996 | 3.91 | 64.2 | |||||||||||||||||||||||||||
|
Total
deposits
|
$ | 4,227,252 | 1.95 | % | 100.0 | % | $ | 4,228,609 | 2.20 | % | 100.0 | % | $ | 3,923,883 | 2.91 | % | 100.0 | % | ||||||||||||||||||
At
December 31, 2009, there were no brokered deposits, as they all matured during
the quarter, compared to $71.5 million and $180.6 million in brokered deposits
at September 30, 2009 and 2008, respectively. Management regularly
considers brokered deposits as a source of funding, but does not currently
consider the cost of this funding source to be balanced with investment
opportunities. As of December 31, 2009, $100.1 million in
certificates were public unit deposits, compared to $91.5 million in public unit
deposits at September 30, 2009. There were no public unit deposits at
September 30, 2008. Management will continue to monitor the wholesale
deposit market for attractive opportunities.
Stockholders’
Equity. Stockholders’ equity remained relatively flat from $941.3
million at September 30, 2009 to $942.0 million at December 31,
2009. During the quarter ended December 31, 2009, $16.7 million of
dividends, or $0.79 per public share, were paid to stockholders, which included
$6.1 million, or $0.29 per public share, related to the special
dividend. Stockholders’ equity increased $70.1 million from $871.2 million
at September 30, 2008 to $941.3 million at September 30, 2009. The
increase was primarily a result of net income of $66.3 million and an increase
in unrealized gains on AFS securities of $39.8 million, partially offset by
dividends paid of $44.1 million.
Weighted Average
Yields and Rates: The following
table presents the weighted average yields earned on loans, securities and other
interest-earning assets, the weighted average rates paid on deposits and
borrowings and the resultant interest rate spreads at the dates
indicated. Yields on tax-exempt securities are not calculated on a
tax-equivalent basis.
61
|
At
December
31,
2009
|
||||||||||||||
|
At
September 30,
|
||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
Weighted
average yield on:
|
||||||||||||||
|
Loans
receivable
|
5.34
|
%
|
5.38
|
%
|
5.69
|
%
|
5.73
|
%
|
||||||
|
MBS
|
4.34
|
4.42
|
4.82
|
4.46
|
||||||||||
|
Investment
securities
|
2.05
|
1.93
|
3.94
|
4.52
|
||||||||||
|
Capital
stock of FHLB
|
2.98
|
2.98
|
4.73
|
6.68
|
||||||||||
|
Cash
and cash equivalents
|
0.23
|
0.21
|
2.95
|
4.94
|
||||||||||
|
Combined
weighted average yield on
|
||||||||||||||
|
interest-earning
assets
|
4.76
|
4.89
|
5.37
|
5.41
|
||||||||||
|
Weighted
average rate paid on:
|
||||||||||||||
|
Savings
deposits
|
0.56
|
0.66
|
1.51
|
2.58
|
||||||||||
|
Checking
deposits
|
0.13
|
0.17
|
0.21
|
0.21
|
||||||||||
|
Money
market deposits
|
0.73
|
0.82
|
1.48
|
3.18
|
||||||||||
|
Certificate
of deposit
|
2.83
|
3.09
|
3.91
|
4.77
|
||||||||||
|
FHLB
advances (1)
|
4.13
|
4.13
|
4.75
|
5.39
|
||||||||||
|
Other
borrowings
|
3.90
|
3.91
|
4.09
|
8.12
|
||||||||||
|
Combined
weighted average rate paid on
|
||||||||||||||
|
interest-bearing liabilities
|
2.85
|
3.00
|
3.67
|
4.52
|
||||||||||
|
Net
interest rate spread
|
1.91
|
%
|
1.89
|
%
|
1.70
|
%
|
0.89
|
%
|
||||||
|
(1)
|
The
December 31, 2009 and September 30, 2009 rates include the net impact of
the deferred prepayment penalties related to the prepayment of certain
FHLB advances and deferred gain associated with the interest rate swap
termination during fiscal year 2008. The September 30, 2008
rates includes the impact of the deferred gain associated with the
interest rate swap termination during fiscal year 2008. The
September 30, 2007 rates include the impact of the interest rate swap
agreements.
|
Average Balance
Sheets: The following
tables present certain information regarding our financial condition and net
interest income for the three months ended December 31, 2009 and 2008 and fiscal
years 2009, 2008 and 2007. Net interest income represents the difference between
interest income earned on interest-earning assets and interest-bearing
liabilities, and the interest rates earned or paid on them. The
tables present the average balances of our assets, liabilities and stockholders’
equity and the related annualized yields and rates on our interest-earning
assets and interest-bearing liabilities for the periods indicated. We derived
the average yields and rates by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. We derived average balances from daily
balances over the periods indicated, except as noted. The average
yields and rates include amortization of fees, costs, premiums and discounts
which are considered adjustments to yields/rates. Yields on
tax-exempt securities were not calculated on a tax-equivalent
basis.
62
|
Three
Months Ended
|
Year
Ended September 30,
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
December
31, 2009
|
December
31, 2008
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Average Outstanding |
Interest Earned/ |
Yield/ Rate |
Average Outstanding |
Interest Earned/ |
Yield/ Rate |
Average Outstanding |
Interest Earned/ |
Yield/ Rate |
Average Outstanding |
Interest Earned/ |
Yield/ Rate |
Average Outstanding |
Interest Earned/ |
Yield/ Rate |
|||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Assets
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage loans (1)
|
$ | 5,347,359 | $ | 71,637 | 5.36 | % | $ | 5,206,218 | $ | 73,409 | 5.64 | % | $ | 5,296,297 | $ | 293,685 | 5.55 | % | $ | 5,099,147 | $ | 286,383 | 5.62 | % | $ | 5,022,178 | $ | 276,317 | 5.50 | % | |||||||||||||||||||
|
Other loans
|
203,524 | 2,889 | 5.63 | 212,961 | 3,307 | 6.16 | 208,252 | 12,097 | 5.81 | 216,404 | 15,637 | 7.21 | 222,000 | 18,427 | 8.30 | ||||||||||||||||||||||||||||||||||
|
Total
loans receivable
|
5,550,883 | 74,526 | 5.37 | 5,419,179 | 76,716 | 5.66 | 5,504,549 | 305,782 | 5.56 | 5,315,551 | 302,020 | 5.68 | 5,244,178 | 294,744 | 5.62 | ||||||||||||||||||||||||||||||||||
|
MBS (2)
|
1,888,230 | 20,754 | 4.40 | 2,201,531 | 26,402 | 4.80 | 2,110,701 | 97,926 | 4.64 | 1,888,186 | 88,395 | 4.68 | 1,605,901 | 68,752 | 4.28 | ||||||||||||||||||||||||||||||||||
|
Investment securities
(2)(3)
|
524,854 | 2,559 | 1.95 | 136,295 | 1,326 | 3.89 | 229,766 | 5,533 | 2.41 | 242,426 | 9,917 | 4.09 | 656,857 | 30,849 | 4.70 | ||||||||||||||||||||||||||||||||||
|
Capital
stock of FHLB
|
133,075 | 1,001 | 2.98 | 124,958 | 780 | 2.48 | 129,716 | 3,344 | 2.58 | 129,216 | 6,921 | 5.36 | 153,478 | 10,017 | 6.53 | ||||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
80,391 | 47 | 0.23 | 33,025 | 49 | 0.58 | 72,184 | 201 | 0.28 | 112,522 | 3,553 | 3.11 | 138,756 | 7,188 | 5.11 | ||||||||||||||||||||||||||||||||||
|
Total
interest-earning assets
|
8,177,433 | 98,887 | 4.84 | 7,914,988 | 105,273 | 5.32 | 8,046,916 | 412,786 | 5.13 | 7,687,901 | 410,806 | 5.34 | 7,799,170 | 411,550 | 5.28 | ||||||||||||||||||||||||||||||||||
|
Other
noninterest-earning assets
|
225,321 | 161,092 | 181,829 | 186,312 | 153,949 | ||||||||||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 8,402,754 | $ | 8,076,080 | $ | 8,228,745 | $ | 7,874,213 | $ | 7,953,119 | |||||||||||||||||||||||||||||||||||||||
|
Liabilities
and stockholders’ equity
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Savings
|
$ | 225,837 | $ | 361 | 0.63 | % | $ | 229,540 | $ | 618 | 1.07 | % | $ | 228,879 | $ | 1,873 | 0.82 | % | $ | 230,818 | $ | 4,105 | 1.77 | % | $ | 195,660 | $ | 4,952 | 2.53 | % | |||||||||||||||||||
|
Checking
|
447,055 | 176 | 0.16 | 405,787 | 211 | 0.21 | 426,976 | 879 | 0.21 | 398,430 | 819 | 0.20 | 396,454 | 850 | 0.21 | ||||||||||||||||||||||||||||||||||
|
Money market
|
867,233 | 1,740 | 0.80 | 775,386 | 2,553 | 1.31 | 814,898 | 8,512 | 1.04 | 804,612 | 16,771 | 2.08 | 807,459 | 26,566 | 3.29 | ||||||||||||||||||||||||||||||||||
|
Certificates
|
2,667,141 | 19,828 | 2.95 | 2,473,763 | 23,403 | 3.75 | 2,585,560 | 89,207 | 3.45 | 2,507,036 | 111,740 | 4.44 | 2,504,069 | 114,911 | 4.59 | ||||||||||||||||||||||||||||||||||
|
Total deposits
|
4,207,266 | 22,105 | 2.09 | 3,884,476 | 26,785 | 2.73 | 4,056,313 | 100,471 | 2.48 | 3,940,896 | 133,435 | 3.37 | 3,903,642 | 147,279 | 3.77 | ||||||||||||||||||||||||||||||||||
|
FHLB advances (4)
|
2,393,134 | 24,819 | 4.11 | 2,477,961 | 29,545 | 4.72 | 2,437,978 | 106,551 | 4.36 | 2,552,883 | 125,748 | 4.89 | 3,009,538 | 153,363 | 5.03 | ||||||||||||||||||||||||||||||||||
|
Other borrowings
|
713,609 | 7,109 | 3.90 | 713,585 | 7,725 | 4.24 | 713,601 | 29,122 | 4.03 | 391,009 | 17,455 | 4.39 | 53,493 | 4,468 | 8.24 | ||||||||||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
7,314,009 | 54,033 | 2.93 | 7,076,022 | 64,055 | 3.58 | 7,207,892 | 236,144 | 3.27 | 6,884,788 | 276,638 | 3.99 | 6,966,673 | 305,110 | 4.35 | ||||||||||||||||||||||||||||||||||
|
Other noninterest-bearing liabilities
|
137,057 | 121,970 | 108,940 | 119,353 | 118,445 | ||||||||||||||||||||||||||||||||||||||||||||
|
Stockholders’ equity
|
951,688 | 878,088 | 911,913 | 870,072 | 868,001 | ||||||||||||||||||||||||||||||||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 8,402,754 | $ | 8,076,080 | $ | 8,228,745 | $ | 7,874,213 | $ | 7,953,119 | |||||||||||||||||||||||||||||||||||||||
|
Net
interest
income
|
$ | 44,854 | $ | 41,218 | $ | 176,642 | $ | 134,168 | $ | 106,440 | |||||||||||||||||||||||||||||||||||||||
|
Net interest rate
spread
|
1.91 | % | 1.74 | % | 1.86 | % | 1.35 | % | 0.93 | % | |||||||||||||||||||||||||||||||||||||||
|
Net interest-earning
assets
|
$ | 863,424 | $ | 838,966 | $ | 839,024 | $ | 803,113 | $ | 832,497 | |||||||||||||||||||||||||||||||||||||||
|
Net
interest
margin
|
2.19 | % | 2.08 | % | 2.20 | % | 1.75 | % | 1.36 | % | |||||||||||||||||||||||||||||||||||||||
|
Ratio
of interest-earning assets to interest-bearing
liabilities
|
1.12 | x | 1.12 | x | 1.12 | x | 1.12 | x | 1.12 | x | |||||||||||||||||||||||||||||||||||||||
*Annualized
| (1) | Calculated net of deferred loan fees, loan discounts, and loans in process. Non-accrual loans are included in the loans receivable average balance with a yield of zero percent. |
| (2) | MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts. |
| (3) |
The
average balance of investment securities includes an average balance of
nontaxable securities of $71.6 million and $57.5 million for the periods
ended December 31, 2009 and 2008 and $61.0 million, $45.9 million, and
$12.0 million for the years ended September 30, 2009, 2008 and 2007,
respectively.
|
| (4) | FHLB advances are stated net of deferred gains and deferred prepayment penalties. The rate at December 31, 2009 is the effective rate. |
| (5) | The average balance for other non-interest-earning assets, other non-interest-bearing liabilities, and stockholders’ equity was calculated based upon month-end balances. |
63
Rate/Volume
Analysis: The table below presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities, comparing the three
months ended December 31, 2009 to the three months ended December 31, 2008,
fiscal years 2009 to 2008 and fiscal years 2008 to 2007. 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 the average balance multiplied by the previous year’s average
rate and (2) changes in rate, which are changes in the average rate multiplied
by the average balance from the previous year. The net changes
attributable to the combined impact of both rate and volume have been allocated
proportionately to the changes due to volume and the changes due to
rate.
|
Three
Months Ended December
31, 2009
vs. 2008 |
||||||||||||||||||||||||||||||||||||
|
Year
Ended September 30,
|
||||||||||||||||||||||||||||||||||||
|
2009
vs. 2008
|
2008
vs. 2007
|
|||||||||||||||||||||||||||||||||||
|
Increase
(Decrease) Due to
|
Increase
(Decrease) Due to
|
Increase
(Decrease) Due to
|
||||||||||||||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans
receivable
|
$ | 1,810 | $ | (4,000 | ) | $ | (2,190 | ) | $ | 10,443 | $ | (6,681 | ) | $ | 3,762 | $ | 3,873 | $ | 3,403 | $ | 7,276 | |||||||||||||||
|
MBS
|
(3,562 | ) | (2,086 | ) | (5,648 | ) | 10,295 | (764 | ) | 9,531 | 12,824 | 6,819 | 19,643 | |||||||||||||||||||||||
|
Investment
securities
|
2,174 | (941 | ) | 1,233 | (494 | ) | (3,890 | ) | (4,384 | ) | (17,380 | ) | (3,552 | ) | (20,932 | ) | ||||||||||||||||||||
|
Capital
stock of FHLB
|
53 | 167 | 220 | 27 | (3,604 | ) | (3,577 | ) | (1,451 | ) | (1,645 | ) | (3,096 | ) | ||||||||||||||||||||||
|
Cash
equivalents
|
40 | (41 | ) | (1 | ) | (947 | ) | (2,405 | ) | (3,352 | ) | (1,182 | ) | (2,453 | ) | (3,635 | ) | |||||||||||||||||||
|
Total
interest-earning assets
|
515 | (6,901 | ) | (6,386 | ) | 19,324 | (17,344 | ) | 1,980 | (3,316 | ) | 2,572 | (744 | ) | ||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Savings
|
(10 | ) | (252 | ) | (262 | ) | (35 | ) | (2,218 | ) | (2,253 | ) | 802 | (1,640 | ) | (838 | ) | |||||||||||||||||||
|
Checking
|
20 | (55 | ) | (35 | ) | 60 | 42 | 102 | 4 | (39 | ) | (35 | ) | |||||||||||||||||||||||
|
Money
market
|
271 | (1,086 | ) | (815 | ) | 208 | (8,589 | ) | (8,381 | ) | (90 | ) | (9,387 | ) | (9,477 | ) | ||||||||||||||||||||
|
Certificates
|
1,697 | (5,265 | ) | (3,568 | ) | 3,351 | (25,783 | ) | (22,432 | ) | 141 | (3,635 | ) | (3,494 | ) | |||||||||||||||||||||
|
FHLB
advances
|
(538 | ) | (4,188 | ) | (4,726 | ) | (4,606 | ) | (14,591 | ) | (19,197 | ) | (23,533 | ) | (4,082 | ) | (27,615 | ) | ||||||||||||||||||
|
Other
borrowings
|
— | (616 | ) | (616 | ) | 12,920 | (1,253 | ) | 11,667 | 13,820 | (833 | ) | 12,987 | |||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,440 | (11,462 | ) | (10,022 | ) | 11,898 | (52,392 | ) | (40,494 | ) | (8,856 | ) | (19,616 | ) | (28,472 | ) | ||||||||||||||||||||
|
Net
change in net interest and dividend income
|
$ | (925 | ) | $ | 4,561 | $ | 3,636 | $ | 7,426 | $ | 35,048 | $ | 42,474 | $ | 5,540 | $ | 22,188 | $ | 27,728 | |||||||||||||||||
Comparison
of Results of Operations for the Three Months Ended December 31, 2009 and
2008
Net
income for the quarter ended December 31, 2009 was $21.0 million compared to
$15.9 million for the same period in the prior fiscal year. The $5.1
million increase in net income between periods was primarily a result of a
decrease in interest expense of $10.1 million and an increase in other income of
$6.5 million, partially offset by a decrease in interest income of $6.4 million,
an increase in the provision for loan losses of $2.6 million and an increase in
income tax expense of $1.8 million.
Interest and
Dividend Income. Total interest
and dividend income for the current quarter was $98.9 million compared to $105.3
million for the prior year quarter. The $6.4 million decrease was
primarily a result of decreases in interest income on MBS of $5.6 million and
loans receivable of $2.2 million, partially offset by an increase in interest
income on investment securities of $1.2 million.
Interest
income on loans receivable for the current quarter was $74.5 million compared to
$76.7 million for the prior year quarter. The $2.2 million decrease
in interest income was primarily a result of a decrease of 29 basis points in
the weighted average yield to 5.37% for the current quarter, partially offset by
a $131.7 million increase in the average balance of the
portfolio. The decrease in the weighted average yield was due to
purchases and originations at market rates which were lower than the existing
portfolio, a significant amount of loan modifications and refinances between
periods, partially offset by an increase in deferred fee amortization as a
result of prepayments, modifications, and refinances. The increase in
the average balance was due to originations and loan purchases between
periods.
64
Interest
income on MBS for the current quarter was $20.8 million compared to $26.4
million for the prior year quarter. The $5.6 million decrease was a
result of a $313.3 million decrease in the average balance and a decrease of 40
basis points in the weighted average yield to 4.40% for the current
quarter. The decrease in the average balance of the portfolio was due
to principal repayments which were not replaced. The weighted average
yield decreased between the two periods due to an increase of prepayments on MBS
with yields higher than the existing portfolio and, to a lesser extent,
purchases of MBS at a lower average yield than the existing portfolio between
the two periods, and adjustable-rate securities repricing to lower market
rates.
Interest
income on investment securities for the current quarter was $2.6 million
compared to $1.3 million for the prior year quarter. The $1.3 million
increase was primarily a result of a $388.6 million increase in the average
balance, partially offset by a decrease in the average yield of 194 basis points
to 1.95% for the current quarter. The average balance increased due
to the purchase of $621.1 million of investment securities between periods,
partially offset by calls and maturities of $73.4 million. The
average yield decreased due to purchases at yields lower than the overall
portfolio yield.
Interest
Expense. Interest expense
decreased $10.1 million to $54.0 million for the current quarter from $64.1
million for the prior year quarter. The decrease in interest expense
was primarily due to a decrease of $4.7 million in interest expense on both FHLB
advances and deposits.
Interest
expense on FHLB advances for the current quarter was $24.8 million compared to
$29.5 million for the prior year quarter. The $4.7 million decrease
in interest expense on FHLB advances was a result of the refinance of $875.0
million of FHLB advances during the second and third quarters of fiscal year
2009 and, to a lesser extent, a decrease in the average balance of $84.8 million
due to maturing advances that were not renewed.
Interest
expense on deposits for the current quarter was $22.1 million compared to $26.8
million for the prior year quarter. The $4.7 million decrease in
interest expense on deposits was due to a decrease in the rates on the entire
deposit portfolio, primarily the certificates of deposit and money market
portfolios, due to the portfolios repricing to lower market
rates. The average rate paid on the deposit portfolio decreased 64
basis points between the two periods, from 2.59% at December 31, 2008 to 1.95%
at December 31, 2009. The decrease in interest expense was partially offset by a
$322.8 million increase in the average balance of the deposit portfolio,
particularly the certificate of deposit and money market
portfolios.
Provision for
Loan Losses. Capitol Federal
Savings Bank recorded a provision for loan losses of $3.1 million during the
current quarter, compared to a provision of $549 thousand in the quarter ended
December 31, 2008. The $3.1 million provision for loan losses
primarily reflects increases in the level of certain qualitative factors in our
general valuation allowance model to account for lingering negative economic
conditions. See “– Critical Accounting Policies – Allowance for Loan
Losses” and “Business – Asset Quality – Loans and REO.”
Other Income and
Expense. Total other
income was $13.1 million for the current quarter compared to $6.6 million for
the prior year quarter. The $6.5 million increase was due primarily
to a gain on the sale of trading MBS of $6.5 million. As previously
discussed, the trading MBS were acquired in conjunction with the loan swap
transaction during the current quarter.
Total
other expenses for the current quarter were $22.7 million for the current
quarter, compared to $22.2 million in the prior quarter. The slight
increase was due primarily to an increase in federal insurance premium of $1.6
million, partially offset by a decrease in other expense, net of $864 thousand
as a result of mortgage servicing activity and net REO
operations. The increase in federal insurance premium was a result of
an increase in the regular quarterly deposit insurance premiums
Income Tax
Expense. Income tax expense for the current quarter was $11.1
million compared to $9.3 million for the prior year quarter. The $1.8
million increase was due to an increase in earnings between periods, partially
offset by a decrease in the effective tax rate between periods. The
effective tax rate for the quarter ended December 31, 2009 was 34.7%, compared
to 36.9% for the prior year quarter. The difference in the effective tax
rate between periods was primarily a result of a decrease in nondeductible
expenses associated with the employee stock ownership plan and a reduction of
unrecognized tax benefits due to the lapse of the statute of limitations during
the current quarter.
65
Comparison
of Results of Operations for the Years Ended September 30, 2009 and
2008
For
fiscal year 2009, CFF recognized net income of $66.3 million compared to net
income of $51.0 million in fiscal year 2008. The $15.3 million
increase in net income was primarily a result of a $40.5 million decrease in
interest expense, partially offset by an $11.6 million increase in other
expenses, a $9.7 million increase in income tax expense, and a $4.3 million
increase in provision for loan loss. The net interest margin for
fiscal year 2009 was 2.20% compared to 1.75% for fiscal year
2008. The 45 basis point increase in the net interest margin was
primarily a result of a decrease in the weighted average rate on
interest-bearing liabilities.
Interest and
Dividend Income. Total interest
and dividend income for fiscal year 2009 was $412.8 million compared to $410.8
million for fiscal year 2008. The $2.0 million increase was a result
of a $9.5 million increase in interest income on MBS and a $3.8 million increase
in interest income on loans receivable, partially offset by a $4.4 million
decrease in interest income on investment securities, a $3.6 million decrease in
dividends on FHLB stock and a $3.4 million decrease in interest income on cash
and cash equivalents.
Interest
income on loans receivable in fiscal year 2009 was $305.8 million compared to
$302.0 million in fiscal year 2008. The $3.8 million increase in loan
interest income was a result of a $189.0 million increase in the average balance
of the loan portfolio between the two periods, partially offset by a decrease of
12 basis points in the weighted average yield of the portfolio to 5.56% for the
current fiscal year. The increase in the average balance was due to
originations and loan purchases during fiscal year 2009. The decrease in the
weighted average yield was due to purchases and originations at market rates
which were lower than the existing portfolio, loan modifications and refinances
during fiscal year 2009, and the home equity loan portfolio repricing to lower
market interest rates, partially offset by an increase in deferred fee
amortization as a result of prepayments, modifications and
refinances.
Interest
income on MBS in fiscal year 2009 was $97.9 million compared to $88.4 million in
fiscal year 2008. The $9.5 million increase in interest income was
primarily due to an increase of $222.5 million in the average balance, slightly
offset by a 4 basis point decrease in the weighted average portfolio yield to
4.64% for the current fiscal year. The increase in the average
portfolio balance was a result of purchases. The funds for the
purchases came from maturities and calls of investment securities and from new
borrowings in fiscal year 2008.
Interest
income on investment securities in fiscal year 2009 was $5.5 million compared to
$9.9 million in fiscal year 2008. The $4.4 million decrease in interest income
was a result of a 168 basis point decrease in the weighted average portfolio
yield to 2.41% for fiscal year 2009 and, to a lesser extent, a decrease of $12.7
million in the average balance of the portfolio. The decrease in the
weighted average yield of the portfolio was attributed to maturities and calls
of securities with weighted average yields greater than the remaining portfolio,
and also due to reinvestments made at lower market yields than the overall
portfolio yield. The decrease in the average balance was a result of
the timing of calls, maturities and security purchases during fiscal year
2009.
Dividends
on FHLB stock in fiscal year 2009 were $3.3 million compared to $6.9 million in
fiscal year 2008. The $3.6 million decrease in dividend income was
due primarily to a 278 basis point decrease in the average yield to 2.58% for
fiscal year 2009. The dividend rate on FHLB stock correlates to the
federal funds rate, which decreased during fiscal year 2009.
Interest
income on cash and cash equivalents in fiscal year 2009 was $201 thousand
compared to $3.6 million in fiscal year 2008. The $3.4 million
decrease was due to a 283 basis point decrease in the weighted average yield due
to a decrease in short-term interest rates between the two periods, and a
decrease in the average balance of $40.3 million. The decrease in the
average balance was a result of cash being utilized to purchase MBS and
investment securities.
Interest
Expense. Total interest expense for fiscal year 2009 was
$236.1 million, compared to $276.6 million in fiscal year 2008. The
$40.5 million decrease in interest expense was due to a decrease in interest
expense on deposits of $32.9 million and a decrease in interest expense on FHLB
advances of $19.2 million, partially offset by an increase in interest expense
on other borrowings of $11.6 million.
Interest
expense on deposits in fiscal year 2009 was $100.5 million compared to $133.4
million in fiscal year 2008. The $32.9 million decrease in interest expense was
primarily a result of a decrease in the average rate paid on the certificate of
deposit, money market and savings portfolios due to the portfolios repricing to
lower market rates. The average rate paid on the deposit portfolio
decreased 89 basis points to 2.48% for fiscal year 2009.
Interest
expense on FHLB advances in fiscal year 2009 was $106.5 million compared to
$125.7 million in fiscal year 2008. The $19.2 million decrease in
interest expense was a result of the termination and maturity of the interest
rate swap agreements during fiscal year 2008, a decrease in the average balance
of FHLB advances and a decrease in the interest rate due to the refinancing of
$875.0 million of advances during the second and third quarters of fiscal year
2009. The decrease in the average balance was a result of maturing
advances that were replaced with repurchase agreements during fiscal year
2008.
66
Interest
expense on other borrowings was $29.1 million in fiscal year 2009 compared to
$17.5 million in fiscal year 2008. The $11.6 million increase was due
to an increase in the average balance as a result of Capitol Federal Savings
Bank entering into $660.0 million of repurchase agreements during fiscal year
2008. The proceeds from the repurchase agreements were used to
purchase MBS and to repay maturing FHLB advances.
Provision for
Loan Losses. During fiscal year 2009, Capitol Federal Savings
Bank experienced an increase in delinquencies, non-performing loans, net loan
charge-offs, and losses on foreclosed property transactions, primarily on
purchased loans, as a result of the decline in housing and real estate markets,
as well as the ongoing economic recession. As a result of these
conditions, Capitol Federal Savings Bank recorded a provision for loan losses of
$6.4 million in fiscal year 2009 compared to a provision of $2.1 million in
fiscal year 2008. The $4.3 million increase in the provision
primarily reflects an increase in the specific valuation allowances on purchased
loans, an increase in the balance of non-performing purchased loans, an increase
in the general valuation allowances primarily related to purchased loans 30 to
89 days delinquent, and an increase in charge-offs, also primarily related to
purchased loans. See “– Critical Accounting Policies – Allowance for
Loan Losses” and “Business – Asset Quality.”
Other Income and
Expense. Total other
income for fiscal year 2009 was $28.6 million compared to $30.0 million in
fiscal year 2008. The $1.4 million decrease in other income was a
result of a $2.0 million decrease in other income, net and a $1.2 million
decrease in income from bank owned life insurance as a result of a decrease in
the net crediting rate due to a decrease in market interest rates, partially
offset by an increase in gains on sale of loans held for sale, net of $1.3
million. The decrease in other income, net was due primarily to the
redemption of shares received in the Visa, Inc. initial public offering of $992
thousand in fiscal year 2008 and interest received on a tax refund of $235
thousand also in fiscal year 2008, both with no corresponding item in fiscal
year 2009.
Total
other expenses for fiscal year 2009 was $93.6 million compared to $82.0 million
for fiscal year 2008. The $11.6 million increase was due to a $6.8
million increase in federal insurance premiums, a $2.0 million increase in
advertising expense and a $2.0 million increase in mortgage servicing activity,
net. The increase in federal insurance premiums was a result of the
FDIC special assessment and increases in the regular quarterly deposit insurance
premiums. The increase in advertising expense was due to expense
associated with Capitol Federal Savings Bank’s new debit card rewards program
and to advertising campaigns undertaken to inform customers of Capitol Federal
Savings Bank’s safety and soundness in response to current economic
conditions. The increase in mortgage servicing activity, net was due
to mortgage servicing asset impairments and valuation allowances due to an
increase in prepayment speeds.
Income Tax
Expense. Income tax
expense for fiscal year 2009 was $38.9 million compared to $29.2 million for
fiscal year 2008. The increase in income tax expense was primarily
due to an increase in earnings compared to fiscal year 2008. The
effective tax rate was 37.0% for fiscal year 2009, compared to 36.4% for fiscal
year 2008. The difference in the effective tax rate between the two
fiscal years was primarily a result of a decrease in nontaxable income from bank
owned life insurance and an increase in pre-tax income which reduced the
effective tax rate benefit of nontaxable income.
Comparison
of Results of Operations for the Years Ended September 30, 2008 and
2007
For
fiscal year 2008, CFF recognized net income of $51.0 million compared to net
income of $32.3 million in fiscal year 2007. The $18.7 million
increase in net income was primarily a result of a $28.5 million decrease in
interest expense and a $6.0 million increase in other income, partially offset
by an $8.6 million increase in income tax expense, a $4.3 million increase in
other expenses, and a $2.3 million increase in the provision for loan
loss.
Total
interest and dividend income in fiscal year 2008 was $410.8 million compared to
$411.6 million in fiscal year 2007. Total interest expense in fiscal
year 2008 was $276.6 million compared to $305.1 million in fiscal year
2007. Net interest margin, before provision for loan losses, was
$134.2 million compared to $106.4 million in fiscal year 2007. As a
result of the flat or inverted yield curve during fiscal year 2007 and the
relatively short term to repricing of our liabilities compared to our assets,
Capitol Federal Savings Bank experienced net interest margin compression during
fiscal year 2007. The steeper, more normalized yield curve
during fiscal year 2008 benefited the net interest margin, as short-term
liabilities repriced to lower interest rates while cash flows from the mortgage
loan and MBS portfolios were reinvested at rates comparable to that of the
existing portfolio.
67
Interest and
Dividend Income. Interest income on loans receivable during
fiscal year 2008 was $302.0 million compared to $294.7 million in fiscal year
2007. The $7.3 million increase in loan interest income was a result
of a $71.4 million increase in the average balance of the loan portfolio between
the two periods and an increase of 6 basis points in the weighted average yield
of the loan portfolio to 5.68% in fiscal year 2008. The increase in
the weighted average yield can be attributed primarily to loans originated
throughout the year at rates higher than the overall portfolio
rate.
Interest
income on MBS in fiscal year 2008 was $88.4 million compared to $68.8 million in
fiscal year 2007. The $19.6 million increase in interest income was
due to an increase of $282.3 million in the average balance of the portfolio and
an increase of 40 basis points in the average yield to 4.68% in fiscal year
2008. The increase in the average portfolio balance was due primarily
to the utilization of cash available for investment and funds from borrowings to
purchase MBS rather than other investment securities due to the more favorable
yields available on MBS. The weighted average yield of the MBS
portfolio increased between the two periods due to the purchase of MBS with
yields higher than the existing portfolio, the maturity and repayment of MBS
with lower yields, and adjustable-rate MBS resetting to higher
coupons.
Interest
income on investment securities in fiscal year 2008 was $9.9 million compared to
$30.8 million in fiscal year 2007. The $20.9 million decrease in interest income
was primarily a result of a decrease of $414.4 million in the average balance of
the portfolio and, to a lesser extent, a 61 basis point decrease in the weighted
average portfolio yield to 4.09% in fiscal year 2008. The decrease in
the average balance was a result of maturities and calls which were not
reinvested into investment securities and were used, in part, to fund maturing
FHLB advances and purchase higher yielding MBS during fiscal year 2008. The
decrease in the weighted average yield of the portfolio was attributed to
purchases with lower yields than the existing portfolio and maturities and calls
of securities with higher yields.
Dividends
on FHLB stock in fiscal year 2008 were $6.9 million compared to $10.0 million in
fiscal year 2007. The $3.1 million decrease in dividend income was
due to a 117 basis point decrease in the average yield to 5.36% in fiscal year
2008 and a $24.3 million decrease in the average balance. The
dividend rate on FHLB stock correlates to the federal funds rate, which also
decreased during fiscal year 2008. The decrease in the average
balance was due to the redemption of shares as the required number of shares
held is based primarily upon the balance of outstanding FHLB advances, which
decreased during fiscal year 2008.
Interest
income on cash and cash equivalents in fiscal year 2008 was $3.6 million
compared to $7.2 million in fiscal year 2007. The $3.6 million
decrease was a result of a 200 basis point decrease in the average yield to
3.11% in fiscal year 2008 due to a decrease in short-term market interest rates,
and a decrease of $26.2 million in the average balance as cash was utilized to
purchase MBS and fund maturing FHLB advances.
Interest
Expense. Interest expense on deposits in fiscal year 2008 was
$133.4 million compared to $147.3 million in fiscal year 2007. The $13.9 million
decrease in interest expense was primarily a result of a decrease in the rate on
the money market, certificate and savings portfolios due to the portfolios
repricing to lower market rates. During fiscal year 2007, Capitol
Federal Savings Bank increased the rates offered on its certificate of deposit
portfolio, with an emphasis on the 19 month to 36 month maturity category, in
order to remain competitive. As certificate of deposits matured
during fiscal year 2008, the amounts retained rolled into lower rate certificate
products.
Interest
expense on FHLB advances in fiscal year 2008 was $125.7 million compared to
$153.4 million in fiscal year 2007. The $27.7 million decrease in
interest expense was primarily a result of a decrease of $456.7 million in the
average balance due to maturing advances which were not renewed in their
entirety and, to a lesser extent, a decrease of 14 basis points in the average
rate to 4.89% in fiscal year 2008 as a result of the termination of the interest
rate swaps. During the quarter ended December 31, 2007, interest rate
swaps with a notional amount of $575.0 million were terminated. The
remaining interest rate swap matured in May 2008. During fiscal year
2008, interest expense related to the interest rate swaps was $2.3 million,
compared to $13.6 million in fiscal year 2007.
Interest
expense on other borrowings was $17.5 million compared to $4.5 million in the
same period in the prior year. The $13.0 million increase was due to
an increase in the average balance of other borrowings due to Capitol Federal
Savings Bank entering into $660.0 million of repurchase agreements during fiscal
year 2008.
68
Provision for
Loan Losses. During fiscal
year 2008, Capitol Federal Savings Bank recorded a provision for loan losses of
$2.1 million compared to a recovery for loan losses of $225 thousand in fiscal
year 2007. Based on our evaluation of the issues regarding the real
estate markets, the overall economic environment, and the increase in and
composition of our delinquencies and non-performing loans, management determined
a provision for loan losses was prudent and warranted in fiscal year
2008.
Other Income and
Expense. Total other
income increased $6.0 million to $30.0 million during fiscal year 2008 compared
to $24.0 million for the fiscal year 2007. The increase in other
income was due primarily to increases in bank owned life insurance income,
retail fees and other income, net. Bank owned life insurance income
was $2.3 million in fiscal year 2008 compared to $27 thousand in fiscal year
2007 as Capitol Federal Savings Bank’s bank owned life insurance purchase was
made during the fourth quarter of fiscal year 2007. Retail fees
increased $1.7 million due primarily to an increase in fees received on ATM and
Visa check cards from increased volume and an increase in the interchange rate
received on point-of-sale transactions. Other income, net increased
$1.3 million due primarily to the redemption of shares received in the Visa,
Inc. initial public offering. Total proceeds from the Visa redemption
reported in other income, net were $992 thousand, offset by a liability accrual
of $594 thousand, reported in other expense, net related to litigation involving
Visa, Inc. for net proceeds of $398 thousand.
Total
other expenses increased $4.3 million to $82.0 million during fiscal year 2008
compared to $77.7 million in fiscal year 2007. The increase was due
primarily to an increase in salaries and employee benefits of $2.2 million and
an increase in other expense, net of $2.4 million. The increase in
salaries and employee benefits was due to an increase in costs associated with
the short-term performance plan due to actual corporate performance exceeding
targeted performance levels, salary increases, and the lack of capitalization of
payroll expense in fiscal year 2008, as salary costs related to the core
conversion were capitalized in fiscal year 2007. The increase in
other expense, net was due primarily to a liability accrual of $594 thousand
related to litigation involving Visa, Inc., as mentioned above, $420 thousand
related to real-estate owned write-downs and a decrease in fiscal year 2007
miscellaneous expenses of approximately $1.0 million.
Income Tax
Expense. Income tax
expense in fiscal year 2008 was $29.2 million compared to $20.6 million for
fiscal year 2007. The increase in income tax expense was due to an
increase in income, partially offset by a decrease in the effective tax rate for
the fiscal year to 36.4%, compared to 39.0% for prior fiscal year
2007. The decrease in the effective tax rate between periods was a
result of an increase in nontaxable income from municipal securities and bank
owned life insurance, along with an increase in pre-tax
income.
Liquidity
and Capital Resources
Liquidity
refers to our ability to generate sufficient cash to fund ongoing operations, to
pay maturing certificates of deposit and other deposit withdrawals, and to fund
loan commitments. Liquidity management is both a daily and long-term
function of our business management. Capitol Federal Savings Bank’s
most available liquid assets are represented by cash and cash equivalents, AFS
MBS and investment securities, and short-term investment
securities. Capitol Federal Savings Bank’s primary sources of funds
are deposits, FHLB advances, other borrowings, repayments on and maturities of
outstanding loans and MBS, other short-term investments, and funds provided by
operations. Capitol Federal Savings Bank’s borrowings primarily have
been used to invest in U.S. government sponsored enterprise securities in an
effort to safely improve the earnings of Capitol Federal Savings Bank while
maintaining capital ratios in excess of regulatory standards for
well-capitalized financial institutions. In addition, Capitol Federal
Savings Bank’s focus on managing risk has provided additional liquidity capacity
by remaining below FHLB borrowing limits and by increasing the balance of MBS
and investment securities available as collateral for
borrowings.
While
scheduled payments from the amortization of loans and MBS and payments on
short-term investments are relatively predictable sources of funds, deposit
flows, prepayments on loans and MBS, and calls of investment securities are
greatly influenced by general interest rates, economic conditions and
competition, and are less predictable sources of funds. To the extent
possible, Capitol Federal Savings Bank manages the cash flows of its loan and
deposit portfolios by the rates it offers customers.
At
December 31, 2009, cash and cash equivalents totaled $105.1 million, an increase
of $63.9 million from September 30, 2009. The increase was related to
proceeds from the sale of trading MBS received in the loan swap transaction that
had not been fully reinvested at the end of the quarter.
69
At
September 30, 2009, cash and cash equivalents totaled $41.2 million, a decrease
of $46.0 million from September 30, 2008. In fiscal year 2009, yields
on cash were significantly lower than in fiscal year 2008 as a result of a
decline in short-term market rates. During fiscal year 2009,
management used excess cash to purchase MBS and investment securities rather
than maintaining a cash balance.
During
the first quarter of fiscal year 2010, loan originations and purchases, net of
principal repayments was $18.2 million, compared to $138.1 million in the prior
year quarter. Loan originations and purchases were funded by cash
flows from operations, as there were no additional borrowings during the quarter
and deposits remained virtually unchanged.
During
fiscal year 2009, loan originations and purchases, net of principal repayments
was $396.9 million, compared to $40.8 million in the prior fiscal
year. The increase in loan originations and purchases, net of
principal repayments, was funded by an increase of deposits. The
increase in deposits reflected the largest change in financing cash flows during
fiscal year 2009, as there were no additional FHLB advances or borrowings in
fiscal year 2009. Capitol Federal Savings Bank paid competitive rates
for its deposits while not paying-up in rates to grow its deposit base beyond
Capitol Federal Savings Bank’s need for funding. The increase in
deposits is believed to have been a result of the economic
environment. Households increased their personal savings rate and
chose to place those funds in deposit products in well-capitalized financial
institutions like Capitol Federal Savings Bank.
During
the first quarter of fiscal year 2010, Capitol Federal Savings Bank received
principal payments on MBS of $112.4 million and proceeds from the sale of
trading MBS received in the loan swap transaction of $199.1
million. These cash inflows were largely reinvested in investment
securities and used to fund loan purchases. The investment securities
purchased have terms shorter than that of the mortgage loans
swapped. If market rates were to rise, the short-term nature of these
securities may allow management the opportunity to reinvest the maturing funds
at a yield higher than current yields.
During
fiscal year 2009, Capitol Federal Savings Bank received principal payments on
MBS of $495.0 million and $97.0 million of investment securities were
called. These cash inflows were largely reinvested in their
respective portfolios, with the exception of the MBS principal repayments, some
of which were reinvested in short-term and callable investment securities.
If market rates were to rise, the short-term nature of these securities may
allow management the opportunity to reinvest the maturing funds at a yield
higher than current yields.
At
December 31, 2009, $1.45 billion of the $2.62 billion in certificates of deposit
were scheduled to mature within one year. Included in the $1.45
billion are $100.1 million in public unit deposits, which have a weighted
average maturity of less than one year. At that date, Capitol Federal
Savings Bank had pledged securities with a fair value of $158.2 million as
collateral for the public unit deposits. The securities pledged as
collateral for public unit deposits are held under joint custody receipt by the
FHLB and generally will be released upon deposit maturity. Based on
our deposit retention experience and our pricing strategy, we anticipate the
majority of the maturing retail deposits will renew, although no assurance can
be given in this regard. Management continuously monitors the
wholesale deposit market for opportunities to obtain brokered and public unit
deposits at attractive rates.
Capitol
Federal Savings Bank utilizes FHLB advances to provide funds for lending and
investment activities. FHLB lending guidelines set borrowing limits
as part of their underwriting standards. At December 31, 2009,
Capitol Federal Savings Bank’s ratio of the face amount of advances to total
assets, as reported to the Office of Thrift Supervision, was 29%. Our
advances are secured by a blanket pledge of our loan portfolio, as collateral,
supported by quarterly reporting to the FHLB. Advances in excess of
40% of total assets, but not exceeding 55% of total assets, may be approved by
the president of the FHLB based upon a review of documentation supporting the
use of the advances. Currently, the blanket pledge is sufficient
collateral for the FHLB advances. It is possible that increases in
our borrowings or decreases in our loan portfolio could require Capitol Federal
Savings Bank to pledge securities as collateral on the FHLB
advances. Capitol Federal Savings Bank’s policy allows borrowing from
the FHLB of up to 55% of total assets. Capitol Federal Savings Bank
relies on the FHLB advances as a primary source of borrowings. There
were no new FHLB advances during the quarter. See “Notes to
Consolidated Financial Statements - Note 7 – Borrowed
Funds.”
70
Capitol
Federal Savings Bank has access to and utilizes other sources for liquidity,
such as secondary market repurchase agreements, brokered deposits, and public
unit deposits. Capitol Federal Savings Bank’s policy allows for
repurchase agreements up to 15% of total assets, brokered deposits up to 15% of
total deposits, and public unit deposits up to 10% of total deposits. At
December 31, 2009, $1.04 billion of securities were eligible but unused for
collateral. At December 31, 2009, Capitol Federal Savings Bank had
repurchase agreements of $660.0 million, or approximately 8% of total assets,
and public unit deposits of $100.1 million, or 1% of total assets. At
December 31, 2009, Capitol Federal Savings Bank had pledged securities with an
estimated fair value of $765.3 million as collateral for repurchase agreements.
At the maturity date, the securities pledged for the repurchase agreements will
be delivered back to Capitol Federal Saving Bank. There were no additional
repurchase agreements during the quarter. Capitol Federal Savings Bank may
enter into additional repurchase agreements as management deems appropriate. The
agreements are treated as secured borrowings and are reported as a liability of
CFF on a consolidated basis. See “Notes to Consolidated Financial
Statements - Note 7 – Borrowed Funds.”
In 2004,
CFF issued $53.6 million in Junior Subordinated Deferrable Interest Debentures
in connection with a trust preferred securities offering. CFF
received, net, $52.0 million from the issuance of the debentures and an
investment of $1.6 million in Capitol Federal Financial Trust I. CFF
did not down-stream the proceeds to be used by Capitol Federal Savings Bank for
Tier 1 capital because Capitol Federal Savings Bank already exceeded all
regulatory requirements to be a well-capitalized
institution. Instead, CFF deposited the proceeds into certificate
accounts at Capitol Federal Savings Bank to be used to further CFF’s general
corporate and capital management strategies which included the payment of
dividends.
During
the first quarter of fiscal year 2010, CFF paid cash dividends of $16.7 million,
or $0.79 per share. The $0.79 per share consisted of one quarterly
dividend of $0.50 per share and a $0.29 special dividend per share related to
fiscal year 2009 earnings, in accordance with CFF’s dividend
policy. During fiscal year 2009, CFF paid cash dividends of $44.1
million, or $2.11 per share. The $2.11 per share consisted of four
quarterly dividends of $0.50 per share and a $0.11 special dividend per share
related to net income for fiscal year 2008. Dividend payments
depend upon a number of factors including CFF’s financial condition and results
of operations, Capitol Federal Savings Bank’s regulatory capital requirements,
regulatory limitations on Capitol Federal Savings Bank’s ability to make capital
distributions to CFF and the amount of cash at the holding
company. See “Dividend Policy” and “Supervision and
Regulation.”
Due to
recent bank failures, in an effort to replenish the Deposit Insurance Fund, the
FDIC required insured institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of calendar year 2009 and for all
of calendar year 2010, 2011 and 2012 during the quarter ended December 31,
2009. The cash requirement for the prepaid FDIC assessments was $27.5
million.
Off-Balance
Sheet Arrangements, Commitments and Contractual Obligations
CFF, in
the normal course of business, makes commitments to buy or sell assets or to
incur or fund liabilities. Commitments may include, but are not
limited to:
| ● |
the
origination, purchase, or sale of loans;
|
|
| ● |
the
purchase or sale of investments and MBS;
|
|
| ● |
extensions
of credit on home equity loans and construction
loans;
|
|
| ● |
terms
and conditions of operating leases; and
|
|
| ● |
funding
withdrawals of certificate of deposits at
maturity.
|
In
addition to its commitments of the types described above, at December 31, 2009
CFF’s off-balance sheet arrangements included its $1.6 million interest in the
Capitol Federal Financial Trust I, which in 2004 issued $52.0 million of
variable rate cumulative trust preferred securities. In connection
therewith, CFF issued $53.6 million of debentures to the
trust.
The
following table summarizes our contractual obligations and other material
commitments as of December 31, 2009 (unaudited). The debentures are
callable at any time, in whole or in part.
71
|
Maturity
Range
|
||||||||||||||||||||
|
Less
than
1
year
|
1
- 3
years
|
3
- 5
years
|
More
than
5
years
|
|||||||||||||||||
|
Total
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Operating
leases
|
$
|
12,809
|
$
|
1,170
|
$
|
1,860
|
$
|
1,521
|
$
|
8,258
|
||||||||||
|
Certificates
of Deposit
|
$
|
2,622,119
|
$
|
1,446,540
|
$
|
1,013,342
|
$
|
160,978
|
$
|
1,259
|
||||||||||
|
Weighted average rate
|
2.83
|
%
|
2.61
|
%
|
3.10
|
%
|
3.10
|
%
|
3.52
|
%
|
||||||||||
|
FHLB
Advances
|
$
|
2,426,000
|
$
|
550,000
|
$
|
526,000
|
$
|
875,000
|
$
|
475,000
|
||||||||||
|
Weighted average rate
|
3.79
|
%
|
4.57
|
%
|
3.58
|
%
|
3.49
|
%
|
3.67
|
%
|
||||||||||
|
Repurchase
Agreements
|
$
|
660,000
|
$
|
145,000
|
$
|
250,000
|
$
|
245,000
|
$
|
20,000
|
||||||||||
|
Weighted average rate
|
3.97
|
%
|
3.87
|
%
|
3.99
|
%
|
3.97
|
%
|
4.45
|
%
|
||||||||||
|
Debentures
|
$
|
53,609
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
53,609
|
||||||||||
|
Weighted average rate
|
3.03
|
%
|
—
|
—
|
—
|
3.03
|
%
|
|||||||||||||
|
Commitments
to originate and
|
||||||||||||||||||||
|
Purchase first mortgage loans
|
$
|
104,214
|
$
|
104,214
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
|
Weighted
average rate
|
4.87
|
%
|
4.87
|
%
|
—
|
—
|
—
|
|||||||||||||
|
Commitments
to fund unused
|
||||||||||||||||||||
|
home equity lines of credit
|
$
|
270,069
|
$
|
270,069
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
|
Weighted
average rate
|
4.47
|
%
|
4.47
|
%
|
—
|
—
|
—
|
|||||||||||||
|
Unadvanced
portion of
|
||||||||||||||||||||
|
construction loans
|
$
|
17,089
|
$
|
17,089
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
|
Weighted
average rate
|
5.15
|
%
|
5.15
|
%
|
—
|
—
|
—
|
|||||||||||||
Excluded
from the table above are income tax liabilities of $101 thousand related to
uncertain income tax positions. The amounts are excluded as
management is unable to estimate the period of cash settlement as it is
contingent on the statute of limitations expiring without examination by the
respective taxing authority.
A
percentage of commitments to originate mortgage loans are expected to expire
unfunded, so the amounts reflected in the table above are not necessarily
indicative of future liquidity requirements. Additionally, Capitol
Federal Savings Bank is not obligated to honor commitments to fund unused home
equity lines of credit if a customer is delinquent or otherwise in violation of
the loan agreement.
We
anticipate we will continue to have sufficient funds, through repayments and
maturities of loans and securities, deposits and borrowings, to meet our current
commitments.
Contingencies
In the
normal course of business, CFF and its subsidiary are named defendants in
various lawsuits and counter claims. In the opinion of management,
after consultation with legal counsel, none of the currently pending suits are
expected to have a materially adverse effect on CFF’s consolidated financial
statements for the quarter ended December 31, 2009 or future
periods.
Regulatory
Capital
Consistent
with management’s goals to operate a sound and profitable financial
organization, we actively seek to maintain a well capitalized status in
accordance with regulatory standards. As of December 31, 2009,
Capitol Federal Savings Bank exceeded all capital requirements of the Office of
Thrift Supervision. The following table presents Capitol Federal
Savings Bank’s regulatory capital ratios at December 31, 2009 based upon
regulatory guidelines.
72
|
Regulatory
|
||||||||
|
Requirement
|
||||||||
|
Bank
Ratios
|
For
Well-
|
|||||||
|
Capitalized
Status
|
||||||||
|
Tangible
equity
|
10.1 | % | N/A | |||||
|
Tier
1 (core) capital
|
10.1 | % | 5.0 | % | ||||
|
Tier
1 (core) risk-based capital
|
23.8 | % | 6.0 | % | ||||
|
Total
risk-based capital
|
24.0 | % | 10.0 | % | ||||
A
reconciliation of Capitol Federal Savings Bank’s equity under accounting
principles generally accepted in the United States of America (GAAP) to
regulatory capital amounts as of December 31, 2009 is as follows (dollars in
thousands):
|
Total
equity as reported under GAAP
|
$ | 876,290 | ||
|
Unrealized
gains losses on AFS securities
|
(30,875 | ) | ||
|
Other
|
(456 | ) | ||
|
Total
tangible and core capital
|
844,959 | |||
|
ALLL
(1)
|
8,180 | |||
|
Total
risk based capital
|
$ | 853,139 |
|
(1)
|
This
amount represents the general valuation allowances calculated using the
formula analysis. Specific valuation allowances are netted against
the related loan balance on the Thrift Financial Report and are therefore
not included in this amount. See “Critical Accounting Policies -
Allowance for Loan Losses” for additional
information.
|
BUSINESS OF CFF
Incorporated
in March 1999, CFF is a federally chartered mid-tier stock holding company
for Capitol Federal Savings Bank, a wholly-owned subsidiary of
CFF. CFF is majority-owned by Capitol Federal Savings Bank MHC, a
federally chartered mutual holding company. CFF’s common stock is
traded on the NASDAQ Global Select Market under the symbol
CFFN.
Capitol
Federal Savings Bank is the only operating subsidiary of CFF. Capitol
Federal Savings Bank is a federally-chartered and insured savings bank
headquartered in Topeka, Kansas. Capitol Federal Savings Bank is
examined and regulated by the Office of Thrift Supervision and its deposits are
insured up to applicable limits by the Deposit Insurance Fund, which is
administered by the Federal Deposit Insurance Corporation (FDIC). At
December 31, 2009, we had total assets of $8.37 billion, loans of $5.42 billion,
deposits of $4.23 billion and total equity of $942.0 million.
We have
been, and intend to continue to be, a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We attract retail deposits from the general public and invest
those funds primarily in permanent loans secured by first mortgages on
owner-occupied, one- to four-family residences. To a much lesser
extent, we also originate consumer loans, loans secured by first mortgages on
non-owner-occupied one- to four-family residences, multi-family and commercial
real estate loans and construction loans. While our primary business
is the origination of one- to four-family mortgage loans funded through retail
deposits, we also purchase whole one- to four-family mortgage loans from
correspondent lenders located within our market areas and select market areas in
Missouri and from nationwide lenders, and invest in certain MBS and investment
securities funded through retail deposits, advances from the FHLB and repurchase
agreements. We occasionally originate loans outside of our market
area, and the majority of the whole loans we purchase from nationwide lenders
are secured by properties located outside of our market areas.
Our
revenues are derived principally from interest on loans, MBS and investment
securities. Our primary sources of funds are retail deposits,
borrowings, repayments on and maturities of loans and MBS, calls and maturities
of investment securities, and funds generated by operations.
73
We offer
a variety of deposit accounts having a wide range of interest rates and terms,
which generally include savings accounts, money market accounts, interest
bearing and non-interest bearing checking accounts, and certificates of deposit
with terms ranging from 91 days to 96 months.
Our
executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603,
and our telephone number at that address is (785) 235-1341. Our
website address is www.capfed.com. Information on our website should
not be considered a part of this prospectus.
Market
Area and Competition
Our
corporate office is located in Topeka, Kansas. We currently have a
network of 45 branches located in nine counties throughout the state of Kansas
and two counties in Missouri. We primarily serve the metropolitan
areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and a
portion of the metropolitan area of greater Kansas City. In addition
to providing full service banking offices, we also provide our customers
telephone and internet banking capabilities.
Capitol
Federal Savings Bank ranked first in deposit market share in the state of Kansas
as reported in the FDIC “Summary of Deposits - Market Share Report” dated June
30, 2009. Deposit market share is measured by total deposits, without
consideration for type of deposit. We do not have commercial deposit accounts
because of our focus on retail deposits, while many of our competitors have both
commercial and retail deposits in their total deposit base. Some of
our competitors also offer products and services that we do not, such as trust
services and private banking. In recent years, Capitol Federal
Savings Bank has experienced a slight decrease in market share due to the
entrance of new competitors such as credit unions, newly chartered banks (de
novo institutions), and increased banking locations by established financial
institutions. Additionally, consumers have the ability to
utilize financial institutions without a brick-and-mortar presence in our market
area by way of online products and services. Management considers our
strong retail banking network and our reputation for financial strength and
customer service to be our major strengths in attracting and retaining customers
in our market areas.
Capitol
Federal Savings Bank is consistently one of the top one- to four-family lenders
with regard to loan volume in the state of Kansas. Through our strong
relationships with real estate agents and marketing efforts which reflect our
reputation and pricing, we attract mortgage loan business from walk-in
customers, customers that apply online, and existing
customers. Competition in originating one- to four-family
mortgage loans primarily comes 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
purchase one- to four-family conventional mortgage loans from correspondent
lenders located within our market areas and select market areas in Missouri, and
from nationwide lenders. At December 31, 2009 loans purchased
from nationwide lenders represented 13% of our total loan portfolio and were
secured by properties located in 47 of the continental United States and
Washington, D.C. At December 31, 2009, purchases from nationwide
lenders in the following states comprised greater than 5% of nationwide
purchased loans: Illinois 12%; Texas 8%; New York 7%; Florida 7%; and
Colorado 5%.
Capitol Federal Savings Bank has opened
two new branches in our Kansas City market area since the beginning of fiscal
year 2010, and will open a new branch in the Wichita market area in the second
quarter of 2010. Capitol Federal Savings Bank continues to consider
expansion opportunities in all its market areas.
Lending
Practices and Underwriting Standards
General. Capitol
Federal Savings Bank’s primary lending activity is the origination of loans and
the purchase of loans from a select group of correspondent
lenders. These loans are generally secured by first mortgages on
owner-occupied, one- to four-family residences in Capitol Federal Savings Bank’s
primary market areas and select market areas in Missouri. To a much lesser
extent, Capitol Federal Savings Bank also makes consumer loans, loans secured by
first mortgages on non-owner occupied one-to four-family residences,
construction loans secured by residential or commercial properties, and real
estate loans secured by multi-family dwellings and commercial real
estate. Additional lending volume has been generated by purchasing
whole one- to four-family conventional mortgage loans from nationwide
lenders. By purchasing loans from nationwide lenders, Capitol Federal
Savings Bank is able to attain some geographic diversification in its loan
portfolio, and help mitigate Capitol Federal Savings Bank’s interest rate risk
exposure as the purchased loans are predominately adjustable-rate or 15-year
fixed-rate loans. At the time these loans were purchased, they met
our underwriting standards. As a result of the continued elevated levels of
unemployment and the declines in real estate values in some of the states where
we have purchased loans, we have experienced an increase in non-performing
purchased loans. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Critical Accounting Policies –
Allowance for Loan Losses” and “– Asset Quality.” The loans purchased
during fiscal year 2009 had an average credit score of 745 at origination and a
weighted average loan to value ratio of 50%, based upon the loan balance at the
time of purchase and the lower of the purchase price or the appraisal at
origination. Capitol Federal Savings Bank purchased $37.6 million of loans from
nationwide lenders during the December 31, 2009 quarter, the majority of which
were adjustable rate. These loans had an average credit score of 725
at origination and a weighted average loan to value ratio of 46% based upon the
loan balance at the time of purchase and the lower of the purchase price or the
appraisal at origination. As of December 31, 2009, we had not
experienced any performance problems with the loans purchased during fiscal
years 2009 or 2010. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Financial Condition – Loans
Receivable.”
74
The
ability of financial institutions, including us, to originate or purchase large
dollar volumes of one- to four-family real estate loans may be substantially
reduced or restricted under certain economic and regulatory conditions, with a
resultant decrease in interest income from these assets. At December
31, 2009, our one- to four-family residential real estate loan portfolio totaled
$5.16 billion, which constituted 94.4% of our total loan portfolio and 61.6% of
our total assets. For a discussion of our interest rate risk
associated with loans see ”Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Quantitative and Qualitative
Disclosure about Market Risk.”
Loans
over $500 thousand must be underwritten by two of our highest class of
underwriters. Any loan greater than $750 thousand must be approved by
the ALCO and loans over $1.5 million must be approved by the board of
directors. For loans requiring ALCO and/or board of directors’
approval, lending management is responsible for presenting to ALCO and/or board
of directors information about the creditworthiness of the borrower and the
value of the subject property. Information pertaining to the
creditworthiness of the borrower generally consists of a summary of the
borrower’s credit history, employment stability, sources of income, assets, net
worth, and debt ratios. The value of the property must be supported
by an independent appraisal report prepared in accordance with our appraisal
policy. Loans over $500 thousand are priced above the standard
mortgage rate.
Under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the
maximum amount which we could have loaned to any one borrower and the borrower’s
related entities at December 31, 2009 was $127.0 million. Our largest
lending relationship to a single borrower or a group of related borrowers at
December 31, 2009 consisted of 17 multi-family real estate projects, two
single-family homes, and four commercial real estate projects located in Kansas,
Iowa, and Texas. Total commitments and loans outstanding to this
group of related borrowers was $47.8 million as of December 31,
2009. Most of the multi-family real estate loans qualify for the low
income housing tax credit program. We have over 30 years of
experience with this group of borrowers, who usually build and manage their own
properties. Each of the loans to this group of borrowers was current
and performing in accordance with repayment terms at December 31,
2009. See additional information under the heading “Multi-family and
Commercial Real Estate Lending.”
The
second largest lending relationship at December 31, 2009, consisted of nine
loans totaling $11.7 million. Five loans are secured by multi-family
real estate units and four are secured by one- to four-family real
estate. We have over 30 years of experience with the
borrowers. All units were built and are presently being managed by
the borrowers. Each of the loans to this group of borrowers was
current and performing in accordance with repayment terms at December 31,
2009.
One- to
Four-Family Residential Real Estate Lending. Capitol Federal
Savings Bank originates and services conventional mortgage loans, or loans not
insured or guaranteed by a government agency. Capitol Federal Savings
Bank also originates Federal Housing Administration (FHA) insured loan products
which are generally sold, along with the servicing of these
loans. New loans are originated through referrals from real estate
brokers and builders, our marketing efforts, and our existing and walk-in
customers. While Capitol Federal Savings Bank originates both
adjustable and fixed-rate loans, our ability to originate loans is dependent
upon customer demand for loans in our market areas. Demand is
affected by the local housing market, competition and the interest rate
environment. During the first quarter of fiscal year 2010, Capitol
Federal Savings Bank originated and refinanced $154.6 million of one- to
four-family fixed-rate mortgage loans and $14.9 million of one- to four-family
ARM loans. During fiscal years 2009 and 2008, Capitol Federal Savings
Bank originated and refinanced $961.5 million and $631.8 million of one- to
four-family fixed-rate mortgage loans, and $35.9 million and $77.7 million of
one- to four-family ARM loans, respectively.
75
Repayment. Capitol
Federal Savings Bank’s one- to four-family loans are primarily fully amortizing
fixed- or ARM loans with contractual maturities of up to 30 years, except for
interest-only ARM loans, which require only the payment of interest during the
interest-only period, all with payments due monthly. Our one- to
four-family loans are generally not assumable and do not contain prepayment
penalties. A due on sale clause, allowing Capitol Federal Savings
Bank to declare the unpaid principal balance due and payable upon the sale of
the secured property, is generally included in the security
instrument.
Pricing. Our
pricing strategy for first mortgage loan products includes setting interest
rates based on secondary market prices and competition within our local lending
markets. ARM loans are offered with either a three-year, five-year or
seven-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. A number of different indices are
used to reprice our ARM loans.
Adjustable rate
loans. Current adjustable-rate one- to four-family
conventional mortgage loans originated by Capitol Federal Savings Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the
interest rate, as well as a specified maximum lifetime cap and minimum rate, or
floor. As a consequence of using caps, the interest rates on these
loans may not be as rate sensitive as our cost of funds. Negative
amortization of principal is not allowed. For three, five, or seven
year ARM loans, borrowers are qualified based on the principal, interest, taxes
and insurance payments at either the initial rate or the fully indexed accrual
rate, whichever is greater. After the initial three, five, or seven
year period, the interest rate is repriced annually and the new principal and
interest payment is based on the new interest rate, remaining unpaid principal
balance and term of the ARM loan. Our ARM loans are not automatically
convertible into fixed-rate loans; however, we do allow borrowers to pay a
modification fee to convert an ARM loan to a fixed-rate loan. ARM
loans can pose different credit risks than fixed-rate loans, primarily because
as interest rates rise, the borrower’s payment also rises, increasing the
potential for default. This specific risk type is known as repricing
risk.
Included
in the loan portfolio at December 31, 2009 were $243.7 million of interest-only
ARM loans, the majority of which were purchased from nationwide lenders during
fiscal year 2005. These loans do not typically require principal
payments during their initial term, and have initial interest-only terms of
either five or ten years. The interest-only loans purchased had an
average credit score of 737 and an average loan to value ratio of 80% or less at
the time of purchase. Capitol Federal Savings Bank has not purchased
any interest-only ARM loans since 2006 and discontinued offering the product in
its local markets during 2008 to reduce future credit risk. At
December 31, 2009, $233.3 million, or 96% of interest-only loans were still in
their interest-only payment term. As of December 31, 2009, $110.7
million will begin to amortize principal within two years, $16.4 million will
begin to amortize principal within two-to-five years, $89.7 million will begin
to amortize principal within five-to-seven years and the remaining $16.4 million
will begin amortizing in seven-to-ten years. At December 31, 2009,
$15.7 million or approximately 50% of non-performing loans were interest-only
and $2.8 million was reserved in the ALLL for these
loans. Non-performing interest-only loans represent approximately 6%
of the total interest-only portfolio at December 31, 2009. See “Asset
Quality – Loans and REO.”
Underwriting. One-
to four-family loans are underwritten manually or by an automated underwriting
system developed by a third party. The system’s components closely
resemble Capitol Federal Savings Bank’s manual underwriting standards which are
generally in accordance with Freddie Mac (FHLMC) and Fannie Mae (FNMA)
underwriting guidelines. The automated underwriting system analyzes
the applicant’s data, with emphasis on credit history, employment and income
history, qualifying ratios reflecting the applicant’s ability to repay, asset
reserves, and loan-to-value ratio. Full documentation to support the
applicant’s credit, income, and sufficient funds to cover all applicable fees
and reserves at closing are required on all loans. Loans that do not
meet the automated underwriting standards are referred to a staff underwriter
for manual underwriting. Properties securing one- to four-family
loans are appraised by either staff appraisers or fee appraisers, both of which
are independent of the loan origination function and have been approved by the
board of directors.
Mortgage
Insurance. For a conventional mortgage with a loan to value
ratio in excess of 80%, private mortgage insurance (PMI) is required in order to
reduce Capitol Federal Savings Bank’s loss exposure to less than 80% of either
the appraised value or the purchase price of the property, whichever is
less. Capitol Federal Savings Bank will lend up to 97% of the lesser
of the appraised value or purchase price for conventional one- to four-family
loans, provided private mortgage insurance is obtained. Management
continuously monitors the claim paying ability of our private mortgage insurance
counterparties. At this time, we believe that our private mortgage
insurance counterparties have the ability to meet potential claim obligations we
may file in the foreseeable future.
76
FHA loans
have mortgage insurance provided by the federal government. The loans
are up to 97.5% of the lesser of the appraised value or purchase price and are
originated and underwritten manually according to private investor and FHA
guidelines. Capitol Federal Savings Bank began offering FHA loans in
late September 2009 to accommodate customers who may not qualify for a
conventional mortgage loan. FHA loans are originated by Capitol
Federal Savings Bank with the intention of selling the loans on a flow basis to
a private investor with servicing released.
Purchased
loans. Capitol Federal Savings Bank purchases approved
conventional one- to four-family loans and the related servicing rights, on a
loan-by-loan basis, from correspondent lenders. During the
first quarter of fiscal 2010, Capitol Federal Savings Bank purchased $27.5
million of one- to four-family loans from correspondent
lenders. During the 2009 and 2008 fiscal years, Capitol Federal
Savings Bank purchased $141.6 million and $119.5 million, respectively, of one-
to four-family loans from correspondent lenders. These loans
generally have an interest rate 0.125% higher than loans we originate; however,
we pay a premium for these loans.
The
underwriting of loans purchased through correspondent lenders is generally
performed by our underwriters, using our underwriting standards. The
products offered by our correspondents are underwritten to standards that are at
least as restrictive as Capitol Federal Savings Bank’s own internal products and
underwriting standards. No doc or stated income, stated assets loans
are not permitted under our underwriting standards. Lenders are required to
fully document all data sources for each application. Management
believes these requirements reduce the credit risk associated with these
loans. Lenders are located within the metropolitan Kansas City market
area and select market areas in Missouri.
Capitol
Federal Savings Bank also purchases conventional one- to four-family loans from
nationwide lenders. The underwriting standards are generally similar
to Capitol Federal Savings Bank’s internal underwriting standards.
No doc or stated income, stated assets loans are not permitted under our
underwriting standards. Lenders are required to fully document all
data sources for each application. Management believes these
requirements reduce the credit risk associated with these
loans. Before committing to purchase a pool of loans from a lender,
Capitol Federal Savings Bank’s Chief Lending Officer or Secondary Marketing
Manager reviews specific criteria such as loan amount, credit scores, loan to
value ratios, geographic location, and debt ratios of each loan in the
pool. If the specific criteria do not meet Capitol Federal Savings
Bank’s underwriting standards and compensating factors are not sufficient, then
a loan will be removed from the pool. Once the review of the specific
criteria is complete and loans not meeting Capitol Federal Savings Bank’s
standards are removed from the pool, changes are sent back to the lender for
acceptance and pricing. Before the pool is funded, an internal bank
underwriter reviews at least 25% of the loan files to confirm loan terms, credit
scores, debt service ratios, property appraisal and other underwriting related
documentation. Our standard contractual agreement with the lender
includes recourse options for any breach of representation or warranty with
respect to the loans purchased. In general, loans are purchased with
servicing retained by the seller. The servicing of purchased loans is
governed by a servicing agreement, which outlines collection policies and
procedures, as well as oversight requirements, such as servicer certifications
attesting to and providing proof of compliance with the servicer
agreement. During the first quarter of fiscal year 2010, Capitol
Federal Savings Bank purchased $37.6 million of one- to four-family loans from
nationwide lenders. During fiscal years 2009 and 2008, Capitol
Federal Savings Bank purchased $191.8 million and $155 thousand, respectively,
of one- to four-family loans from nationwide lenders.
Loan modification
program. In an effort to offset the impact of repayments and
to retain our customers, Capitol Federal Savings Bank offers existing loan
customers whose loans have not been sold to third parties the opportunity to
modify their original loan terms to new loan terms generally consistent with
those currently being offered. This is a convenient tool for
customers who may have considered refinancing from an ARM loan to a fixed-rate
loan, would like to reduce their term, or take advantage of lower rates
associated with current market rates. The program helps ensure
Capitol Federal Savings Bank maintains the relationship with the customer and
significantly reduces the amount of effort required for customers to obtain
current market pricing and terms without having to refinance their
loans. Capitol Federal Savings Bank charges a fee for this service
generally comparable to fees charged on new loans. Capitol Federal
Savings Bank does not solicit customers for this program, but considers it a
valuable opportunity to retain customers who, due to our conservative initial
underwriting, could likely obtain similar financing elsewhere. During
the first quarter of fiscal 2010 we modified $139.7 million of our originated
loans. During fiscal years 2009 and 2008, we modified $1.14 billion and
$200.4 million of our originated loans.
Loan
sales. Conventional one- to four-family loans may be sold on a
bulk basis for portfolio restructuring or on a flow basis as loans are
originated to reduce interest rate risk and/or maintain a certain liquidity
position. Capitol Federal Savings Bank generally retains the
servicing on these loans. ALCO determines which conventional one- to
four-family loans are to be originated as held for sale or held for
investment. Conventional one- to four-family loans originated as held
for sale are to be sold in accordance with policies set forth by
ALCO. Conventional one- to four-family loans originated as held for
investment are generally not eligible for sale unless a specific segment of the
portfolio is identified for asset restructuring purposes. Generally,
Capitol Federal Savings Bank will continue to service these loans.
77
Construction
Lending. Capitol Federal Savings Bank also originates
construction-to-permanent loans primarily secured by one- to four-family
residential real estate. The majority of the one- to four-family
construction loans are secured by property located within Capitol Federal
Savings Bank’s Kansas City market areas. Construction loans are
obtained primarily by homeowners who will occupy the property when construction
is complete. Construction loans to builders for speculative purposes
are not permitted.
The
application process includes submission of complete 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. All
construction loans are manually underwritten using Capitol Federal Savings
Bank’s internal underwriting standards. The construction and
permanent loans are closed at the same time allowing the borrower to secure the
interest rate at the beginning of the construction period and throughout the
permanent loan. Construction draw requests and the supporting
documentation are reviewed and approved by management. Capitol
Federal Savings Bank also performs regular documented inspections of the
construction project to ensure the funds are being used for the intended purpose
and the project is being completed according to the plans and specifications
provided. At December 31, 2009, we had $33.4 million in
construction-to-permanent loans outstanding, including undisbursed loan funds,
representing almost 1% of our total loan portfolio.
Consumer
Lending. Capitol Federal Savings Bank offers a variety of
secured consumer loans, including home equity loans and lines of credit, home
improvement loans, auto loans, and loans secured by savings
deposits. Capitol Federal Savings Bank also originates a very
limited amount of unsecured loans. Capitol Federal Savings Bank does
not originate any consumer loans on an indirect basis, such as contracts
purchased from retailers of goods or services which have extended credit to
their customers. All consumer loans are originated in Capitol Federal
Savings Bank’s market areas. At December 31, 2009, our consumer loan
portfolio totaled $203.2 million, or 3.7% of our total loan
portfolio.
The
majority of the consumer loan portfolio is comprised of home equity lines of
credit, which have interest rates that can adjust monthly based upon changes in
the Prime rate, to a maximum of 18%. Home equity loans may be
originated in amounts, together with the amount of the existing first mortgage,
of up to 95% of the value of the property securing the loan. In order
to minimize risk of loss, home equity loans that are greater than 80% of the
value of the property, when combined with the first mortgage, require private
mortgage insurance. The term-to-maturity of home equity and home
improvement loans may be up to 20 years. Other home equity lines of
credit have no stated term-to-maturity and require a payment of 1.5% of the
outstanding loan balance per month. Interest-only home equity lines of credit
have a maximum term of 12 months, monthly payments of accrued interest, and a
balloon payment at maturity. Repaid principal may be re-advanced at
any time, not to exceed the original credit limit of the loan. Other
consumer loan terms vary according to the type of collateral and the length of
the contract. Home equity loans, including lines of credit and
home improvement loans, comprised 3.5% of our total loan portfolio, or $194.0
million, at December 31, 2009. As of December 31, 2009, 72.0% of the
home equity portfolio was adjustable-rate.
The
underwriting standards for consumer loans include a determination of the
applicant’s payment history on other debts and an assessment of their ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security in relation to
the proposed loan amount.
Consumer
loans generally have shorter terms to maturity or reprice more frequently, which
reduces our exposure to changes in interest rates, and usually carry higher
rates of interest than do one- to four-family loans. However,
consumer loans may entail greater risk than do one- to four-family loans,
particularly in the case of consumer loans that are secured by rapidly
depreciable assets, such as automobiles. 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.
78
Multi-family and
Commercial Real Estate Lending. At December 31,
2009, multi-family and commercial real estate loans totaled $71.4 million, or
1.3% of our total loan portfolio. Capitol Federal Savings Bank’s
multi-family and commercial real estate loans are secured primarily by
multi-family dwellings and small commercial buildings generally located in
Capitol Federal Savings Bank’s market areas. These loans are granted
based on the income producing potential of the property and the financial
strength of the borrower. Loan to value ratios on multi-family and
commercial real estate loans do not exceed 80% of the appraised value of the
property securing the loans. The net operating income, which is the
income derived from the operation of the property less all operating expenses,
must be sufficient to cover the payments related to the outstanding debt at the
time of origination. Capitol Federal Savings Bank generally requires
personal guarantees of the borrowers covering a portion of the debt in addition
to the security property as collateral for these loans. Appraisals on
properties securing these loans are performed by independent state certified fee
appraisers approved by the board of directors. Our multi-family and
commercial real estate loans are originated with either a fixed or adjustable
interest rate. The interest rate on ARM loans is based on a variety
of indices, generally determined through negotiation with the
borrower. While maximum maturities may extend to 30 years, these
loans frequently have shorter maturities and may not be fully amortizing,
requiring balloon payments of unamortized principal at maturity.
We
generally do not maintain a tax or insurance escrow account for multi-family or
commercial real estate loans. In order to monitor the adequacy of
cash flows on income-producing properties with a principal balance of $1.5
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.
Our
multi-family and commercial real estate loans are generally large dollar loans
and involve a greater degree of credit risk than one- to four-family
loans. Such loans typically involve large balances to single
borrowers or groups of related borrowers. Because payments on
multi-family and commercial real estate loans 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.”
Capitol
Federal Savings Bank is a participant with four other banking institutions on a
$42.5 million commercial construction loan secured by a retail shopping center
in Kansas. Capitol Federal Savings Bank’s original participant share
was $15.0 million, which was to be disbursed as the improvements were
completed. The loan was converted from a construction loan to a
permanent loan in April 2009, but still had funds to advance for tenant finish.
Due to economic factors, the lead bank and the borrower requested to restructure
the project and reduce the overall commitment to $31.0 million, which reduced
Capitol Federal Savings Bank’s commitment to $10.9 million as of August
2009. The overall commitment was reduced further to $23.1 million in
December, 2009, which reduced Capitol Federal Savings Bank’s commitment to $8.2
million at December 31, 2009. The change involved completing
construction for retail space that was already started, of which 83% was leased
as of December 31, 2009, and postponing the development of additional
space. This loan is part of our largest lending relationship to a
single borrower or a group of related borrowers at December 31,
2009. Although the loan has performed per the terms of the agreement,
the change in the agreement has prompted management to classify the loan as
Special Mention at December 31, 2009. See “— Classified
Assets.”
Loan
Portfolio. The following table presents information concerning
the composition of our loan portfolio in dollar amounts and in percentages
(before deductions for undisbursed loan funds, unearned loan fees and deferred
costs, and the allowance for loan losses) as of the dates
indicated.
79
| December 31, |
September
30,
|
||||||||||||||||||||||||||||||||||||||||||||||||
| 2009 | 2009 |
2008
|
2007 | 2006 |
2005
|
||||||||||||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Real
Estate Loans:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to four-family
|
$ | 5,155,773 | 94.4 | % | $ | 5,321,935 | 94.2 | % | $ | 5,026,358 | 93.4 | % | $ | 4,992,398 | 93.4 | % | $ | 4,931,505 | 93.8 | % | $ | 5,189,006 | 94.5 | % | |||||||||||||||||||||||||
|
Multi-family
and commercial
|
71,395 | 1.3 | 80,493 | 1.4 | 56,081 | 1.0 | 60,625 | 1.1 | 56,774 | 1.1 | 49,563 | 0.9 | |||||||||||||||||||||||||||||||||||||
|
Construction
|
33,403 | 0.6 | 39,535 | 0.7 | 85,178 | 1.6 | 74,521 | 1.4 | 45,452 | 0.8 | 45,312 | 0.8 | |||||||||||||||||||||||||||||||||||||
|
Total
real estate loans
|
5,260,571 | 96.3 | 5,441,963 | 96.3 | 5,167,617 | 96.0 | 5,127,544 | 95.9 | 5,033,731 | 95.7 | 5,283,881 | 96.2 | |||||||||||||||||||||||||||||||||||||
|
Consumer
Loans:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Home
equity
|
193,987 | 3.5 | 195,557 | 3.5 | 202,956 | 3.8 | 208,642 | 3.9 | 212,938 | 4.1 | 198,135 | 3.6 | |||||||||||||||||||||||||||||||||||||
|
Other
|
9,186 | 0.2 | 9,430 | 0.2 | 9,272 | 0.2 | 10,440 | 0.2 | 10,804 | 0.2 | 12,371 | 0.2 | |||||||||||||||||||||||||||||||||||||
|
Total
consumer loans
|
203,173 | 3.7 | 204,987 | 3.7 | 212,228 | 4.0 | 219,082 | 4.1 | 223,742 | 4.3 | 210,506 | 3.8 | |||||||||||||||||||||||||||||||||||||
|
Total
loans receivable
|
5,463,744 | 100.0 | % | 5,646,950 | 100.0 | % | 5,379,845 | 100.0 | % | 5,346,626 | 100.0 | % | 5,257,473 | 100.0 | % | 5,494,387 | 100.0 | % | |||||||||||||||||||||||||||||||
|
Less:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Undisbursed
loan funds
|
17,089 | 20,649 | 43,186 | 42,481 | 22,605 | 14,803 | |||||||||||||||||||||||||||||||||||||||||||
|
Unearned
loan fees and deferred
costs
|
10,525 | 12,186 | 10,088 | 9,893 | 9,318 | 10,856 | |||||||||||||||||||||||||||||||||||||||||||
|
Allowance
for losses
|
12,207 | 10,150 | 5,791 | 4,181 | 4,433 | 4,598 | |||||||||||||||||||||||||||||||||||||||||||
|
Total
loans receivable, net
|
$ | 5,423,923 | $ | 5,603,965 | $ | 5,320,780 | $ | 5,290,071 | $ | 5,221,117 | $ | 5,464,130 | |||||||||||||||||||||||||||||||||||||
80
The
following table presents the contractual maturity of our loan portfolio at
December 31, 2009. Loans which have adjustable interest rates are
shown as maturing in the period during which the contract is due. The
table does not reflect the effects of possible prepayments or enforcement of due
on sale clauses.
|
Real
Estate
|
Consumer
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to Four-Family
|
Multi-family
and
Commercial
|
Construction(2)
|
Home
Equity (3)
|
Other
|
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)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Amounts
due:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Within one
year (1)
|
$
|
2,131
|
6.00
|
%
|
$
|
22
|
7.00
|
%
|
$
|
17,673
|
5.18
|
%
|
$
|
4,024
|
4.14
|
%
|
$
|
1,478
|
5.59
|
%
|
$
|
25,328
|
5.11
|
%
|
||||||||||||||||||||||||
|
After
one year:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Over one
to two
|
5,117
|
5.57
|
—
|
—
|
15,730
|
5.11
|
1,456
|
4.64
|
1,083
|
8.10
|
23,386
|
5.32
|
||||||||||||||||||||||||||||||||||||
|
Over two
to three
|
8,508
|
5.53
|
996
|
5.72
|
—
|
—
|
2,004
|
5.23
|
1,092
|
6.56
|
12,600
|
5.59
|
||||||||||||||||||||||||||||||||||||
|
Over
three to five
|
45,562
|
5.30
|
34
|
8.50
|
—
|
—
|
3,580
|
5.42
|
5,136
|
5.36
|
54,312
|
5.32
|
||||||||||||||||||||||||||||||||||||
|
Over five
to ten
|
479,433
|
5.18
|
6,867
|
5.87
|
—
|
—
|
32,187
|
5.11
|
368
|
8.62
|
518,855
|
5.19
|
||||||||||||||||||||||||||||||||||||
|
Over 10
to 15
|
856,233
|
5.00
|
13,098
|
6.40
|
—
|
—
|
60,379
|
4.87
|
29
|
6.50
|
929,739
|
5.01
|
||||||||||||||||||||||||||||||||||||
|
After 15
years
|
3,758,789
|
5.25
|
50,378
|
6.17
|
—
|
—
|
90,357
|
6.37
|
—
|
—
|
3,899,524
|
5.29
|
||||||||||||||||||||||||||||||||||||
|
Total
due after one year
|
5,153,642
|
5.21
|
71,373
|
6.18
|
15,730
|
5.11
|
189,963
|
5.64
|
7,708
|
6.07
|
5,438,416
|
5.23
|
||||||||||||||||||||||||||||||||||||
|
Total loans
|
$
|
5,155,773
|
5.21
|
%
|
$
|
71,395
|
6.18
|
%
|
$
|
33,403
|
5.15
|
%
|
$
|
193,987
|
5.60
|
%
|
$
|
9,186
|
6.00
|
%
|
5,463,744
|
5.23
|
%
|
|||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Undisbursed
loan funds
|
17,089
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Unearned loan fees and
deferred costs |
10,525
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
12,207
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Total
loans receivable, net
|
$
|
5,423,923
|
||||||||||||||||||||||||||||||||||||||||||||||
|
(1)
|
Includes
demand loans, loans having no stated maturity, and overdraft
loans.
|
|
(2)
|
Construction
loans are presented based upon the term to complete
construction.
|
|
(3)
|
For
home equity loans, the maturity date calculated assumes the customer
always makes the required minimum payment. The majority of
interest-only home equity lines of credit assume a balloon payment of
unpaid principal at 120 months. All other home equity lines of
credit assume a term of 240
months.
|
81
The
following table presents, as of December 31, 2009, the amount of loans, net of
undisbursed loan funds, due after December 31, 2010, and whether these loans
have fixed or adjustable interest rates.
| Fixed | Adjustable | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Real
Estate Loans:
|
||||||||||||
|
One- to four-family
|
$ | 4,096,494 | $ | 1,057,148 | $ | 5,153,642 | ||||||
|
Multi-family and commercial
|
68,902 | 2,471 | 71,373 | |||||||||
|
Construction
|
15,185 | 545 | 15,730 | |||||||||
|
Consumer
Loans:
|
||||||||||||
|
Home
equity
|
53,203 | 136,760 | 189,963 | |||||||||
|
Other
|
3,780 | 3,928 | 7,708 | |||||||||
|
Total
|
$ | 4,237,564 | $ | 1,200,852 | $ | 5,438,416 | ||||||
The
following table shows our loan originations, loan purchases and participations,
transfers, and repayment activity for the periods
indicated. Purchased loans include loans purchased from correspondent
and nationwide lenders. The table below does not include modified
loans.
|
Three
Months
Ended
December
31,
|
Year
Ended
September
30,
|
|||||||||||||||
|
2009
|
2009
|
2008
|
2007
|
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Originations
by type:
|
||||||||||||||||
|
Adjustable-rate:
|
||||||||||||||||
|
Real
estate - one- to four-family
|
$ | 14,885 | $ | 33,601 | $ | 65,740 | $ | 91,570 | ||||||||
|
- multi-family and commercial
|
— | — | 1,800 | — | ||||||||||||
|
- construction
|
— | 2,261 | 11,939 | 12,792 | ||||||||||||
|
Home
equity
|
21,810 | 91,053 | 87,614 | 87,022 | ||||||||||||
|
Other
consumer
|
1,190 | 4,391 | 1,731 | — | ||||||||||||
|
Total
adjustable-rate loans originated
|
37,885 | 131,306 | 168,824 | 191,384 | ||||||||||||
|
Fixed-rate:
|
||||||||||||||||
|
Real
estate - one- to four-family
|
146,194 | 936,930 | 584,181 | 541,521 | ||||||||||||
|
- multi-family and commercial
|
— | 14,891 | 975 | 4,873 | ||||||||||||
|
- construction
|
8,395 | 24,563 | 47,584 | 32,368 | ||||||||||||
|
Home
equity
|
1,500 | 10,069 | 14,475 | 25,285 | ||||||||||||
|
Other
consumer
|
418 | 1,922 | 4,796 | 8,019 | ||||||||||||
|
Total
fixed-rate loans originated
|
156,507 | 988,375 | 652,011 | 612,066 | ||||||||||||
|
Total
loans originated
|
194,392 | 1,119,681 | 820,835 | 803,450 | ||||||||||||
|
Purchases
and Participations:
|
||||||||||||||||
|
Real
estate - one- to four-family
|
65,079 | 333,432 | 119,631 | 129,335 | ||||||||||||
|
- multi-family and commercial
|
— | — | — | — | ||||||||||||
|
- construction
|
— | — | — | 15,000 | ||||||||||||
|
Total
loans purchased/participations
|
65,079 | 333,432 | 119,631 | 144,335 | ||||||||||||
|
Transfer
of modified loans to loans held for sale, net
|
(194,759 | ) | (94,672 | ) | — | — | ||||||||||
|
Principal
repayments
|
(245,838 | ) | (1,083,731 | ) | (899,178 | ) | (855,980 | ) | ||||||||
|
Decrease
in other items, net
|
(2,080 | ) | (7,605 | ) | (8,069 | ) | (2,652 | ) | ||||||||
|
Net
loan activity
|
$ | (183,206 | ) | $ | 267,105 | $ | 33,219 | $ | 89,153 | |||||||
82
Asset
Quality
Capitol
Federal Savings Bank’s traditional underwriting guidelines have provided Capitol
Federal Savings Bank generally low delinquencies and low levels of
non-performing assets compared to national levels. Of particular
importance is the complete documentation required for each loan Capitol Federal
Savings Bank originates and purchases. This allows us to make an
informed credit decision based upon a thorough assessment of the borrower’s
ability to repay the loan compared to underwriting methodologies that do not
require full documentation.
For one-
to four-family loans and home equity loans, when a borrower fails to make a loan
payment 15 days after the due date, a late charge is assessed and a notice is
mailed. All delinquent balances are reviewed by collection personnel
once the loan is 16 or more days past due. Attempts to contact the
borrower occur by personal letter and, if no response is received, by telephone,
with the purpose of establishing repayment arrangements for the borrower to
bring the loan current. Repayment arrangements may be approved by a
designated bank officer. Once a loan becomes 90 days delinquent, a
demand letter is issued requiring the loan to be brought current or foreclosure
procedures will be implemented. Once a loan becomes 120 days
delinquent, and an acceptable repayment plan has not been established, the loan
is forwarded to legal counsel to initiate foreclosure. We also
monitor whether mortgagors who filed for bankruptcy are meeting their obligation
to pay the mortgage debt in accordance with the terms of the bankruptcy
petition.
We
monitor delinquencies on our purchased loan portfolio with reports we receive
from the servicers. We monitor these servicer reports to ensure that
the servicer is upholding the terms of the servicing agreement. The
reports generally provide total principal and interest due and length of
delinquency, and are used to prepare monthly management reports and perform
delinquent loan trend analysis. Management also utilizes information
from the servicers to monitor property valuations and identify the need to
record specific valuation allowances. The servicers handle collection
efforts per the terms of the servicing agreement. In the event of a
foreclosure, the servicer obtains our approval prior to initiating foreclosure
proceedings, and handles all aspects of the repossession and disposition of the
repossessed property, which is also governed by the terms of the servicing
agreement.
The
following matrix shows the balance of one- to four-family loans as of December
31, 2009, cross-referenced by loan to value ratio and credit
score. The loan to value ratios used in the matrix were based on the
current loan balance and the most recent bank appraisal available, or the lesser
of the purchase price or original appraisal. In most cases, the most
recent appraisal was obtained at the time of origination. The loan to
value ratios based upon appraisals obtained at the time of origination may not
necessarily indicate the extent to which we may incur a loss on any given loan
that may go into foreclosure as the value of the underlying collateral may have
declined since the time of origination. Credit scores were updated in
March 2009 for loans originated by Capitol Federal Savings Bank and in September
2009 for purchased loans. Management will continue to update credit
scores as deemed necessary based upon economic conditions. As set
forth in the matrix, the greatest concentration of loans fall into the “751 and
above” credit score category and have a loan to value ratio of less than
70%. The loans falling into the “less than 660” credit score category
and having loan to value ratios of more than 80% comprise the lowest
concentration. The average loan to value ratio and credit score for
our one-to four-family loans purchased at December 31, 2009 was approximately
67% and 758, respectively. The average loan to value ratio and credit
score for our one- to four-family originated loans at December 31, 2009 was
approximately 59% and 742, respectively.
|
Credit
Score
|
||||||||||||||||||||||||||||||||||||||||
|
Less
than 660
|
661
to 700
|
701
to 750
|
751
and above
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Loan
to value ratio
|
Amount
|
%
of total
|
Amount
|
%
of total
|
Amount
|
%
of total
|
Amount
|
%
of total
|
Amount
|
%
of total
|
||||||||||||||||||||||||||||||
|
|
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
|
Less
than 70%
|
$
|
121,923
|
2.4
|
%
|
$
|
158,508
|
3.1
|
%
|
$
|
427,621
|
8.3
|
%
|
$
|
1,891,927
|
36.7
|
%
|
$
|
2,599,979
|
50.5
|
%
|
||||||||||||||||||||
|
70%
to 80%
|
114,771
|
2.2
|
125,766
|
2.4
|
406,457
|
7.9
|
1,152,435
|
22.3
|
1,799,429
|
34.8
|
||||||||||||||||||||||||||||||
|
More
than 80%
|
71,345
|
1.4
|
77,532
|
1.5
|
211,548
|
4.1
|
395,940
|
7.7
|
756,365
|
14.7
|
||||||||||||||||||||||||||||||
|
$
|
308,039
|
6.0
|
%
|
$
|
361,806
|
7.0
|
%
|
$
|
1,045,626
|
20.3
|
%
|
$
|
3,440,302
|
66.7
|
%
|
$
|
5,155,773
|
100.0
|
%
|
|||||||||||||||||||||
83
Delinquent
Loans. The following tables set forth our loans 30 - 89 days
delinquent by type, number and amount as of the periods
presented. Purchased loans include loans purchased from nationwide
lenders.
|
December
31,
|
Loans
Delinquent for 30-89 Days at September 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Number
|
Amount
|
Number
|
Amount
|
|||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||||||||||||||||||
|
Originated
|
184 | $ | 19,468 | 159 | $ | 15,488 | 125 | $ | 13,244 | 149 | $ | 13,117 | ||||||||||||||||||||
|
Purchased
|
44 | 11,464 | 41 | 10,556 | 37 | 7,083 | 26 | 3,854 | ||||||||||||||||||||||||
|
Multi-family
& commercial
|
1 | 5 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Construction
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Consumer
Loans:
|
||||||||||||||||||||||||||||||||
|
Home
equity
|
49 | 1,021 | 40 | 708 | 33 | 664 | 28 | 589 | ||||||||||||||||||||||||
|
Other
|
24 | 114 | 15 | 89 | 21 | 118 | 29 | 172 | ||||||||||||||||||||||||
|
Total
|
302 | $ | 32,072 | 255 | $ | 26,841 | 216 | $ | 21,109 | 232 | $ | 17,732 | ||||||||||||||||||||
|
Delinquent
loans to total loans
|
0.59 | % | 0.48 | % | 0.40 | % | 0.34 | % | ||||||||||||||||||||||||
Loans 30 to 89 days delinquent
increased $5.7 million from $21.1 million at September 30, 2008 to $26.8 million
at September 30, 2009. Loans 30 to 89 days delinquent increased $5.3
million from $26.8 million at September 30, 2009 to $32.1 million at December
31, 2009. We believe the increase in the 30 to 89 day delinquent balance from
September 30, 2008 to September 30, 2009 and September 30, 2009 to December 31,
2009 was primarily due to the increase in and continued elevated level of
unemployment.
The
following table presents the average percentage of one- to four-family loans, by
principal balance, that entered the 30-89 days delinquent category during the 12
months ended December 31, 2009 that paid off, returned to performing status,
stayed 30-89 days delinquent, or progressed to the non-performing or REO
categories. Purchased loans include loans purchased from nationwide
lenders.
|
30-89
Day Delinquent Loan Trend Analysis
|
||||||||||||||||||||||||
|
30-89
Days
|
||||||||||||||||||||||||
|
Paid
Off
|
Performing
|
Delinquent
|
Non-Performing
|
REO
|
Total
|
|||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Originated
|
5.7
|
%
|
38.1
|
%
|
34.1
|
%
|
18.0
|
%
|
4.1
|
%
|
100.0
|
%
|
||||||||||||
|
Purchased
|
3.7
|
%
|
20.9
|
%
|
35.6
|
%
|
37.6
|
%
|
2.2
|
%
|
100.0
|
%
|
||||||||||||
|
Total
Portfolio Average
|
4.8
|
%
|
30.9
|
%
|
35.3
|
%
|
25.9
|
%
|
3.1
|
%
|
100.0
|
%
|
||||||||||||
Non-performing
Assets. The table below sets forth the number, amount and
categories of non-performing assets. Non-performing assets consist of
non-performing loans and real estate owned (REO). Purchased loans
include loans purchased from nationwide lenders. Non-performing loans
are non-accrual loans that are 90 or more days delinquent or are in the process
of foreclosure. At all dates presented, we had no loans past due 90
days or more that were still accruing interest. The amount of
interest income on non-performing loans, before non-accruing status, that was
included in interest income was $115 thousand for the three months ended
December 31, 2009 and $473 thousand for the year ended September 30,
2009. The amount of additional interest income that would have been
recorded on non-performing loans if they were not on non-accruing status was
$298 thousand for the three months ended December 31, 2009 and $603 thousand for
the year ended September 30, 2009. REO includes assets acquired in
settlement of loans.
84
|
September
30,
|
||||||||||||||||||||||||||||||||||||||||||||||
|
December
31, 2009
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||||||||
|
Number
|
Amount | Number | Amount | Number | Amount |
Number
|
Amount |
Number
|
Amount
|
Number
|
Amount | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Non-performing
loans:
|
||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Originated
|
104
|
$
|
10,040
|
99
|
$
|
9,248
|
70
|
$
|
6,488
|
68
|
$
|
4,941
|
56
|
$
|
3,534
|
74
|
$
|
4,471
|
||||||||||||||||||||||||||||
|
Purchased
|
70
|
21,912
|
70
|
21,259
|
25
|
6,708
|
9
|
2,163
|
13
|
1,857
|
5
|
563
|
||||||||||||||||||||||||||||||||||
|
Multi-family
& commercial
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||
|
Construction
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||
|
Consumer
loans:
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Home
equity
|
32
|
516
|
22
|
367
|
19
|
379
|
13
|
207
|
12
|
177
|
11
|
113
|
||||||||||||||||||||||||||||||||||
|
Other
|
6
|
9
|
8
|
45
|
11
|
91
|
7
|
41
|
3
|
41
|
4
|
11
|
||||||||||||||||||||||||||||||||||
|
212
|
32,477
|
199
|
30,919
|
125
|
13,666
|
97
|
7,352
|
84
|
5,609
|
94
|
5,158
|
|||||||||||||||||||||||||||||||||||
|
Real
estate owned:
|
||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Originated (1)
|
55
|
4,726
|
51
|
5,702
|
36
|
2,228
|
30
|
2,036
|
34
|
2,401
|
30
|
1,368
|
||||||||||||||||||||||||||||||||||
|
Purchased
|
9
|
1,911
|
8
|
1,702
|
12
|
2,918
|
1
|
61
|
—
|
—
|
1
|
245
|
||||||||||||||||||||||||||||||||||
|
Multi-family
& commercial
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||
|
Construction
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||
|
Consumer
loans:
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Home
equity
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||
|
Other
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1
|
8
|
1
|
40
|
||||||||||||||||||||||||||||||||||
|
64
|
6,637
|
59
|
7,404
|
48
|
5,146
|
31
|
2,097
|
35
|
2,409
|
32
|
1,653
|
|||||||||||||||||||||||||||||||||||
|
Total
non-performing assets
|
276
|
$
|
39,114
|
258
|
$
|
38,323
|
173
|
$
|
18,812
|
128
|
$
|
9,449
|
119
|
$
|
8,018
|
126
|
$
|
6,811
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Non-performing
loans as a percentage of total loans
|
0.60
|
%
|
0.55
|
%
|
0.26
|
%
|
0.14
|
%
|
0.11
|
%
|
0.09
|
%
|
||||||||||||||||||||||||||||||||||
|
Non-performing
assets as a percentage of total assets
|
0.47
|
%
|
0.
46
|
%
|
0.23
|
%
|
0.12
|
%
|
0.10
|
%
|
0.08
|
%
|
||||||||||||||||||||||||||||||||||
|
(1) Real
estate related consumer loans are included in the one- to four-family
category as the underlying collateral is a one- to four-family
property.
|
85
Non-performing
loans increased $17.2 million from $13.7 million at September 30, 2008 to $30.9
million at September 30, 2009. The increase in non-performing loans
reflected the economic recession and the continued deterioration of the housing
market, particularly in some of the states in which we have purchased loans.
Non-performing loans increased $1.6 million from $30.9 million at September 30,
2009 to $32.5 million at December 31, 2009. The balance of
non-performing loans continues to remain at historically high levels due to the
continued elevated level of unemployment coupled with the decline in real estate
values, particularly in some of the states in which we have purchased
loans. At December 31, 2009, one-to four-family non-performing loans
with loan to value ratios greater than 80% comprised approximately 15% of total
non-performing loans. Of these loans, 71% have PMI which reduces or
eliminates Capitol Federal Savings Bank’s exposure to loss. The
balance of one-to four-family non-performing loans with loan to value ratios
greater than 80% with no PMI was $1.4 million at December 31,
2009. At origination, these loans generally had loan to value ratios
less than 80%, but as a result of declining real estate values as reflected in
updated appraisals, the loan to value ratios are now in excess of
80%.
The
following table presents the top twelve states where our one- to four-family
mortgages are located, and the corresponding balance of 30-89 day delinquent
loans, non-performing loans and the weighted average loan to value ratios for
non-performing loans at December 31, 2009. The loan to value ratios
were based on the current loan balance and the most recent appraisal available,
or the lesser of the purchase price or original appraisal.
|
Loans
30 to 89
|
||||||||||||||||||||||||||||
|
One-
to Four-Family
|
Days
Delinquent
|
Non-Performing
Loans
|
||||||||||||||||||||||||||
|
State
|
Balance
|
%
of Total
|
Balance
|
%
of Total
|
Balance
|
%
of Total
|
Average
loan
to
value
|
|||||||||||||||||||||
|
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||
|
Kansas
|
$
|
3,717,625
|
72.1
|
%
|
$
|
14,290
|
46.2
|
%
|
$
|
8,442
|
26.4
|
%
|
76
|
%
|
||||||||||||||
|
Missouri
|
749,956
|
14.6
|
5,177
|
16.7
|
1,598
|
5.0
|
92
|
|||||||||||||||||||||
|
Illinois
|
78,757
|
1.5
|
1,008
|
3.2
|
2,129
|
6.7
|
67
|
|||||||||||||||||||||
|
Texas
|
51,295
|
1.0
|
753
|
2.4
|
58
|
0.2
|
74
|
|||||||||||||||||||||
|
New
York
|
50,282
|
1.0
|
875
|
2.8
|
846
|
2.6
|
75
|
|||||||||||||||||||||
|
Florida
|
48,407
|
0.9
|
113
|
0.4
|
3,649
|
11.4
|
71
|
|||||||||||||||||||||
|
Colorado
|
35,069
|
0.7
|
204
|
0.7
|
415
|
1.3
|
79
|
|||||||||||||||||||||
|
Arizona
|
33,442
|
0.6
|
1,227
|
4.0
|
4,181
|
13.1
|
75
|
|||||||||||||||||||||
|
Virginia
|
31,185
|
0.6
|
1,816
|
5.9
|
444
|
1.4
|
71
|
|||||||||||||||||||||
|
Connecticut
|
31,016
|
0.6
|
—
|
—
|
151
|
0.5
|
68
|
|||||||||||||||||||||
|
Minnesota
|
28,835
|
0.6
|
676
|
2.2
|
129
|
0.4
|
70
|
|||||||||||||||||||||
|
New
Jersey
|
27,560
|
0.5
|
327
|
1.1
|
360
|
1.1
|
59
|
|||||||||||||||||||||
|
Other
states
|
272,344
|
5.3
|
4,466
|
14.4
|
9,550
|
29.9
|
71
|
|||||||||||||||||||||
|
$
|
5,155,773
|
100.0
|
%
|
$
|
30,932
|
100.0
|
%
|
$
|
31,952
|
100.0
|
%
|
74
|
%
|
|||||||||||||||
Impaired
Loans. A loan is considered impaired when, based on current
information and events, it is probable that Capitol Federal Savings Bank will be
unable to collect all amounts due, including principal and interest, according
to the contractual terms of the loan agreement. Impaired loans
totaled $47.4 million, $41.4 million, $13.7 million, and $7.4 million at
December 31, 2009 and September 30, 2009, 2008, and 2007,
respectively. All troubled debt restructurings (TDRs) that have not
been performing under the new terms for 12 consecutive months and non-accrual
loans are considered to be impaired loans.
A TDR is
the situation where, due to a borrower’s financial difficulties, Capitol Federal
Savings Bank grants a concession to the borrower that Capitol Federal Savings
Bank would not otherwise have considered. The majority of Capitol
Federal Savings Bank’s TDRs involve a restructuring of loan terms such as a
temporary reduction in the payment amount to require only interest and escrow
(if required) and extending the maturity date of the loan. At
December 31, 2009 and September 30, 2009, 2008, and 2007, Capitol Federal
Savings Bank had TDRs of $15.2 million, $10.8 million, $918 thousand, and $230
thousand, respectively. The increase in TDRs from September 30, 2008
to September 30, 2009 and September 30, 2009 to December 31, 2009 was primarily
due to the increase in and continued elevated level of unemployment which has
resulted in some borrowers experiencing financial difficulties. We
had no TDRs during the years ended September 30, 2006 and 2005. TDRs
are not reported as non-performing loans unless the restructured loans are more
than 90 days delinquent. The balance of TDRs included in the impaired
loan balance at December 31, 2009 was $15.2 million, of which 93%, or $14.3
million, were originated loans. Of the $15.2 million, $623 thousand
was greater than 90 days delinquent and was included in the non-performing loan
balance at December 31, 2009. The amount of interest recognized in
interest income on total TDRs was $207 thousand for the quarter ended December
31, 2009. The amount of interest included in interest income on
non-performing TDRs, before non-accruing status, was $10 thousand for the
quarter ended December 31, 2009. The amount of additional interest
income that would have been recorded on the non-performing TDR loans if they
were not on non-accruing status was $6 thousand for the quarter ended December
31, 2009. Loans are removed from the TDR classification after 12
consecutive months of satisfactory repayment performance under the new loan
terms.
86
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. In addition, the regulations also provide for a special
mention category which are performing loans on which known information about the
collateral pledged or 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 assets in the non-performing asset categories. TDRs that were
performing prior to restructuring are reported as special mention until they
have been performing for 12 consecutive months under the new loan
terms. 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. TDRs that were more than 90 days
delinquent at the time of restructuring are reported as substandard until they
have been performing for 12 consecutive months under the new loan
terms. Assets classified as doubtful have all of the weaknesses
inherent as 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 reports problem assets as either special mention,
substandard or doubtful, it may establish specific valuation allowances in an
amount deemed prudent by management and approved by the board of
directors. General valuation allowances may be established to
recognize the inherent risk associated with lending activities, but unlike
specific valuation allowances, have not been allocated to specific problem
assets within a portfolio of similar assets. When an insured
institution classifies problem assets as loss, it is required either to
establish a specific valuation 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 allowance for loan losses is subject to review by the Office of
Thrift Supervision and, in limited circumstances, the FDIC, which may order the
establishment of additional loss allowances.
In
connection with the filing of Capitol Federal Savings Bank’s periodic reports
with the Office of Thrift Supervision and in accordance with our asset
classification policy, we regularly review the problem assets in our portfolio
to determine whether any assets require classification in accordance with
applicable regulations. The following table sets forth the balance of
assets, less specific valuation allowances, classified as special mention or
substandard at December 31, 2009. At that date, we had no assets,
less specific valuation allowances, classified as doubtful or
loss. Purchased loans and purchased REO represent loans purchased
from nationwide lenders.
87
|
Special
Mention
|
Substandard
|
|||||||||||||||
|
|
Number
|
Amount
|
Number
|
Amount
|
||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Real
Estate Loans:
|
||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||
|
Originated
|
57
|
$
|
9,546
|
131
|
$
|
15,068
|
||||||||||
|
Purchased
|
1
|
262
|
70
|
18,691
|
||||||||||||
|
Multi-family
and commercial
|
1
|
8,167
|
—
|
—
|
||||||||||||
|
Construction
|
—
|
—
|
—
|
—
|
||||||||||||
|
Consumer
loans:
|
||||||||||||||||
|
Home
equity
|
6
|
71
|
38
|
836
|
||||||||||||
|
Other
|
—
|
—
|
8
|
51
|
||||||||||||
|
Total
loans
|
65
|
18,046
|
247
|
34,646
|
||||||||||||
|
Real
estate owned:
|
||||||||||||||||
|
Originated
|
—
|
—
|
50
|
4,727
|
||||||||||||
|
Purchased
|
—
|
—
|
9
|
1,911
|
||||||||||||
|
Total
real estate owned
|
—
|
—
|
59
|
6,638
|
||||||||||||
|
Trust
preferred securities
|
—
|
—
|
1
|
2,408
|
||||||||||||
|
Total
classified assets
|
65
|
$
|
18,046
|
307
|
$
|
43,692
|
||||||||||
Allowance for
Loan Losses and Provision for Loan Losses. Management maintains an
allowance for loan losses (ALLL) to absorb known and inherent losses in the loan
portfolio based on ongoing quarterly assessments of the loan
portfolio. Our ALLL methodology considers a number of quantitative
and qualitative factors, including the trend and composition of our delinquent
and non-performing loans, results of foreclosed property transactions, and the
status and trends of the local and national economies and housing
markets. The ALLL is maintained through provisions for loan losses
which are charged to income. The provision for loan losses is
established after considering the results of management’s quarterly assessment
of the allowance for loan losses. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Critical
Accounting Policies.” At December 31, 2009, our ALLL was $12.2 million, or 0.23%
of the total loan portfolio and 38% of total non-performing
loans. This compares with an ALLL of $10.2 million, or 0.18% of the
total loan portfolio and 33% of total non-performing loans as of September 30,
2009.
The
following table presents CFF’s activity for the ALLL and related ratios at the
dates and for the periods indicated. Charge-offs represent losses on
loans transferred to REO and losses on short sales. Recoveries
represent amounts recovered after a loan has been charged-off. Once a
loan enters REO, any future write downs or recoveries are reported in REO
operations in other expenses on the consolidated statement of income; therefore,
recoveries of charge-offs are rare.
88
|
Three
Months
Ended
December
31,
|
Year
Ended September 30,
|
|||||||||||||||||||||||
| 2009 |
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
|
(Dollars in thousands) | |||||||||||||||||||||||
|
Balance
at beginning of period
|
$ | 10,150 | $ | 5,791 | $ | 4,181 | $ | 4,433 | $ | 4,598 | $ | 4,495 | ||||||||||||
|
Charge-offs:
|
||||||||||||||||||||||||
|
One-
to four-family loans-originated
|
39 | 226 | 86 | 8 | 95 | 91 | ||||||||||||||||||
|
One-
to four-family loans-purchased
|
856 | 1,781 | 321 | — | — | — | ||||||||||||||||||
|
Multi-family
&
commercial
|
— | — | — | — | — | — | ||||||||||||||||||
|
Construction
|
— | — | — | — | — | — | ||||||||||||||||||
|
Home
equity
|
23 | 1 | 2 | 3 | — | — | ||||||||||||||||||
|
Other
consumer
|
5 | 24 | 32 | 16 | 37 | 56 | ||||||||||||||||||
|
Total
charge-offs
|
923 | 2,032 | 441 | 27 | 132 | 147 | ||||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||||||
|
One-
to
four-family
|
— | — | — | — | 1 | 35 | ||||||||||||||||||
|
Multi-family
&
commercial
|
— | — | — | — | — | — | ||||||||||||||||||
|
Construction
|
— | — | — | — | — | — | ||||||||||||||||||
|
Home
equity
|
— | — | — | — | — | — | ||||||||||||||||||
|
Other
consumer
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
recoveries
|
— | — | — | — | 1 | 35 | ||||||||||||||||||
|
Net
charge-offs
|
923 | 2,032 | 441 | 27 | 131 | 112 | ||||||||||||||||||
|
Allowance
on loans in the loan swap transaction
|
(135 | ) | — | — | — | (281 | ) | — | ||||||||||||||||
|
Provision
(recovery)
|
3,115 | 6,391 | 2,051 | (225 | ) | 247 | 215 | |||||||||||||||||
|
Balance
at end of
period
|
$ | 12,207 | $ | 10,150 | $ | 5,791 | $ | 4,181 | $ | 4,433 | $ | 4,598 | ||||||||||||
|
Ratio
of net charge-offs during the period to
average loans outstanding(1)
|
0.02 | % | 0.04 | % | — | % | — | % | — | % | — | % | ||||||||||||
|
Ratio
of net charge-offs during the period to
average non-performing assets
|
2.39 | % | 7.11 | % | 3.12 | % | 0.31 | % | 1.77 | % | 1.31 | % | ||||||||||||
|
ALLL
as a percentage of non-performing loans
|
37.59 | % | 32.83 | % | 42.37 | % | 56.87 | % | 79.03 | % | 89.14 | % | ||||||||||||
|
ALLL
as a percentage of total loans (end
of
period)
|
0.23 | % | 0.18 | % | 0.11 | % | 0.08 | % | 0.08 | % | 0.08 | % | ||||||||||||
|
(1)
|
Ratios
for the years ended September 30, 2008, 2007, 2006 and 2005 calculate to
be less than 0.01%.
|
89
Provisions
for loan losses are charged to income in order to maintain the ALLL at a level
management considers adequate to absorb known and inherent losses in the loan
portfolio. Our ALLL methodology considers a number of quantitative
and qualitative factors, including the trend and composition of our delinquent
and non-performing loans, results of foreclosed property and short sale
transactions and the status and trends of the local and national economies and
housing markets. The amount of the ALLL is based on estimates, and
the ultimate losses may vary from such estimates as more information becomes
available or conditions change. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies – Allowance for Loan
Losses.” The $3.1 million provision for loan loss recorded in
the current quarter primarily reflects increases in the level of certain
qualitative factors in our general valuation allowance model. Despite
the current economic operating environment and some deterioration in our
portfolio, particularly the purchased loan portfolio, our credit quality
continued to compare favorably to the industry and our
peers. Although management believes the ALLL is established and
maintained at adequate levels, additions may be necessary if economic conditions
fail to improve or if other conditions differ substantially from the current
operating environment.
Historically,
our charge-offs have been low due to our low level of non-performing loans and
the amount of underlying equity in the properties collateralizing one- to
four-family loans. The increase in non-performing purchased loans and
the decline in real estate and housing markets have begun to result in higher
charge-offs, particularly with purchased loans. However, the overall
amount of charge-offs has not been significant because of our underwriting
standards and the relative economic stability of the geographic areas in which
Capitol Federal Savings Bank originates loans. A deterioration in economic
conditions in these areas, or continued or increased deterioration in other
areas where the property securing our purchased loans are located, could,
however, lead to an increase in charge-offs.
The
distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
|
December
31,
|
September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
|
2009
|
2009
|
2008 |
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||||||||||
|
Amount
of Loan Loss Allowance
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
of Loan Loss Allowance
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount of Loan Loss Allowance |
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
of Loan Loss Allowance
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
of Loan Loss Allowance
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
of Loan Loss Allowance
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to four-family
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Originated
|
$ | 4,715 | 82.0 | % | $ | 3,604 | 81.9 | % | $ | 3,075 | 80.7 | % | $ | 2,962 | 77.0 | % | $ | 2,819 | 72.9 | % | $ | 2,811 | 77.7 | % | ||||||||||||||||||||||||
|
Purchased
|
6,814 | 12.4 | 5,972 | 12.3 | 2,307 | 13.6 | 773 | 17.1 | 977 | 21.3 | 1,055 | 17.1 | ||||||||||||||||||||||||||||||||||||
|
Multi-family
and commercial
|
327 | 1.3 | 227 | 1.4 | 54 | 1.1 | 57 | 1.1 | 54 | 1.1 | 270 | 0.9 | ||||||||||||||||||||||||||||||||||||
|
Construction
|
20 | 0.6 | 22 | 0.7 | 41 | 0.6 | 69 | 0.6 | 258 | 0.4 | 129 | 0.5 | ||||||||||||||||||||||||||||||||||||
|
Home equity
|
283 | 3.5 | 268 | 3.5 | 229 | 3.8 | 227 | 4.0 | 249 | 4.1 | 250 | 3.6 | ||||||||||||||||||||||||||||||||||||
|
Other consumer
|
48 | 0.2 | 57 | 0.2 | 85 | 0.2 | 93 | 0.2 | 76 | 0.2 | 83 | 0.2 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 12,207 | 100.0 | % | $ | 10,150 | 100.0 | % | $ | 5,791 | 100.0 | % | $ | 4,181 | 100.0 | % | $ | 4,433 | 100.0 | % | $ | 4,598 | 100.0 | % | ||||||||||||||||||||||||
Investment
Activities
Federally
chartered savings institutions have the authority to invest in various types of
liquid assets, including: U.S. Treasury obligations; securities of various
federal agencies; government-sponsored enterprises, including callable agency
securities and municipal bonds; 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,
corporate debt securities, and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. As a member of the FHLB, Capitol Federal
Savings Bank is required to maintain a specified investment in the capital stock
of the FHLB. See “Regulation - Federal Home Loan Bank System,” “—
Capitol Federal Savings Bank,” and ”— Qualified Thrift Lender Test” for a
discussion of additional restrictions on our investment activities.
The Chief
Investment Officer has the primary responsibility for the management of Capitol
Federal Savings Bank’s investment portfolio, subject to the direction and
guidance of the ALCO. The Chief Investment Officer considers various
factors when making decisions, including the marketability, maturity, and tax
consequences of the proposed investment. The composition of the
investment portfolio will be affected by various market conditions, including
the slope of the yield curve, the level of interest rates, the impact on Capitol
Federal Savings Bank’s interest rate risk, the trend of net deposit flows, the
volume of loan sales, the anticipated demand for funds via withdrawals,
repayments of borrowings, and loan originations and purchases.
90
The
general objectives of our investment portfolio are to provide liquidity when
loan demand is high, to assist in maintaining earnings when loan demand is low,
and to maximize earnings while satisfactorily managing liquidity risk, interest
rate risk, reinvestment risk, and credit risk. Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections
are reviewed regularly and updated to assure that adequate liquidity is
maintained. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Quantitative and Qualitative Disclosure
about Market Risk.”
We
classify securities as trading, available-for-sale (AFS) or held-to-maturity at
the date of purchase. Securities that are purchased and held
principally for resale in the near future are classified as trading securities
and are reported at fair value, with unrealized gains and losses reported in the
consolidated statements of income. AFS securities are reported at
fair value, with unrealized gains and losses reported as a component of
accumulated other comprehensive income (loss) within stockholders’ equity, net
of deferred income taxes. Held to maturity securities are reported at
cost, adjusted for amortization of premium and accretion of
discount. We have both the ability and intent to hold the held to
maturity securities to maturity.
Management
monitors the securities portfolio for OTTI on an ongoing basis and performs a
formal review quarterly. The process involves monitoring market
events and other items that could impact issuers. Management assesses
whether an OTTI is present when the fair value of a security is less than its
amortized cost basis at the balance sheet date. Management determines
whether OTTI losses should be recognized for impaired securities by assessing
all known facts and circumstances surrounding the securities. If CFF
intends to sell an impaired security or if it is more likely than not that CFF
will be required to sell an impaired security before recovery of its amortized
cost basis, OTTI has occurred and the difference between amortized cost and fair
value will be recognized as a loss in earnings. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies.” At December 31, 2009, no securities
had been identified as other-than-temporarily impaired.
Investment
Securities. Our investment securities portfolio consists of
securities issued by government-sponsored enterprises (primarily issued by FNMA,
FHLMC, and FHLB), taxable and non-taxable municipal bonds and trust preferred
securities. The portfolio consists of securities classified as either
HTM or AFS. During the quarter ended December 31, 2009, our
investment securities portfolio increased $171.2 million from $480.7 million at
September 30, 2009 to $651.9 million at December 31, 2009. The
increase was a result of purchases of $173.4 million. All of the
purchases during the quarter ended December 31, 2009 were fixed-rate and had a
weighted average yield of 2.39% and a weighted average life of 1.25 years, due
to the majority of the securities being callable. If market rates
were to rise, the short-term nature of these securities may allow management the
opportunity to reinvest the maturing funds at a higher yield. See
“Notes to Consolidated Financial Statements – Note 3 - Securities” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Financial Condition – Investment
Securities.”
Mortgage-Backed
Securities. Our MBS portfolio consists primarily of securities
issued by government-sponsored enterprises (primarily issued by FNMA and FHLMC).
The principal and interest payments of MBS issued by FNMA and FHLMC are
collateralized by the underlying mortgage assets with principal and interest
payments guaranteed by the agencies. The underlying mortgage assets
are conforming mortgages that comply with FNMA and FHLMC underwriting
guidelines, as applicable, and are therefore not considered
subprime.
During
the quarter ended December 31, 2009, our MBS portfolio decreased $114.5 million
from $1.99 billion at September 30, 2009 to $1.88 billion at December 31,
2009. The decrease in the balance was a result of some cash flows
from the MBS portfolio being reinvested into investment securities.
During
the quarter ended December 31, 2009, MBS with a fair value of $192.7 million
were received in conjunction with the loan swap transaction. The
related MBS were sold for a $6.5 million gain during the three months ended
December 31, 2009. The proceeds from the sale were primarily used to
purchase investment securities with terms shorter than that of the mortgage
loans that were swapped. The loan swap transaction was primarily
undertaken for interest rate risk management purposes. See “Notes to
Consolidated Financial Statements – Note 3 - Securities” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Financial Condition – Mortgage-Backed Securities.”
A small
portion of the MBS portfolio consists of non-agency 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 MBS are used to create investment classes with different
maturities and, in some cases, different amortization schedules, as well as a
residual interest, with each such class possessing different risk
characteristics. At December 31, 2009, we held CMOs with a carrying
value of $51.1 million, none of which qualified as high risk mortgage securities
as defined under Office of Thrift Supervision regulations. Our CMOs
are currently classified as either HTM or AFS. We do not purchase
residual interest bonds.
91
MBS
generally yield less than the loans that underlie such securities because of the
servicing fee retained by the servicer and the cost of payment guarantees or
credit enhancements that reduce credit risk. However, MBS are
generally more liquid than individual mortgage loans and may be used to
collateralize certain borrowings and public unit deposits of Capitol Federal
Savings Bank. In general, MBS issued or guaranteed by FNMA and FHLMC
are weighted at no more than 20% for risk-based capital purposes compared to the
50% risk-weighting assigned to most non-securitized mortgage
loans. On October 7, 2008, the Office of Thrift Supervision and other
federal banking agencies proposed amendments to existing regulations that would
reduce the risk weighting for MBS issued or guaranteed by FNMA and FHLMC from
20% to 10%.
When
securities are purchased for a price other than par, the difference between the
price paid and par is accreted to or amortized against the interest earned over
the life of the security, depending on whether a discount or premium to par is
paid. Movements in interest rates affect prepayment rates which, in
turn, affect the average lives of MBS and the speed at which the discount or
premium is accreted to or amortized against earnings.
While MBS
issued or backed by FNMA and FHLMC carry a reduced credit risk compared to whole
loans, these 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 the
underlying mortgage loans and so affect both the prepayment speed, and value, of
the securities. As noted above, Capitol Federal Savings Bank, on some
transactions, pays a premium over par value for MBS purchased. Large
premiums may cause significant negative yield adjustments due to accelerated
prepayments on the underlying mortgages.
The
following table sets forth the composition of our investment and MBS portfolio
at the dates indicated. Our investment securities portfolio at
December 31, 2009 did not contain securities of any issuer with an aggregate
book value in excess of 10% of our stockholders’ equity, excluding those issued
by government-sponsored enterprises.
| December 31, | September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2009 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||||||||||||||||
|
Carrying
Value
|
%
of
Total
|
Fair
Value
|
Carrying
Value
|
%
of
Total
|
Fair
Value
|
Carrying
Value
|
%
of
Total
|
Fair
Value
|
Carrying
Value
|
%
of
Total
|
Fair
Value
|
|||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
AFS
securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
MBS
|
$ | 1,305,096 | 84.7 | % | $ | 1,305,096 | $ | 1,389,211 | 85.5 | % | $ | 1,389,211 | $ | 1,484,055 | 96.7 | % | $ | 1,484,055 | $ | 402,686 | 79.7 | % | $ | 402,686 | ||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
228,840 | 14.9 | 228,840 | 229,875 | 14.2 | 229,875 | 44,188 | 2.9 | 44,188 | 99,705 | 19.8 | 99,705 | ||||||||||||||||||||||||||||||||||||
|
Trust
preferred securities
|
2,408 | 0.2 | 2,408 | 2,110 | 0.1 | 2,110 | 2,655 | 0.2 | 2,655 | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Municipal
bonds
|
2,753 | 0.2 | 2,753 | 2,799 | 0.2 | 2,799 | 2,743 | 0.2 | 2,743 | 2,719 | 0.5 | 2,719 | ||||||||||||||||||||||||||||||||||||
|
Total AFS
securities
|
1,539,097 | 100 | 1,539,097 | 1,623,995 | 100.0 | 1,623,995 | 1,533,641 | 100.0 | 1,533,641 | 505,110 | 100.0 | 505,110 | ||||||||||||||||||||||||||||||||||||
|
HTM
securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
MBS
|
572,873 | 57.8 | 594,365 | 603,256 | 71.0 | 627,829 | 750,284 | 89.0 | 743,764 | 1,011,585 | 70.6 | 995,415 | ||||||||||||||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
348,623 | 35.2 | 348,240 | 175,394 | 20.7 | 175,929 | 37,397 | 4.4 | 36,769 | 401,431 | 28.0 | 398,598 | ||||||||||||||||||||||||||||||||||||
|
Municipal
bonds
|
69,319 | 7.0 | 71,112 | 70,526 | 8.3 | 73,000 | 55,376 | 6.6 | 55,442 | 20,313 | 1.4 | 20,342 | ||||||||||||||||||||||||||||||||||||
|
Total HTM
securities
|
990,815 | 100.0 | % | 1,013,717 | 849,176 | 100.0 | % | 876,758 | 843,057 | 100.0 | % | 835,975 | 1,433,329 | 100.0 | % | 1,414,355 | ||||||||||||||||||||||||||||||||
| $ | 2,529,912 | $ | 2,552,814 | $ | 2,473,171 | $ | 2,500,753 | $ | 2,376,698 | $ | 2,369,616 | $ | 1,938,439 | $ | 1,919,465 | |||||||||||||||||||||||||||||||||
92
The
composition and maturities of the investment and MBS portfolio at December 31,
2009 are indicated in the following table by remaining contractual maturity,
without consideration of call features or pre-refunding dates. Yields
on tax-exempt investments are not calculated on a taxable equivalent
basis.
|
One
year or less
|
More
than
1 to
5 years
|
More
than
5 to
10 years
|
Over
10 years
|
Total
|
|||||||||||||||||||||||||
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Fair
Value
|
|||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
|
AFS
securities:
|
|||||||||||||||||||||||||||||
|
MBS
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
$
|
110,832
|
4.90
|
%
|
$
|
1,194,264
|
4.48
|
%
|
$
|
1,305,096
|
4.51
|
%
|
$
|
1,305,096
|
|||||||
|
U.S.
government-sponsored enterprises
|
25,999
|
1.57
|
202,841
|
1.53
|
—
|
—
|
—
|
—
|
228,840
|
1.53
|
228,840
|
||||||||||||||||||
|
Trust
preferred securities
|
—
|
—
|
—
|
—
|
—
|
—
|
2,408
|
1.92
|
2,408
|
1.92
|
2,408
|
||||||||||||||||||
|
Municipal
bonds
|
—
|
—
|
593
|
3.58
|
912
|
3.72
|
1,248
|
3.90
|
2,753
|
3.77
|
2,753
|
||||||||||||||||||
|
Total
AFS securities
|
25,999
|
1.57
|
203,434
|
1.54
|
111,744
|
4.89
|
1,197,920
|
4.47
|
1,539,097
|
4.06
|
1,539,097
|
||||||||||||||||||
|
HTM
Securities:
|
|||||||||||||||||||||||||||||
|
MBS
|
—
|
—
|
—
|
—
|
319,908
|
4.40
|
252,964
|
3.43
|
572,872
|
3.97
|
594,365
|
||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
—
|
—
|
348,624
|
2.20
|
—
|
—
|
—
|
—
|
348,624
|
2.20
|
348,240
|
||||||||||||||||||
|
Municipal bonds
|
1,506
|
2.81
|
19,237
|
2.51
|
33,140
|
3.33
|
15,436
|
2.80
|
69,319
|
2.97
|
71,112
|
||||||||||||||||||
|
Total
HTM securities
|
1,506
|
2.81
|
367,861
|
2.22
|
353,048
|
4.30
|
268,400
|
3.39
|
990,815
|
3.28
|
1,013,717
|
||||||||||||||||||
|
$
|
27,505
|
1.64
|
%
|
$
|
571,295
|
1.97
|
%
|
$
|
464,792
|
4.44
|
%
|
$
|
1,466,320
|
4.28
|
%
|
$
|
2,529,912
|
3.76
|
%
|
$
|
2,552,814
|
||||||||
Sources
of Funds
General. Our
sources of funds are deposits, borrowings, repayment of principal and interest
on loans and MBS, interest earned on and maturities and calls of investment
securities, and funds generated from operations.
Deposits. We offer a
variety of retail deposit accounts having a wide range of interest rates and
terms. Our deposits consist of savings accounts, money market
accounts, interest-bearing and non-interest bearing checking accounts, and
certificates of deposit. We rely primarily upon competitive pricing
policies, marketing, and customer service to attract and retain
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 utilize strategic pricing
to obtain funds and to respond with flexibility to changes in consumer
demand. We endeavor to manage the pricing of our deposits in keeping
with our asset and liability management, liquidity, and profitability
objectives. Based on our experience, we believe that our deposits are
stable sources of funds. Despite this stability, our ability to
attract and maintain these deposits and the rates paid on them has been, and
will continue to be, significantly affected by market conditions.
The
following table sets forth our deposit flows during the periods
indicated. Included in the table are brokered and public unit
deposits which totaled $100.1 million, $163.0 million, $180.6 million, and
$193.0 million at December 31, 2009 and September 30, 2009, 2008, and 2007,
respectively.
93
|
Three
Month Ended
December
31,
|
Year
Ended September 30,
|
|||||||||||||||
|
2009
|
2009
|
2008
|
2007
|
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Opening
balance
|
$
|
4,228,609
|
$
|
3,923,883
|
$
|
3,922,782
|
$
|
3,900,431
|
||||||||
|
Deposits
|
1,763,775
|
7,021,015
|
7,108,677
|
7,168,045
|
||||||||||||
|
Withdrawals
|
1,788,858
|
6,818,534
|
7,242,121
|
7,289,077
|
||||||||||||
|
Interest
credited
|
23,726
|
102,245
|
134,545
|
143,383
|
||||||||||||
|
Ending
balance
|
$
|
4,227,252
|
$
|
4,228,609
|
$
|
3,923,883
|
$
|
3,922,782
|
||||||||
|
Net
increase (decrease)
|
$
|
(1,357
|
) |
$
|
304,726
|
$
|
1,101
|
$
|
22,351
|
|||||||
|
Percent
increase (decrease)
|
(0.03
|
)% |
7.77
|
%
|
0.03
|
%
|
0.57
|
%
|
||||||||
The following table sets forth the
dollar amount of deposits in the various types of deposit programs we offered
for the periods indicated.
|
At
December 31,
|
At
September 30,
|
|||||||||||||||||||||||||||||||||
|
2009
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Percent
|
Percent
|
Percent
|
Percent
|
|||||||||||||||||||||||||||||||
|
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
|
Non-Certificates:
|
||||||||||||||||||||||||||||||||||
|
Checking
|
$ | 491,619 | 11.7 | % | $ | 439,975 | 10.4 | % | $ | 400,461 | 10.2 | % | $ | 394,109 | 10.1 | % | ||||||||||||||||||
|
Savings
|
225,383 | 5.3 | 226,396 | 5.4 | 232,103 | 5.9 | 237,148 | 6.0 | ||||||||||||||||||||||||||
|
Money
market
|
888,131 | 21.0 | 848,157 | 20.1 | 772,323 | 19.7 | 790,277 | 20.2 | ||||||||||||||||||||||||||
|
Total
non-certificates
|
1,605,133 | 38.0 | 1,514,528 | 35.9 | 1,404,887 | 35.8 | 1,421,534 | 36.3 | ||||||||||||||||||||||||||
|
Certificates
(by rate):
|
||||||||||||||||||||||||||||||||||
| 0.00 – 0.99% | 97,315 | 2.3 | 78,036 | 1.8 | 114 | — | 134 | — | ||||||||||||||||||||||||||
| 1.00 – 1.99% | 493,527 | 11.7 | 254,846 | 6.0 | 7,426 | 0.2 | — | — | ||||||||||||||||||||||||||
| 2.00 – 2.99% | 905,202 | 21.4 | 971,605 | 23.0 | 413,102 | 10.5 | 35,815 | 0.9 | ||||||||||||||||||||||||||
| 3.00 – 3.99% | 684,727 | 16.2 | 848,991 | 20.1 | 935,470 | 23.8 | 225,162 | 5.7 | ||||||||||||||||||||||||||
| 4.00 – 4.99% | 282,351 | 6.7 | 326,087 | 7.7 | 747,612 | 19.1 | 746,707 | 19.0 | ||||||||||||||||||||||||||
| 5.00 – 5.99% | 158,041 | 3.7 | 233,572 | 5.5 | 414,347 | 10.6 | 1,489,706 | 38.0 | ||||||||||||||||||||||||||
| 6.00 – 6.99% | 956 | — | 944 | — | 925 | — | 3,724 | 0.1 | ||||||||||||||||||||||||||
|
Total
certificates
|
2,622,119 | 62.0 | 2,714,081 | 64.1 | 2,518,996 | 64.2 | 2,501,248 | 63.7 | ||||||||||||||||||||||||||
| $ | 4,227,252 | 100.0 | % | $ | 4,228,609 | 100.0 | % | $ | 3,923,883 | 100.0 | % | $ | 3,922,782 | 100.0 | % | |||||||||||||||||||
The
following table sets forth the maturity and rate range of our certificate of
deposit portfolio at December 31, 2009.
94
|
At
December 31, 2009
|
||||||||||||||||||||||||||
|
Amount
Due
|
Percent
of
|
|||||||||||||||||||||||||
|
More
than
|
More
than
|
Total
|
||||||||||||||||||||||||
|
One
year
|
1
year to
|
2
to 3
|
More
than
|
Certificates
|
||||||||||||||||||||||
|
|
or
less
|
2
years
|
years
|
3
years
|
Total
|
of
Deposit
|
||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| 0.00 – 0.99% |
$
|
97,266
|
$
|
9
|
$
|
40
|
$
|
—
|
$
|
97,315
|
3.7
|
%
|
||||||||||||||
| 1.00 – 1.99% |
343,623
|
149,140
|
764
|
—
|
493,527
|
18.8
|
||||||||||||||||||||
| 2.00 – 2.99% |
575,138
|
212,376
|
51,884
|
65,804
|
905,202
|
34.5
|
||||||||||||||||||||
| 3.00 – 3.99% |
136,555
|
285,942
|
169,137
|
93,093
|
684,727
|
26.1
|
||||||||||||||||||||
| 4.00 – 4.99% |
135,573
|
122,784
|
20,654
|
3,340
|
282,351
|
10.8
|
||||||||||||||||||||
| 5.00 – 5.99% |
157,429
|
612
|
—
|
—
|
158,041
|
6.0
|
||||||||||||||||||||
| 6.00 – 6.99% |
956
|
—
|
—
|
—
|
956
|
0.1
|
||||||||||||||||||||
|
$
|
1,446,540
|
$
|
770,863
|
$
|
242,479
|
$
|
162,237
|
$
|
2,622,119
|
100.0
|
%
|
|||||||||||||||
The
following table sets forth the maturity information for our certificate of
deposit portfolio as of December 31, 2009.
|
Maturity
|
||||||||||||||||||||
|
Over
|
Over
|
|||||||||||||||||||
|
3
months
|
3
to 6
|
6
to 12
|
Over
|
|||||||||||||||||
|
or
less
|
months
|
months
|
12
months
|
Total
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Certificates
of deposit less than $100,000
|
$
|
288,552
|
$
|
297,159
|
$
|
430,530
|
$
|
879,674
|
$
|
1,895,915
|
||||||||||
|
Certificates
of deposit of $100,000 or more
|
166,802
|
116,532
|
146,965
|
295,905
|
726,204
|
|||||||||||||||
|
Total
certificates of
deposit
|
$
|
455,354
|
$
|
413,691
|
$
|
577,495
|
$
|
1,175,579
|
$
|
2,622,119
|
||||||||||
The board
of directors has authorized the utilization of brokers to obtain deposits as a
source of funds. Capitol Federal Savings Bank has entered into
several relationships with nationally recognized wholesale deposit brokerage
firms to accept deposits from these firms. Depending on market
conditions, Capitol Federal Savings Bank may use brokered deposits to fund asset
growth and gather deposits that may help to manage interest rate
risk. Capitol Federal Savings Bank’s policies limit the amount of
brokered deposits that it may have at any time to 15% of total
deposits. The rates paid on brokered deposits plus fees are generally
equivalent to rates offered by the FHLB on advances and comparable to some rates
paid on retail deposits. At September 30, 2009 and 2008, the balance
of brokered deposits was $71.5 million, or approximately 2% of total deposits,
and $180.6 million, or approximately 5% of total deposits, respectively. Capitol
Federal Savings Bank had no brokered deposits at December 31, 2009.
The board
of directors also has authorized the utilization of public unit deposits as a
source of funds. Capitol Federal Savings Bank’s policies limit the
amount of public unit deposits that it may have at any time to 10% of total
deposits. In order to qualify to obtain such deposits, Capitol
Federal Savings Bank must have a branch in each county in which it collects
public unit deposits, and by law, must pledge securities as collateral for all
such balances in excess of the FDIC insurance limits (currently $250 thousand
through December 31, 2013.) At December 31, 2009 and September 30,
2009, the balance of public unit deposits was $100.1 million and $91.5 million,
respectively, or approximately 2% of total deposits at both dates. At
September 30, 2008, Capitol Federal Savings Bank did not have any public unit
deposits.
Borrowings. Although retail
deposits are our main source of funds, we may utilize borrowings when, at the
time of the borrowing, they can be invested at a positive rate spread, when we
desire additional capacity to fund loan demand or when they help us meet our
asset and liability management objectives. Historically, our
borrowings primarily have consisted of FHLB advances. From time to
time, we also utilize the line-of-credit that we maintain at the
FHLB. During fiscal year 2008, Capitol Federal Savings Bank began
supplementing FHLB advances with repurchase agreements, wherein Capitol Federal
Savings Bank enters into agreements with selected brokers to sell securities
under agreements to repurchase. These agreements are recorded as
financing transactions as Capitol Federal Savings Bank maintains effective
control over the transferred securities.
95
We may
obtain FHLB advances upon the security of our blanket pledge
agreement. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Commitments.” FHLB advances may be made pursuant to several different
credit programs, each of which has its own interest rate, maturity, repayment,
and convertible features, if any. At December 31, 2009, we had $2.39
billion in FHLB advances.
During
fiscal year 2009, Capitol Federal Savings Bank prepaid $875.0 million of
fixed-rate FHLB advances with a weighted average interest rate of 5.65% and a
weighted average remaining term to maturity of 11 months. The prepaid
FHLB advances were replaced with $875.0 million of fixed-rate FHLB advances,
with a weighted average contractual interest rate of 3.41% and an average term
of 69 months. Capitol Federal Savings Bank paid a $38.4 million
penalty to the FHLB as a result of prepaying the FHLB advances. The
prepayment penalty was deferred and will be recognized in interest expense over
the life of the new FHLB advances. As a result, the prepayment
penalty effectively increased the interest rate on the new advances 96 basis
points at the time of the transaction. See “Notes to Consolidated
Financial Statements—Note 7 Borrowed Funds.”
During
fiscal year 2008, Capitol Federal Savings Bank had interest rate swaps with a
notional amount of $800.0 million hedged against an equal amount of FHLB
advances. The interest rate swaps were designated as fair value
hedges and Capitol Federal Savings Bank accounted for the hedges using the
shortcut method. During the
quarter ended December 31, 2007, management terminated interest rate swaps with
a notional amount of $575.0 million that were scheduled to mature during fiscal
year 2010. As a result of the termination, Capitol Federal Savings
Bank received cash proceeds and recorded a deferred gain of $1.7
million. The gain will be amortized to interest expense on FHLB
advances over the remaining life of the FHLB advances that were originally
hedged by the terminated interest rate swap agreements. As of
September 30, 2008, all remaining interest rate swap agreements had
matured.
Capitol
Federal Savings Bank may enter into additional repurchase agreements as
management deems appropriate, up to 15% of Bank assets, per Bank
policy. At December 31, 2009, repurchase agreements were $660.0
million, or approximately 8% of total assets. The securities
underlying the agreements continue to be carried in Capitol Federal Savings
Bank’s securities portfolio. At December 31, 2009, we had securities
with a fair value of $765.3 million pledged as collateral. Repurchase
agreements are made at mutually agreed upon terms between counterparties and
Capitol Federal Savings Bank. The use of repurchase agreements allows
for the diversification of funding sources and the use of securities that were
not being leveraged as collateral. See “Notes to Consolidated
Financial Statements —Note 7” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and
Commitments.”
In 2004,
CFF formed Capitol Federal Financial Trust I (the Trust), which issued $52.0
million of variable rate cumulative trust preferred securities in a private
transaction exempt from registration under the Securities Act of
1933. The Trust used the proceeds from the sale of its trust
preferred securities and from the sale of $1.6 million of its common securities
to CFF to purchase $53.6 million of Junior Subordinated Deferrable Interest
Debentures which are the sole assets of the Trust. See “Notes to
Consolidated Financial Statements — Note 7.”
Interest
on the debentures is due quarterly in January, April, July and October until the
maturity date of April 7, 2034. The interest rate on the debentures,
which is identical to the distribution rate paid on the trust securities and
resets at each interest payment, is based upon the three month LIBOR rate plus
275 basis points. Principal is due at maturity. CFF was
permitted to prepay the debentures at a premium until April 2009, at which point
the borrowings became redeemable at par. Redemption of the debentures
by CFF will result in redemption of a like amount of trust preferred securities
by the trust. There are certain covenants that CFF is required to
comply with regarding the debentures. These covenants include a
prohibition on cash dividends in the event of default or deferral of interest on
the debentures, annual certifications to the trust and other covenants related
to the payment of interest and principal and maintenance of the
trust. CFF was in compliance with all the covenants at December 31,
2009.
96
The
following table sets forth certain information relating to each category of
borrowings for which the average short-term balance outstanding during the
period was more than 30% of stockholders’ equity at the end of the
period. The maximum balance, average balance, and weighted average
interest rate during the quarters ended December 31, 2009 and 2008, and fiscal
years 2009, 2008, and 2007 reflect all borrowings that were scheduled to mature
within one year at any month-end during these periods. For the period
ended December 31, 2009, the repurchase agreements scheduled to mature within
one year did not exceed 30% of stockholders’ equity. For the other
periods presented, there were no repurchase agreements scheduled to mature
within one year.
|
At
or for the Three
Months
Ended December
31,
|
At
or for the Year Ended September 30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
FHLB Advances:
|
||||||||||||||||||||
|
Balance
|
$ | 550,000 | $ | 795,000 | $ | 350,000 | $ | 620,000 | $ | 1,125,000 | ||||||||||
|
Maximum
balance outstanding at any month-end during the
period
|
550,000 | 795,000 | 795,000 | 925,000 | 1,275,000 | |||||||||||||||
|
Average
balance
|
450,000 | 678,333 | 396,250 | 742,500 | 1,118,907 | |||||||||||||||
|
Weighted
average interest rate during the period
|
4.49 | % | 4.44 | % | 4.54 | % | 4.31 | % | 3.95 | % | ||||||||||
|
Weighted
average interest rate at end of period
|
4.57 | % | 4.70 | % | 4.49 | % | 4.27 | % | 4.23 | % | ||||||||||
Subsidiary
and Other Activities
As a
federally chartered savings bank, we are permitted by Office of Thrift
Supervision regulations to invest up to 2% of our Capitol Federal Savings Bank
assets, or $167.5 million at December 31, 2009, in the stock of, or as unsecured
loans to, service corporation subsidiaries. We may invest an
additional 1% of our assets in service corporations where such additional funds
are used for inner-city or community development purposes. At
December 31, 2009, Capitol Federal Savings Bank had one subsidiary, Capitol
Funds, Inc. At December 31, 2009, Capitol Funds, Inc. had a capital
balance of $5.6 million. Capitol Funds, Inc. has a wholly owned
subsidiary, Capitol Federal Mortgage Reinsurance Company
(CFMRC). CFMRC serves as a reinsurance company for the private
mortgage insurance companies Capitol Federal Savings Bank uses in its normal
course of operations. CFMRC provides mortgage reinsurance on certain
one- to four-family loans in Capitol Federal Savings Bank’s
portfolio. During fiscal year 2009, three of the four mortgage
insurance companies that CFMRC does business with stopped writing new
business. The one remaining mortgage insurance company stopped
writing new business in January 2010. During the quarter ended December 31, 2009
and the year ended September 30, 2009, Capitol Funds, Inc. reported consolidated
net income of $102 thousand and $460 thousand, respectively, which was primarily
composed of income from CFMRC.
Properties
At
December 31, 2009, we had 34 traditional branch offices and ten in-store branch
offices. Capitol Federal Savings Bank owns the office building in which
its home office and executive offices are located, and 24 of its other branch
offices. The remaining 19 branch offices, including ten in-store locations, were
leased.
For
additional information regarding our lease obligations, see “Notes to
Consolidated Financial Statements — Note 5.” We added three branches
in our Kansas City and Wichita markets in fiscal 2009 and have preliminary plans
to add an additional three branches in those same markets in fiscal
2010. Management believes that our current facilities are adequate to
meet our present and immediately foreseeable needs. However, we will
continue to monitor customer growth and expand our branching network, if
necessary, to serve our customers’ needs.
97
General
Set forth
below is a brief description of certain laws and regulations that are applicable
to Capitol Federal Financial, Inc. and Capitol Federal Savings
Bank. The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
Congress
is currently considering various significant regulatory reform
proposals. If new legislation is enacted, it could have a significant
impact on the regulation and operations of financial institutions and their
holding companies. The proposals generally provide for the
elimination of the Office of Thrift Supervision, our primary regulator, and
could require Capitol Federal Financial, Inc. to
become a bank holding company, making it subject to regulatory capital
requirements for the first time. In addition, Capitol Federal Savings
Bank could be required to convert to a national bank or a state bank
charter. There are also proposals for the creation of a new consumer
financial protection agency that would issue and enforce consumer protection
initiatives governing financial products and services. The details
and impact of regulatory reform proposals cannot be determined until new
legislation is enacted. In addition, the regulations governing
Capitol Federal Financial, Inc. and
Capitol Federal Savings Bank may be amended from time to time. Any
legislative or regulatory changes in the future could adversely affect our
operations and financial condition. No assurance can be given as to
whether or in what form any such changes may occur.
The
Office of Thrift Supervision has extensive enforcement authority over all
savings associations and their holding companies, including Capitol Federal
Savings Bank and Capitol Federal Financial, Inc. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision. Except under certain circumstances,
public disclosure of final enforcement actions by the Office of Thrift
Supervision is required by law.
Capitol
Federal Savings Bank
Capitol
Federal Savings Bank, as a federally chartered savings bank, is subject to
regulation and oversight by the Office of Thrift Supervision extending to all
aspects of its operations. This regulation of Capitol Federal Savings
Bank is intended for the protection of depositors and not for the purpose of
protecting stockholders. Capitol Federal Savings Bank is required to
maintain minimum levels of regulatory capital and will be subject to some
limitations on the payment of dividends to Capitol Federal Financial,
Inc. See “— Capital Requirements for Capitol Federal Savings Bank”
and “— Limitations on Dividends and Other Capital
Distributions.” Capitol Federal Savings Bank also is subject to
regulation and examination by the Federal Deposit Insurance Corporation, which
insures the deposits of Capitol Federal Savings Bank to the maximum extent
permitted by law.
Office
of Thrift Supervision
The
investment and lending authority of Capitol Federal Savings Bank is prescribed
by federal laws and regulations and Capitol Federal Savings Bank is prohibited
from engaging in any activities not permitted by such laws and
regulations.
As a
federally chartered savings bank, Capitol Federal Savings Bank is required to
meet a qualified thrift lender test. This test requires Capitol
Federal Savings Bank to have at least 65% of its portfolio assets, as defined by
regulation, in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, Capitol
Federal Savings Bank may maintain 60% of its assets in those assets specified in
Section 7701(a) (19) of the Internal Revenue Code. Under either test,
Capitol Federal Savings Bank is required to maintain a significant portion of
its assets in residential housing related loans and investments. Any
institution that fails to meet the qualified thrift lender test must, within one
year, either become a bank or be subject to certain restrictions on its
operations, unless within the year it meets the test, and thereafter remains a
qualified thrift lender. An institution that fails the test a second
time must immediately convert to a bank or be subjected to the
restrictions. Any holding company of an institution that fails the
test and does not re-qualify within a year must become a bank holding
company. If such an institution has not converted to a bank within
three years after it failed the test, it must divest all investments and cease
all activities not permissible for both a national bank and a savings
association. As of December 31, 2009, Capitol Federal Savings Bank
met the qualified thrift lender test.
98
Capitol
Federal Savings Bank is subject to a 35% of total assets limit on consumer
loans, commercial paper and corporate debt securities, and a 20% limit on
commercial non-mortgage loans. At December 31, 2009, Capitol Federal
Savings Bank had 0.11% of its assets in non-real estate consumer loans,
commercial paper and corporate debt securities and 0% of its assets in
commercial non-mortgage loans.
Our
relationship with our depositors and borrowers is regulated to a great extent by
federal laws and regulations, especially in such matters as the ownership of
savings accounts and the form and content of our mortgage
requirements. In addition, the branching authority of Capitol Federal
Savings Bank is regulated by the Office of Thrift
Supervision. Capitol Federal Savings Bank is generally authorized to
branch nationwide.
Capitol
Federal Savings Bank is subject to a statutory lending limit on aggregate loans
to one person or a group of persons combined because of certain common
interests. That limit is equal to 15% of our unimpaired capital and
surplus, except that for loans fully secured by readily marketable collateral,
the limit is increased to 25%. At December 31, 2009, Capitol Federal
Savings Bank’s lending limit under this restriction was $128.0
million. We have no loans in excess of our lending
limit.
We are
subject to periodic examinations by the Office of Thrift
Supervision. During these examinations, the examiners may require
Capitol Federal Savings Bank to provide for higher general or specific loan loss
reserves, which can impact our capital and earnings. As a federally
chartered savings bank, Capitol Federal Savings Bank is subject to a semi-annual
assessment, based upon its total assets, to fund the operations of the Office of
Thrift Supervision.
The
Office of Thrift Supervision 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 regulated by the Office of Thrift Supervision that fails to comply
with these standards must submit a compliance plan.
Insurance
of Accounts and Regulation by the Federal Deposit Insurance
Corporation
The
Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation
insures deposit accounts in Capitol Federal Savings Bank. Beginning
in October 2008, the Federal Deposit Insurance Corporation temporarily increased
Federal Deposit Insurance Corporation deposit insurance coverage per separately
insured depositor to $250 thousand through December 31, 2013. On
January 1, 2014, the coverage limit is scheduled to return to $100
thousand, except for certain retirement accounts which will be insured up to
$250 thousand.
The
Federal Deposit Insurance Corporation assesses deposit insurance premiums on
each Federal Deposit Insurance Corporation-insured institution quarterly based
on annualized rates for one of four risk categories applied to its deposits,
subject to certain adjustments. Each institution is assigned to one
of four risk categories based on its capital, supervisory ratings and other
factors. Well capitalized institutions that are financially sound
with only a few minor weaknesses are assigned to Risk Category
I. Risk Categories II, III and IV present progressively greater risks
to the DIF. Under the Federal Deposit Insurance Corporation’s
risk-based assessment rules, effective April 1, 2009, the initial base
assessment rates prior to adjustments range from 12 to 16 basis points for Risk
Category I, and are 22 basis points for Risk Category II, 32 basis points for
Risk Category III and 45 basis points for Risk Category IV. Initial
base assessment rates are subject to adjustments based on an institution’s
unsecured debt, secured liabilities and brokered deposits, such that the total
base assessment rates after adjustments range from 7 to 24 basis points for Risk
Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points
for Risk Category III and 40 to 77.5 basis points for Risk Category
IV. Rates increase uniformly by 3 basis points effective January 1,
2011.
99
In
addition to the regular quarterly assessments, due to losses and projected
losses attributed to failed institutions, the Federal Deposit Insurance
Corporation imposed a special assessment of 5 basis points on the amount of each
depository institution’s assets reduced by the amount of its Tier 1 capital (not
to exceed 10 basis points of its assessment base for regular quarterly premiums)
as of June 30, 2009, which was collected on September 30, 2009.
As a
result of a decline in the reserve ratio (the ratio of the net worth of the DIF
to estimated insured deposits) and concerns about expected failure costs and
available liquid assets in the DIF, the Federal Deposit Insurance Corporation
adopted a rule requiring each insured institution to prepay on December 30, 2009
the estimated amount of its quarterly assessments for the fourth quarter of
calendar year 2009 and all quarters through the end of calendar year 2012 (in
addition to the regular quarterly assessment for the third quarter of calendar
year 2009 due on December 30, 2009). The prepaid amount is recorded
as an asset with a zero risk weight and the institution will continue to record
quarterly expenses for deposit insurance. For purposes of calculating
the prepaid amount, assessments are measured at the institution’s assessment
rate as of September 30, 2009, with a uniform increase of 3 basis points
effective January 1, 2011, and are based on the institution’s assessment base
for the third quarter of 2009, with growth assumed quarterly at an annual rate
of 5%. If events cause actual assessments during the prepayment
period to vary from the prepaid amount, institutions will pay excess assessments
in cash, or receive a rebate of prepaid amounts not exhausted after collection
of assessments due on June 13, 2013, as applicable. Collection of the
prepayment does not preclude the Federal Deposit Insurance Corporation from
changing assessment rates or revising the risk-based assessment system in the
future.
In
October 2008, the Federal Deposit Insurance Corporation introduced the Temporary
Liquidity Guarantee Program (the TLGP), a program designed to improve the
functioning of the credit markets and to strengthen capital in the financial
system during this period of economic distress. The TLGP has two
components: 1) a debt guarantee program, guaranteeing newly issued senior
unsecured debt, and 2) a transaction account guarantee program, providing a
full guarantee of non-interest bearing deposit transaction accounts, Negotiable
Order of Withdrawal (or NOW) accounts paying less than 0.5% annual interest, and
interest on lawyers trust accounts, regardless of the amount. Capitol
Federal Savings Bank has not issued any debt under this
program. Capitol Federal Savings Bank is presently participating in
the transaction account guarantee program during the extension period ending
December 31, 2010. The fees for this program range from 15-25 basis
points (annualized), depending on the institution’s risk category for deposit
insurance assessment purposes, assessed on amounts in covered accounts exceeding
$250 thousand.
Transactions
with Affiliates
Transactions
between Capitol Federal Savings Bank and its affiliates are required to be on
terms as favorable to the institution as transactions with non-affiliates, and
certain of these transactions, such as loans to an affiliate, are restricted to
a percentage of Capitol Federal Savings Bank’s capital, and may require eligible
collateral in specified amounts. In addition, Capitol Federal Savings
Bank may not lend to any affiliate engaged in activities not permissible for a
bank holding company or acquire the securities of most
affiliates. Capitol Federal Financial, Inc. will
be an affiliate of Capitol Federal Savings Bank.
Capitol
Federal Financial, Inc.
As a
savings and loan holding company, Capitol Federal Financial, Inc. will
be subject to regulation, supervision and examination by the Office of Thrift
Supervision, and to semiannual assessments. Applicable federal law
and regulations limit the activities of Capitol Federal Financial, Inc. and
require the approval of the Office of Thrift Supervision for any acquisition or
divestiture of a subsidiary, including another financial institution or holding
company.
Capital
Requirements for Capitol Federal Savings Bank
Capitol
Federal Savings Bank is required to maintain specified levels of regulatory
capital under regulations of the Office of Thrift Supervision. Office
of Thrift Supervision regulations state that to be adequately capitalized, an
institution must have a leverage ratio of at least 4.0%, a Tier 1 risk-based
capital ratio of at least 4.0% and a total risk-based capital ratio of at least
8.0%. To be well capitalized, an institution must have a leverage
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a
total risk-based capital ratio of at least 10.0%.
100
The term
leverage ratio means the ratio of Tier 1 capital to adjusted total
assets. The term Tier 1 risk-based capital ratio means the ratio of
Tier 1 capital to risk-weighted assets. The term total risk-based
capital ratio means the ratio of total capital to risk-weighted
assets.
The term
Tier 1 capital generally consists of common stockholders’ equity and retained
earnings and certain noncumulative perpetual preferred stock and related
earnings, excluding most intangible assets.
Total
capital consists of the sum of an institution’s Tier 1 capital and the amount of
its Tier 2 capital up to the amount of its Tier 1 capital. Tier 2
capital consists generally of certain cumulative and other perpetual preferred
stock, certain subordinated debt and other maturing capital instruments, the
amount of the institution’s allowance for loan and lease losses up to 1.25% of
risk-weighted assets and certain unrealized gains on equity
securities.
Risk-weighted
assets are determined under the Office of Thrift Supervision capital
regulations, which assign to every asset, including certain off-balance sheet
items, a risk weight generally ranging from 0% to 100% based on the inherent
risk of the asset. The Office of Thrift Supervision is authorized to
require Capitol Federal Savings Bank to maintain an additional amount of total
capital to account for concentrations of credit risk, levels of interest rate
risk, equity investments in non-financial companies and the risks of
non-traditional activities. Institutions that are not well
capitalized are subject to certain restrictions on brokered deposits and
interest rates on deposits.
The
Office of Thrift Supervision is authorized and, under certain circumstances,
required to take certain actions against savings banks that fail to meet the
minimum ratios for an adequately capitalized institution. Any such
institution must submit a capital restoration plan and, until such plan is
approved by the Office of Thrift Supervision, may not increase its assets,
acquire another institution, establish a branch or engage in any new activities,
and generally may not make capital distributions. The Office of
Thrift Supervision is authorized to impose the additional restrictions on
institutions that are less than adequately capitalized.
Office of
Thrift Supervision regulations state that any institution that fails to comply
with its capital plan or has Tier 1 risk-based or core capital ratios of less
than 3.0% or a total risk-based capital ratio of less than 6.0% is considered
significantly undercapitalized and must be made subject to one or more
additional specified actions and operating restrictions that may cover all
aspects of its operations and may include a forced merger or acquisition of the
institution. An institution with tangible equity to total assets of
less than 2.0% is critically undercapitalized and becomes subject to further
mandatory restrictions on its operations. The Office of Thrift
Supervision generally is 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
of any of these measures on Capitol Federal Savings Bank may have a substantial
adverse effect on its operations and profitability. In general, the
Federal Deposit Insurance Corporation must be appointed receiver for a
critically undercapitalized institution whose capital is not restored within the
time provided. When the Federal Deposit Insurance Corporation as
receiver liquidates an institution, the claims of depositors and the Federal
Deposit Insurance Corporation as their successor (for deposits covered by
Federal Deposit Insurance Corporation insurance) have priority over other
unsecured claims against the institution.
At
December 31, 2009, Capitol Federal Savings Bank was considered a
well-capitalized institution under Office of Thrift Supervision
regulations. Regulatory capital is discussed further in “Note 14 of
the Notes to Consolidated Financial Statements.”
Capital
Requirements for Capitol Federal Financial, Inc.
Capitol
Federal Financial Inc. will
not be subject to any capital requirements unless it is required to become a
bank holding company. The Office of Thrift Supervision,
however, expects Capitol Federal Financial, Inc. to
support Capitol Federal Savings Bank, including providing additional capital to
Capitol Federal Savings Bank if it does not meet its capital
requirements.
101
Community
Reinvestment and Consumer Protection Laws
In
connection with its lending activities, Capitol Federal Savings Bank is subject
to a number of federal laws designed to protect borrowers and promote lending to
various sectors of the economy and population. These include the
Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, and the Community
Reinvestment Act (CRA). In addition, federal banking regulators,
pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the
ability of banks and other financial institutions to disclose nonpublic consumer
information to non-affiliated third parties. The regulations require
disclosure of privacy policies and allow consumers to prevent certain personal
information from being shared with non-affiliated parties.
The CRA
requires the appropriate federal banking agency, in connection with its
examination of a bank, to assess the bank’s record in meeting the credit needs
of the communities served by the bank, including low and moderate income
neighborhoods. Under the CRA, institutions are assigned a rating of
outstanding, satisfactory, needs to improve, or substantial
non-compliance. Capitol Federal Savings Bank received a
satisfactory rating in its most recent CRA evaluation.
Bank
Secrecy Act / Anti-Money Laundering Laws
Capitol
Federal Savings Bank is subject to the Bank Secrecy Act and other anti-money
laundering laws and regulations, including the USA PATRIOT Act of
2001. These laws and regulations require Capitol Federal Savings Bank
to implement policies, procedures, and controls to detect, prevent, and report
money laundering and terrorist financing and to verify the identity of their
customers. Violations of these requirements can result in substantial
civil and criminal sanctions. In addition, provisions of the USA
PATRIOT Act require the federal financial institution regulatory agencies to
consider the effectiveness of a financial institution’s anti-money laundering
activities when reviewing mergers and acquisitions.
Limitations
on Dividends and Other Capital Distributions
Office of
Thrift Supervision regulations impose various restrictions on the ability of
savings institutions, including Capitol Federal Savings Bank, to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. Capitol Federal Savings Bank must file a notice or
application with the Office of Thrift Supervision before making any capital
distribution. Capitol Federal Savings Bank generally may make capital
distributions during any calendar year in an amount up to 100% of net income for
the year-to-date plus retained net income for the two preceding years, so long
as it is well capitalized after the distribution. If Capitol Federal
Savings Bank proposes to make a capital distribution when it does not meet its
capital requirements (or will not following the proposed capital distribution)
or that will exceed these net income-based limitations, it must obtain Office of
Thrift Supervision approval prior to making such distribution. The
Office of Thrift Supervision may always object to any distribution based on
safety and soundness concerns.
Dividends
from Capitol Federal Financial, Inc. may depend, in part, upon its receipt of
dividends from Capitol Federal Savings Bank. No insured depository
institution may make a capital distribution if, after making the distribution,
the institution would be undercapitalized.
Federal
Securities Law
The stock
of Capitol Federal Financial, Inc. will be registered with the SEC under the
Securities Exchange Act of 1934, as amended. Capitol Federal
Financial, Inc. 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, Inc. stock held by persons who are affiliates of Capitol
Federal Financial, Inc. may not be resold without registration unless sold in
accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal stockholders. If
Capitol Federal Financial, Inc. meets specified current public information
requirements, each affiliate of Capitol Federal Financial, Inc. will be able to
sell in the public market, without registration, a limited number of shares in
any three-month period.
102
The
Securities and Exchange Commission and the Nasdaq have adopted regulations and
policies under the Sarbanes-Oxley Act of 2002 that will apply to Capitol Federal
Financial, Inc. as a registered company under the Securities Exchange Act of
1934 and a Nasdaq traded company. The stated goals of these
Sarbanes-Oxley requirements are to increase corporate responsibility, provide
for enhanced penalties for accounting and auditing improprieties at publicly
traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities
laws. The Securities and Exchange Commission and Nasdaq
Sarbanes-Oxley-related regulations and policies include very specific additional
disclosure requirements and new corporate governance rules.
Federal
Taxation
General. Capitol
Federal Financial, Inc. and Capitol Federal Savings Bank are and will be subject
to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below.
Method of
Accounting. For federal income tax purposes, Capitol Federal
Savings Bank currently reports its income and expenses on the accrual method of
accounting and uses a fiscal year ending on September 30 for filing its federal
income tax return.
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 the regular tax. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. Except in fiscal year 2007, during the last five
years. Capitol Federal Savings Bank has not been subject to the
alternative minimum tax.
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. In 2009,
Internal Revenue Code Section 172(b)(1) was amended to allow businesses to carry
back losses incurred in 2008 and 2009 for up to five years to offset 50% of the
available income from the fifth year and 100% of the available income for the
other four years.
Corporate
Dividends-Received Deduction. Capitol Federal Financial, Inc.
intends to file a consolidated return with Capitol Federal Savings Bank;
therefore, dividends it receives from Capitol Federal Savings Bank will not be
included as income to Capitol Federal Financial, Inc..
State
Taxation
The
earnings/losses of Capitol Federal Financial, Inc. will be combined with Capitol
Federal Savings Bank and Capitol Funds, Inc. for purposes of filing a
consolidated Kansas corporate tax return. The Kansas corporate tax
rate is 4.0%, plus a surcharge of 3.05% on earnings greater than $50
thousand.
Capitol
Federal Savings Bank files a Kansas privilege tax return. 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. Capitol Federal Savings Bank has not
received notification from the state of any potential tax liability for any
years still subject to audit.
103
The Board
of Directors of Capitol Federal Financial, Inc. will consist of the seven
individuals who currently serve as directors of CFF, Capitol Federal Savings
Bank MHC and Capitol Federal Savings Bank. The Board of Directors of
Capitol Federal Financial, Inc. will be divided into three classes, as nearly
equal as possible, with approximately one-third of the directors elected each
year. The directors will be elected by the stockholders of Capitol
Federal Financial, Inc. annually for three-year terms, and until their
successors are elected and have qualified. The terms of the directors
of each of Capitol Federal Financial, Inc. and Capitol Federal Savings Bank are
identical. The executive officers of Capitol Federal Financial, Inc.
will be the same as those of CFF. Executive officers of Capitol
Federal Financial, Inc. are elected annually and hold office until their
respective successors have been elected or until death, resignation or removal
by the board of directors.
We expect
that Capitol Federal Financial, Inc. and Capitol Federal Savings Bank will
continue to have common directors until there is a business reason to establish
separate management structures.
The
following table provides the positions, ages (as of September 30, 2009), and
terms of office, as applicable, of CFF’s directors and our named executive
officers.
|
Name(1)
|
Age
|
Position(s)
Held
|
Director
Since(2)
|
Term
of Office
Expires
|
|
DIRECTORS
|
||||
|
John
B. Dicus
|
48
|
Chairman,
President and Chief Executive Officer and Director
|
1989
|
2013
|
|
B.
B. Andersen
|
73
|
Director
|
1981
|
2012
|
|
Morris
J. Huey, II
|
60
|
Director
|
2009
|
2012
|
|
Jeffrey
M. Johnson
|
43
|
Director
|
2005
|
2011
|
|
Michael
T. McCoy, M.D.
|
60
|
Director
|
2005
|
2011
|
|
Jeffrey
R. Thompson
|
48
|
Director
|
2004
|
2013
|
|
Marilyn
S. Ward
|
70
|
Director
|
1977
|
2011
|
|
EXECUTIVE OFFICERS WHO ARE NOT
DIRECTORS
|
||||
|
Larry
K. Brubaker
|
62
|
Executive
Vice President for Corporate Services of Capitol Federal Savings
Bank
|
N/A
|
N/A
|
|
R.
Joe Aleshire
|
62
|
Executive
Vice President for Retail Operation of Capitol Federal Savings
Bank
|
N/A
|
N/A
|
|
Kent
G. Townsend
|
48
|
Executive
Vice President and Chief Financial Officer of CCF and Capitol Federal
Savings Bank
|
N/A
|
N/A
|
|
Rick
C. Jackson
|
44
|
Executive Vice
President, Chief Lending Officer and Community Development Director of
Capitol Federal Savings Bank
|
N/A
|
N/A
|
|
Tara
D. Van Houweling
|
36
|
First
Vice President, Principal Accounting Officer and Reporting
Director
|
N/A
|
N/A
|
(1) The
mailing address for each person listed is c/o CFF, 700 South Kansas Avenue,
Topeka, Kansas, 66603.
(2) Includes
service as a director of Capitol Federal Savings Bank.
Business
Experience and Qualifications of Our Directors
The Board
believes that the many years of service that our directors have at CFF and Capitol Federal Savings Bank is one of their most
important qualifications for service on our Board. This service has
given them extensive knowledge of the banking business and of
CFF. Furthermore, their service on our Board committees, especially
in areas of audit, compensation and stock benefits is critical to their ability
to oversee the management of Capitol Federal
Savings Bank by our executive officers. Service on the Board
by two of our senior executive officers is critical to aiding the outside
directors understand the critical and complicated issues that are common in the
banking business. Each outside director brings special skills,
experience and expertise to the Board as a result of their other business
activities and associations. The business experience of each of our
directors for at least the past five years and the experience, qualifications,
attributes, skills and areas of expertise of each director that further supports
his or her service as a director are set forth below. Unless otherwise
indicated, each director has held his or her current position for the past five
years.
104
John B.
Dicus. Mr. Dicus became Chief Executive Officer of Capitol Federal
Savings Bank and CFF effective January 1, 2003 and became Chairman of the Board
of Directors of Capitol Federal Savings Bank and CFF upon the retirement of John
C. Dicus from the Board in January 2009. Prior to his appointment as
Chief Executive Officer, he served as President and Chief Operating Officer for
Capitol Federal Savings Bank since 1996 and for CFF since its inception in March
1999. Before that, he served as Executive Vice President of Corporate
Services for Capitol Federal Savings Bank for four years. He has been
with Capitol Federal Savings Bank in various other positions since
1985. Mr. Dicus’s many years of service in all areas of Capitol
Federal Savings Bank’s operations and his duties as President and Chief
Executive Officer of CFF and Capitol Federal Savings Bank bring a special
knowledge of the financial, economic and regulatory challenges CFF faces and he
is well suited to educating the Board on these matters. He is the son
of Mr. John C. Dicus, who retired as our Chairman in January 2009 and still
serves as Chairman Emeritus.
Jeffrey R.
Thompson. In 2007, Mr.
Thompson became Chief Executive Officer of Salina Vortex Corp., a Salina,
Kansas-based manufacturing company, after having served as Chief Financial
Officer of that company since 2002. From 2001
to 2002, he served as Vice President, Supply Chain, for The Coleman Company,
Wichita, Kansas, a manufacturer and marketer of consumer
products. From 1992 to 2001, he served in a variety of capacities for
Koch Industries, Inc., Wichita, Kansas, including President of Koch Financial
Services, Inc. from 1998 to 2001. From 1986 to 1992, he worked in
several positions for Chrysler Capital Public Finance, Kansas City, Missouri,
primarily in the areas of originating, underwriting and servicing tax-exempt
municipal leases. Mr. Thompson has over 25 years of business
experience, including 20 years in the financial services business and 15 years
with profit and loss responsibility in manufacturing companies. He
brings general business, financial and risk management skills to Capitol Federal
Savings Bank, including knowledge of compensation matters, which is important to
his service on our Compensation Committee. Mr. Thompson is a
certified public accountant and his accounting
knowledge and experience is important to his service on our Audit
Committee. His participation in the Wichita, Kansas business
community for over 18 years brings knowledge of the local economy and business
opportunities for Capitol Federal Savings Bank.
Jeffrey M.
Johnson. Mr. Johnson is President of Flint Hills National Golf
Club, Andover, Kansas, a position he has held since March 2003. From
March 1997 until joining Flint Hills, Mr. Johnson was an investment advisor with
Raymond James Financial Services in Wichita, Kansas. Mr. Johnson’s
extensive knowledge of investments and the regulated financial services industry
supports the Board’s and the Audit Committee’s knowledge in those
areas. Before 1997, he served in a variety of restaurant management
positions with Lone Star Steakhouse & Saloon, Inc. and Coulter Enterprises,
Inc. Mr. Johnson is also part-owner of several restaurants in
Lawrence, Manhattan and Wichita, Kansas and parts of Texas. He brings
general business, financial and risk management skills to Capitol Federal
Savings Bank, including knowledge of compensation matters, which is important to
his service on our Compensation Committee. His participation in the
Wichita, Kansas business community and his service on local non-profit boards
for over 15 years bring knowledge of the local economy and business
opportunities for Capitol Federal Savings Bank.
Michael T. McCoy,
M.D. Dr. McCoy has been an orthopedic surgeon in private
practice for over 25 years. In his private practice, he has employed
up to 15 employees and gained the accounting, financial and risk management
skill necessary to operate a small business. Since October 2004, he
has also served as Chief of Orthopedic Surgery at Stormont Vail Regional Medical
Center in Topeka, Kansas. He previously served as Chief of Surgery at
Stormont Vail from January 1987 to January 1988. His management and
business experience in his private practice and these hospital positions bring
knowledge and experience to his service on the Board and the Compensation and
Audit Committees. Dr. McCoy is a member of the Kansas Medical
Society, the Shawnee County Medical Society, the American Academy of Orthopedic
Surgeons and the American Orthopedic Society for Sports Medicine.
105
Marilyn S.
Ward. From 1985 until her retirement in 2004, Ms. Ward was Executive
Director of ERC/Resource & Referral, a family resource center located in
Topeka, Kansas, where she was responsible for financial operations, including
fund-raising, budgeting and grant writing. Ms. Ward currently serves
as the president of the board of the Kansas Association of Child Care Resources
and Referral Agencies, a state-wide organization that oversees the Kansas
network of child care resource and referral agencies, where she is involved in
overseeing financial and accounting matters. Ms. Ward also serves on
the board and the executive committee of the Kansas Children’s Service League
which oversees numerous family services programs throughout
Kansas. She brings general business, financial and accounting skills
to Capitol Federal Savings Bank, including knowledge of compensation matters,
which is important to her service on our Audit and Compensation
Committees. She has participated in numerous training programs for
financial institution directors, which enhances her service as a
director.
B.B.
Andersen. Mr. Andersen has had a life long career in
construction, development and management companies with activities in over 14
states. He is currently involved in various real estate development
projects in Colorado, Missouri and Mississippi. Mr. Andersen also
owns a company that constructed and managed a conference and business center in
Iraq for three years, ending in 2009. He brings general business,
financial and risk management skills to Capitol Federal Savings Bank, including
knowledge of compensation matters, which is important to his service on our
Audit and Compensation Committees. He also brings knowledge of real
estate valuation and transactions that support our lending
business.
Morris J. Huey,
II. Mr. Huey retired from
Capitol Federal Savings Bank in January 2010. From June 2002 until
his retirement, Mr. Huey served as Executive Vice President and Chief Lending
Officer of Capitol Federal Savings Bank and President of Capitol Funds, Inc., a
wholly owned subsidiary of Capitol Federal Savings Bank. From August
2002 until his retirement, he also served as President of CFMRC, a wholly owned
subsidiary of Capitol Funds, Inc. Prior to that, he served as the
Central Region Lending Officer since joining Capitol Federal Savings Bank in
1991. Mr. Huey’s many years of service in various areas of Capitol
Federal Savings Bank’s operations and his duties as Executive Vice President and
Chief Lending Officer of Capitol Federal Savings Bank bring a special knowledge
of the financial, economic and regulatory challenges CFF faces and he is well
suited to educating the Board on these matters.
Business
Background of Our Executive Officers Who Are Not Directors
The
business experience for the past five years of each of our executive officers is
set forth below. Unless otherwise indicated, the executive officer
has held his or her position for the past five years.
Larry K.
Brubaker. Mr. Brubaker has been employed with Capitol Federal
Savings Bank since 1971 and currently serves as Executive Vice President for
Corporate Services, a position he has held since 1997. Prior to that,
he was employed by Capitol Federal Savings Bank as the Eastern Region Manager
for seven years.
R. Joe
Aleshire. Mr. Aleshire has been employed with Capitol Federal
Savings Bank since 1973 and currently serves as Executive Vice President for
Retail Operations, a position he has held since 1997. Prior to that,
he was employed by Capitol Federal Savings Bank as the Wichita Area Manager for
17 years.
Kent G.
Townsend. Mr. Townsend serves as Executive Vice President and
Chief Financial Officer of Capitol Federal Savings Bank, its subsidiaries, and
CFF. Mr. Townsend also serves as Treasurer for Capitol Funds, Inc.
and CFMRC, subsidiaries of Capitol Federal Savings Bank. Mr. Townsend
was promoted to Executive Vice President, Chief Financial Officer and Treasurer
on September 1, 2005. Prior to that, he served as Senior Vice
President, a position he held since April 1999, and Controller of CFF, a
position he held since March 1999. He has served in similar positions
with Capitol Federal Savings Bank since September 1995. He served as
the Financial Planning and Analysis Officer with Capitol Federal Savings Bank
for three years and other financial related positions since joining Capitol
Federal Savings Bank in 1984.
Rick C.
Jackson. Mr. Jackson currently serves as Executive Vice
President, Chief Lending Officer and Community Development Director of Capitol
Federal Savings Bank. He also serves as the President of Capitol
Funds, Inc., a subsidiary of Capitol Federal Savings Bank and President of
CFMRC. He has been with Capitol Federal Savings Bank since 1993 and has
held the position of Community Development Director since that
time. He has held the position of Chief Lending Officer since
February 2010.
106
Tara D. Van
Houweling. Ms. Van Houweling
has been employed with Capitol Federal Savings Bank and CFF since May 2003 and
currently serves as First Vice President, Principal Accounting Officer and
Reporting Director. She has held the position of Reporting Director
since May 2003.
Director
Independence
The Board
of Directors of CFF has determined that the following directors, constituting a
majority of the Board, are independent directors, as that term is
defined in Rule 4200 of the Marketplace Rules of the NASDAQ Stock Market
(NASDAQ): Directors Andersen, Johnson, McCoy, Thompson and Ward.
Compensation
Committee Interlocks and Insider Participation
CFF’s s
compensation plans and matters are administered by the Stock Benefit Committee
and the Compensation Committee. The Stock Benefit Committee is
currently comprised of Directors Andersen and Ward. The Compensation
Committee is currently comprised of Directors Andersen (Chairperson), Johnson,
McCoy, Thompson and Ward. None of these individuals was an officer or
employee of CFF during the year ended September 30, 2009, or is a former officer
of CFF.
During
the year ended September 30, 2009, (i) no executive of CFF served as a
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of another entity, one of whose executive officers served on the
Stock Benefit Committee or Compensation Committee of CFF; (ii) no executive
officer of CFF served as a director of another entity, one of whose executive
officers served on the Stock Benefit Committee or the Compensation Committee of
CFF; and (iii) no executive officer of CFF served as a member of the
compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served as a director of
CFF.
Director
Compensation
The
members of the Boards of Directors of CFF and Capitol Federal Savings Bank are
identical. Each non-employee director receives an annual retainer,
paid monthly, of $22 thousand (increased from $20 thousand effective January 1,
2009) for his or her service on Capitol Federal Savings Bank’s Board of
Directors and $22 thousand (increased from $20 thousand effective January 1,
2009) for his or her service on CFF’s Board of Directors ($44 thousand in
total). No additional fees are paid for attending Board or Board
committee meetings. Ms. Ward receives $1 thousand for serving as the
Audit Committee chair. Each outside director receives $1 thousand for
each meeting attended concerning Capitol Federal Savings Bank and/or CFF
business that is outside of Board meetings. During fiscal 2009, John
C. Dicus, Chairman Emeritus and former Chairman of the Board, was paid $12
thousand by Capitol Federal Savings Bank and $12 thousand by CFF ($24 thousand
in total) for his service as a director until his retirement from the Board in
January 2009 and thereafter for his service as Chairman
Emeritus. During fiscal 2009, John B. Dicus, Chairman, President and
Chief Executive Officer, was paid $12 thousand by Capitol Federal Savings Bank
and $12 thousand by CFF ($24 thousand in total) for his service as a director of
Capitol Federal Savings Bank and CFF. During fiscal 2009, Morris J.
Huey II, Executive Vice President and Chief Lending Officer, who was elected to
the Board of Directors in January 2009, was paid $9 thousand by Capitol Federal
Savings Bank and $9 thousand by CFF ($18 thousand in total) for his service as a
director of Capitol Federal Savings Bank and CFF.
107
The following table sets forth certain
information regarding the compensation earned by or awarded to each director,
other than Messrs. John C. Dicus, John B. Dicus and Huey, who served on the
Board of Directors of CFF in fiscal 2009. Compensation payable to
Messrs. John C. Dicus, John B. Dicus and Huey for their service as directors is
included in the “Salary” column of the Summary Compensation Table, under
“Executive Compensation” below.
|
Name
|
Fees
Earned
Or
Paid in
Cash
($)(1)
|
Stock
Awards
($)(2)
|
Option
Awards
($)(3)
|
All
Other
Compensation
($)(4)
|
Total
($)
|
|||||||||||||||
|
B.B.
Andersen
|
$ | 43,000 | — | — | $ | 1,000 | $ | 44,000 | ||||||||||||
|
Jeffrey
M. Johnson
|
$ | 43,000 | $ | 65,060 | $ | 39,072 | $ | 6,440 | $ | 153,572 | ||||||||||
|
Michael
T. McCoy, M.D.
|
$ | 43,000 | $ | 65,060 | $ | 39,072 | $ | 5,440 | $ | 152,572 | ||||||||||
|
Jeffrey
R. Thompson
|
$ | 43,000 | $ | 23,873 | $ | 16,054 | $ | 1,220 | $ | 84,147 | ||||||||||
|
Marilyn
S. Ward
|
$ | 44,000 | — | — | $ | 1,000 | $ | 45,000 | ||||||||||||
|
(1)
|
Includes
annual retainers for service on the Boards of Directors of both CFF and
Capitol Federal Savings Bank, as well as additional fees discussed
above.
|
|
(2)
|
Amounts
in the table represent the compensation cost of restricted stock
recognized for fiscal 2009 for financial statement reporting purposes
pursuant to ASC 718-10 Compensation – Stock Compensation. The assumptions
used in calculating these amounts are set forth in Note 10 of the Notes to
Consolidated Financial Statements. The restricted stock grants for
which expense is shown in the table consist of a grant of 10,000 shares to
Mr. Thompson in fiscal 2005 and a grant of 10,000 shares to each of Mr.
Johnson and Dr. McCoy in fiscal 2006. As of September 30, 2009,
Directors Thompson, Johnson and McCoy held 0, 2,000 and 2,000 unvested
shares of restricted stock, respectively. None of the Company’s
other directors held unvested shares of restricted stock as of September
30, 2009.
|
|
(3)
|
Amounts
in the table represent the compensation cost of stock options recognized
for fiscal 2009 for financial statement reporting purposes pursuant to ASC
718-10. The assumptions used in calculating these amounts are
set forth in Note 10 of the Notes to Consolidated Financial
Statements. The stock options for which expense is shown in the
table consist of an option to purchase 50,000 shares granted to Mr.
Thompson in fiscal 2005, which had a grant date fair value calculated in
accordance with ASC 718-10 of $246,500, and options to purchase 50,000
shares granted to each of Mr. Johnson and Dr. McCoy in fiscal 2006, each
having a grant date fair value calculated in accordance with ASC 718-10 of
$195,500. As of September 30, 2009, total shares underlying
stock options held by the non-employee directors were as follows: Mr.
Andersen – 0 shares; Mr. Johnson – 50,000 shares; Dr. McCoy – 50,000
shares; Mr. Thompson – 50,000 shares; and Ms. Ward – 0
shares.
|
|
(4)
|
Represents
dividends paid on unvested shares of restricted stock, as well as, for
Directors Johnson and Ward, $1,000 for attending a conference and, for
Director Andersen, $1,000 for attending a non-board committee meeting of
Capitol Federal Savings Bank.
|
Compensation
Discussion and Analysis
This
section discusses CFF’s compensation program, including how it relates to the
executive officers named in the compensation tables which follow this section
(who we sometimes refer to below and elsewhere as the named executive officers,
or NEOs), consisting of:
|
●
|
John
B. Dicus, our Chairman, President and Chief Executive
Officer,
|
|
|
●
|
Morris
J. Huey II, our Executive Vice President and Chief Lending
Officer,
|
|
|
●
|
Kent
G. Townsend, our Executive Vice President and Chief Financial
Officer,
|
|
|
●
|
Richard
J. Aleshire, our Executive Vice President for Retail
Operations,
|
|
|
●
|
Larry
K. Brubaker, our Executive Vice President for Corporate Services;
and
|
|
|
●
|
John
C. Dicus, our former Chairman of our Board of
Directors.
|
In
January 2009, Mr. John B. Dicus became Chairman of the Board as Mr. John C.
Dicus was required to retire from the Board of Directors due to age limitations
in CFF’s by-laws. Mr. John C. Dicus continues to work with CFF as a
non-executive employee on matters related to the Board, the asset and liability
committee and benefit plans.
Set forth below is an analysis of the
objectives of our compensation program, the material compensation policy
decisions we have made under this program and the material factors that we
considered in making those decisions.
108
Overview
of Compensation Program. The Compensation Committee of our Board
of Directors (the Committee), which consists solely of our independent
directors, has responsibility for developing, implementing and monitoring
adherence to CFF’s compensation philosophies and program. The Stock
Benefit Committee (the Sub-Committee), also comprised entirely of independent
directors, administers and makes stock-based compensation awards from time to
time under our 2000 Stock Option and Incentive Plan and our 2000 Recognition and
Retention Plan, both of which were approved by our stockholders in
2000. See “- Stock Incentive Plans” below. The Committee
is mindful of CFF’s unique corporate structure and business strategies, and
strives to provide a complete compensation program that provides an incentive to
executive officers to maximize CFF’s performance with the goal of enhancing
stockholder value. CFF’s compensation program is based upon the
following philosophies:
|
●
|
preserve
the financial strength, safety and soundness of CFF and Capitol Federal
Savings Bank;
|
|
●
|
reward
and retain key personnel by compensating them in the midpoint of salary
ranges at comparable financial institutions and making them eligible for
annual cash bonuses based on CFF’s performance and the individual
officer’s performance;
|
|
●
|
focus
management on maximizing earnings while managing risk by maintaining high
asset quality, managing interest rate risk within Board guidelines,
emphasizing cost control, and maintaining appropriate levels of capital;
and
|
|
●
|
provide
an opportunity to earn additional compensation if CFF’s stockholders
experience increases in returns through stock price appreciation and/or
dividends.
|
CFF’s
primary forms of current compensation for executive officers include base
salary, short-term incentive compensation and long-term incentive
compensation. CFF provides long-term compensation in the form of
stock option and restricted stock awards and stock allocations through an
employee stock ownership plan. CFF also has a tax-qualified defined contribution
retirement plan, health and life insurance benefits and vacation
benefits. CFF does not have an employment or change of control
agreement with any officer or employee.
The Committee meets as
needed during the year to consider all aspects of CFF’s compensation program,
including a review at least once per year of a tally sheet for each NEO
quantifying each component of the NEO’s compensation package, in order to
satisfy itself that the total compensation paid to the NEO is reasonable and
appropriate. As discussed in greater detail below under “Role of
Management,” the Committee meets with management to receive their analyses and
recommendations, as requested by the Committee, considers the information
provided to the Committee and makes decisions accordingly.
Base
Salary. The Committee sets the base salary for
all executive officers of CFF. The Committee seeks to set fair and
reasonable compensation levels throughout CFF by taking into account the
influences of market conditions on each operational area of CFF and the relative
compensation at different management levels in CFF within each operational
area. The Committee recognizes that base salary is the only element
of the compensation package provided by CFF that is fixed in amount before the
fiscal year begins and is paid during the year without regard to CFF’s
performance. The base salary for each NEO reflects the Committee’s
consideration of a combination of factors, including: competitive market salary,
the officer’s experience and tenure, overall operational and managerial
effectiveness and breadth of responsibility for each officer. Each
named executive officer’s base salary and performance is reviewed
annually. Base salary is not targeted to be a percentage of total
compensation, although the Committee does give consideration to the total amount
of compensation being paid to each NEO when setting NEO base
salaries.
The
Committee has not used third party consultants or other service providers to
present compensation plan suggestions or market data. Instead, the
Committee has directed the Chairman, President and CEO to provide comparable
market salary data for executive officers based upon a selected population of
comparable financial institutions at both the regional and national
levels. The Committee uses three different comparisons for the
establishment of base salary.
For
fiscal year 2009, the comparison information was compiled from information
reported in the most recent proxy statements of the financial institutions
listed below. The financial institutions selected for comparison
purposes were based upon the Chairman, President and CEO’s knowledge of the
selected financial institutions, the comparability of their operations,
corporate structure and/or size as appropriate comparisons to
CFF. Financial institutions selected for comparison purposes may be
added or removed from the list each year as a result of acquisitions, closings,
operating in a distressed mode or because another financial institution more
appropriately compares to the operations of CFF than a previously listed
financial institution.
109
These comparisons
include:
|
(1)
|
our
executive officer salaries and annual compensation compared with other
public thrift institutions with total assets between $4 billion and $12
billion in asset size, consisting of the following: TFS
Financial (MHC), BankAtlantic Bancorp, FirstFed Financial, Washington
Federal, First Niagara Financial, New Alliance Bancshares, Northwest
Bancorp (MHC), Investors Bancorp (MHC), Provident Financial, and Dime
Community Bancshares;
|
|
(2)
|
our
executive officer salaries and annual compensation compared with the
mutual holding companies with assets greater than $4 billion, consisting
of TFS Financial, Investors Bancorp, Beneficial Mutual and Northwest
Bancorp; and
|
|
(3)
|
our
executive officer salaries and annual compensation compared with a group
of other public thrifts and banks that are in the same region as CFF,
ranging in size from $1 billion to $17 billion, consisting
of: Commerce Bancshares, UMB Financial Corporation, BancFirst,
TierOne Corporation, Great Southern Bancorp, NASB Financial and Pulaski
Financial.
|
The first
two comparisons show how our executive officer salaries and annual compensation
compare on a national scale and the third provides a comparison of the level of
executive base salaries in the region within which we most likely compete for
executive talent. The Committee used information from the most recent
proxy statement filed by each company listed above. The Committee
received information showing the base compensation of each CEO, CFO and other
three NEOs in each company’s report. The level of compensation paid
to our CEO and CFO are compared directly to the equivalent positions in the
listed companies. The compensation paid the first highest NEO within
each of the listed companies above, not including the CEO or CFO, is compared to
compensation paid to our first most highly compensated NEO, not including the
CEO, the CFO or our former Chairman. The compensation paid to the
second highest NEO within each of the listed companies above, not including the
CEO or CFO, is compared to the compensation paid to our second most highly
compensated NEO, not including the CEO, the CFO or our former
Chairman. The compensation paid to the third highest NEO within each
of the listed companies above, not including the CEO or CFO, is compared to the
compensation paid to our third most highly compensated NEO, not including the
CEO, the CFO or our former Chairman.
The
Committee reviews the market data provided and does not attempt to set the base
salaries of our NEOs at specific target percentiles of the market data
provided. The Committee uses this data to set the base salary of each
NEO, other than our former Chairman, whose salary is discussed below, in light
of the range of base salaries paid among the comparable financial institutions
with the objective to be in the middle of the salary ranges for each
position. From this, the Committee considers the level of base salary
for each executive officer of CFF. In general, the range of salaries
for the named executive officers other than the CEO is narrow because the
comparison in range of salaries among non-CEO executive officer positions in the
various market comparisons reviewed is not considered significantly different by
the Committee to warrant a wider spread in base salary. The salary of
the CEO is established to reflect his hands-on approach to leadership and his
involvement at CFF on a daily basis, the leadership roles he fills in local,
regional and national industry related activities and his direct involvement in
addressing stockholder value and stockholder relations.
The
Committee does not put as much emphasis on the market comparison information
when considering bonus or other incentive compensation as it does on base salary
for CFF’s executive officers. This is primarily because of the divergence in
practice regarding the structure of bonus plans and the types of incentives
offered executive officers.
110
The
salary of our former Chairman is established by considering his day-to-day
involvement at CFF and his years of experience. His salary level was
established to lie generally between that of senior officers and executive
officers of CFF.
Bonus
Incentive Plans. All officers of CFF are eligible to
receive cash bonuses on an annual basis under the Short Term Performance Plan
(STPP), based upon CFF’s financial performance and the individual officer’s
performance during the fiscal year. The cash awards are made in
January of the year following the fiscal year end of September 30 (i.e., in
January 2010, in the case of the STPP award for the fiscal year ended September
30, 2009). A participant’s STPP award may not exceed the percentage
of salary specified in the plan for his or her position level. For
the Chairman, President and CEO, the maximum percentage is 60%, and for each of
the other NEOs, the maximum percentage is 40%. The STPP is intended
to:
|
●
|
promote
stability of operations and the achievement of earnings targets and
business goals;
|
|
|
●
|
link
executive compensation to specific corporate objectives and individual
results; and
|
|
|
●
|
provide
a competitive reward structure for
officers.
|
In
November of each fiscal year, after considering management’s recommendations
(see “Role of Management” below), the Committee sets target, maximum and minimum
performance levels for that year. The targeted performance level is
the most likely performance level forecasted for CFF in the ensuing fiscal year
given the operational considerations described below. The Committee
considers three targets in order to focus management on the performance of CFF
as a whole. By focusing on the overall performance of CFF, over time
the Committee believes the value to the stockholders from management’s
performance will be maximized. In seeking to maximize the long-term
performance of CFF, management focuses on all critical risks and objectives of
CFF. By not taking excessive credit risk and keeping interest rate
risk below levels established by the Board it is likely that the earnings of CFF
will remain strong over time. By managing the amount of capital of
Capitol Federal Savings Bank, CFF benefits by having a proper amount of
leverage, which improves the opportunities to enhance
earnings. Focusing on cost control helps to mitigate risks that
operating expenses will rise beyond the level at which they are supportable by
Capitol Federal Savings Bank’s operating income.
The areas
of Company performance targeted consist of the efficiency ratio, basic earnings
per share and return on average equity. The efficiency ratio is
computed by dividing total non-interest expense by the sum of net interest and
dividend income and total other income. Basic earnings per share is
calculated in accordance with accounting principles generally accepted in the
United States of America. Return on average equity is computed by
dividing net income for the fiscal year by the average month end balance of
total stockholders’ equity for the thirteen monthly time periods from the prior
fiscal year end through the current fiscal year end, ending September
30th. The efficiency ratio, basic earnings per share and return on
average equity are equally weighted.
In
general, CFF performance targets for the STPP are based upon the ensuing year’s
forecast of business activity, interest rates, pricing assumptions, operating
assumptions and forecasted net income. The Committee requires that
the target efficiency ratio for each fiscal year be no worse than the actual
efficiency ratio of the just completed fiscal year. The purpose of the
efficiency ratio performance target is to focus the officers on keeping
operating expenses under control and at the lowest level possible, regardless of
the impact of interest rates on the operations of CFF. The targets
for earnings per share and return on average equity are established based upon
the forecasted performance of CFF and anticipated capital management plans for
CFF. Except as noted above with regard to the target efficiency
ratio, the targets
for each of the performance goals are independent of the prior year’s
results. There are two scales for each performance target: (i) a
target scale, which includes increments between the target level of performance
and a maximum level of performance, and decrements between the target level of
performance and a minimum level of performance; and (ii) an award scale, which
proceeds at one percent increments beginning at 20% corresponding to the minimum
performance level on the target scale, through 60% corresponding to the target
level of performance on the target scale, and up to 100% corresponding to the
maximum level of performance on the target scale. Plan participants
will earn a percentage on the award scale for a particular performance target of
between 20% (if performance is at the minimum level of performance on the target
scale) and 100% (if performance is at or above the maximum level of performance
on the target scale). The percentage earned on the award scale for a
particular performance target will be zero if performance is below the minimum
level of performance on the target scale. The average of the
percentages earned on the award scales for the three performance targets
represents the total percentage of the maximum possible STPP award each
participant has earned for the CFF performance component of the STPP
award. In order to pay any award under the STPP for the CFF
performance component based on performance above the target level, however, the
Committee must determine that CFF has net income for the fiscal year equal to at
least five times the aggregate dollar amount of total STPP awards for that year
that would otherwise be made above the target level.
111
Below is
a table showing the targets established and the performance achieved for fiscal
years 2009, 2008 and 2007. The percent of total columns represent,
for each performance target (efficiency ratio, basic earnings per share and
return on average equity), the percentage earned on the award scale for that
target, based on the level of achievement on the target scale. The
total column represents the average of the award scale percentages earned for
the three performance targets, which, as noted above, represents the total
percentage of the maximum possible STPP award that has been earned for the CFF
performance component of the STPP award. For fiscal year 2009, the
level of achievement for each performance target was above the minimum level of
performance on the target scale, but below the target level of performance on
the target scale. For fiscal year 2008, the level of achievement for
each performance target was at or above the maximum level of performance on the
target scale. For fiscal year 2007, the level of achievement for
efficiency ratio was below the minimum level of performance on the target scale,
and the level of achievement for each of the other two performance targets was
above the minimum level of performance on the target scale, but below the target
level of performance on the target scale.
|
Target
|
Performance
|
Percent
of total
|
||||||||||||||||||||||||||||||||||||||
|
Fiscal
Year
|
Efficiency
Ratio
|
Basic
EPS
|
ROAE
|
Efficiency
Ratio
|
Basic
EPS
|
ROAE
|
Efficiency
Ratio
|
Basic
EPS
|
ROAE
|
Total
|
||||||||||||||||||||||||||||||
|
2009
|
44.27 | % | $ | 0.94 | 7.74 | % | 45.62 | % | $ | 0.91 | 7.27 | % | 44.00 | % | 40.00 | % | 25.00 | % | 36.00 | % | ||||||||||||||||||||
|
2008
|
59.28 | % | $ | 0.49 | 4.13 | % | 49.93 | % | $ | 0.70 | 5.86 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||||||||||||||
|
2007
|
48.03 | % | $ | 0.48 | 4.05 | % | 59.60 | % | $ | 0.44 | 3.72 | % | 0.00 | % | 35.00 | % | 34.00 | % | 23.00 | % | ||||||||||||||||||||
CFF did
not achieve the target level of performance in any of its performance objective
criteria during fiscal year 2009 primarily as a result of two events; the FDIC
special assessment in the third quarter of fiscal year 2009 and a loan loss
provision expense in excess of the amount forecasted. CFF paid $3.8
million to the FDIC as a special assessment imposed on all insured depository
institutions, which was a result of the FDIC insurance fund not being adequately
funded due to bank closures and the resulting losses being paid by the
FDIC.
The loan
loss provision expense for fiscal year 2009, totaling $6.4 million, was in
excess of the amount estimated in the preparation of our forecast of operations
for fiscal year 2009.
Each NEO
receives 90 percent of his STPP award based upon the achievement of the three
pre-established financial performance targets of CFF discussed
above. This is intended to focus each named executive officer on
maximizing the overall performance of CFF and not on achievement of goals in a
particular operational area. Because of the predominance of the focus
of the NEO bonuses on the overall performance of CFF, specific individual
performance goals are not usually set for named executive officers. Instead,
each NEO’s individual contribution to CFF’s performance is a subjective
determination by the Committee following discussion with the Chairman, President
and CEO, giving consideration to each NEO’s response to CFF’s changing
operational needs during the year.
The
Committee has the authority under the STPP to reduce bonus awards to executive
officers that would otherwise be earned for any reason the Committee believes
appropriate. This may be done for all executive officers or for
individual executive officers. The Committee did not exercise any
such negative discretion with respect to STPP awards for fiscal years 2009, 2008
or 2007.
CFF also
maintains a deferred incentive bonus plan (DIBP) for executive officers in
conjunction with the STPP. The DIBP is administered as an unfunded
plan of deferred compensation with all benefits expensed and recorded as
liabilities as they are accrued. The purpose of the two plans working
together is to provide incentives and awards to executive officers to enhance
CFF’s performance and stockholder value over a four year time
horizon. Each executive officer has the opportunity to defer a
minimum of $2 thousand and up to 50 percent (up to a maximum of $100 thousand)
of their cash award under the STPP. The amount deferred receives a 50
percent match that is accrued over a three year mandatory deferral
period. The amount deferred plus the 50 percent match is deemed to
have been invested in Company stock on the last business day of the calendar
year preceding the receipt of the STPP award (e.g., on December 31, 2009, in the
case of the STPP award for fiscal year 2009 paid in January 2010), in the form
of phantom stock. The shares deemed purchased in phantom stock
receive dividend equivalents as if the stock were owned by the executive
officer. At the end of the mandatory deferral period, the DIBP is
paid out in cash and is comprised of the initial amount deferred, the 50 percent
match, dividend equivalents on the phantom shares over the deferral period and
the increase in the market value of CFF’s stock over the deferral period, if
any, on the phantom shares. There is no provision for the reduction
of the DIBP award at the end of the mandatory deferral period if the market
value of CFF’s stock at that time is lower than the market value at the time of
the deemed investment.
112
For all
participants in both the STPP and the DIBP, it is generally required that the
recipient be employed by Capitol Federal Savings Bank on the date the award is
paid.
Stock
Incentive Plans. CFF’s stock incentive plans are
designed to provide incentives for long-term positive performance of the
executive officers by aligning their interests with those of our stockholders by
providing the executive officer the opportunity to participate in the
appreciation, if any, in CFF’s stock price, which may occur after the date
options or restricted stock awards are granted. CFF maintains two
stock incentive plans: The 2000 Stock Option and Incentive Plan and
the 2000 Recognition and Retention Plan. The Sub-Committee
administers these two plans, determines eligibility and grants
awards. Both of these stock incentive plans were approved by
stockholders in April 2000. There were no grants of either options or
restricted stock to any NEO during our fiscal years 2009, 2008 or
2007.
As
required by the Stock Option and Incentive Plan, stock options have an exercise
price that is equal to the average of the bid and ask prices of the last
transaction as of the date of the grant approved by the
Sub-Committee. The Committee has not set minimum stock ownership
levels for any NEO. We do not coordinate the timing of options and
stock awards with the release of material non-public information.
Role
of Management. The Committee makes all decisions
regarding the compensation of our executive officers. The Committee
has asked the CEO to provide, in addition to the comparable market salary data
based upon a selected population of comparable financial institutions at both
the regional and national levels, reviews of the performance of each NEO
except for himself and
recommendations for the salaries of each NEO except for himself and any
recommendations for stock awards. Management recommends the target,
minimum and maximum performance goals for CFF and the related bonus targets
under the STPP to be approved by the Committee. In addition,
management may from time to time recommend changes to the compensation program
in response to changes in the marketplace in which CFF competes for executive
talent and in light of the absolute performance level of CFF. The
compensation of the CEO is determined by the Committee without prior
recommendations from him. The Committee makes all decisions in light
of the information provided and the Committee members’ experience and
expectations for all NEOs.
Perquisites
and Other Personal Benefits. CFF does not provide any perquisites or
other personal benefits for any NEO in excess of $10,000 in the
aggregate.
Retirement and
Other Benefits. CFF provides an employee
stock ownership plan and a defined contribution plan to all employees who
qualify for participation under each plan. The employee stock
ownership plan provides for the allocation of 201,638 shares distributed
annually among all participants based upon each employee’s qualifying
compensation as a percentage of the total of all qualifying compensation for all
participants. Each NEO participates in the employee stock ownership
plan and the defined contribution plan.
The
defined contribution plan provides for a match from CFF of $2 for every $1
dollar contributed by each participant based upon the required percentage of
base salary as determined by the board. If the participant does not make his or
her required contribution, CFF does not make a contribution to the
plan. For our 2009, 2008 and 2007 fiscal years, this was 0.5% of each
participant’s base salary. Participants in the plan, including NEOs,
may make additional contributions to the plan of up to 10.0% of their qualifying
compensation.
CFF does
not offer any defined benefit plan or post-retirement benefit plan that requires
expense to CFF following the termination of employment of any NEO.
113
CFF
provides a life insurance benefit for every employee who works on average more
than 20 hours per week. The benefit is 1.5 times the base salary with
a cap of $300,000 in total death benefit. Each of the NEOs
participates in this benefit program.
CFF has
provided for the purchase of a life insurance annuity for the
CEO. The salary of the CEO has been grossed up for the cost of the
annuity and the income tax associated with the resulting imputed taxable
income. CFF has provided this gross up because CFF wished to provide
the life insurance annuity benefit to the CEO without him having to bear the
associated tax obligation. The gross up for this benefit is not
included in the base salary of the CEO, but is included in the “All Other
Compensation” column of the Summary Compensation Table.
In
September 2007, Capitol Federal Savings Bank purchased Bank Owned Life
Insurance. Under the terms of the Bank Owned Life Insurance, each
insured employee was provided the opportunity to designate a beneficiary to
receive a death benefit equal to the insured employee’s base salary as of August
27, 2007 if the insured dies while employed by Capitol Federal Savings
Bank. All NEOs except Mr. John C. Dicus (due to his age), are insured
under the Bank Owned Life Insurance and have designated
beneficiaries. Once the NEO’s employment with Capitol Federal Savings
Bank terminates, the death benefit to the beneficiary of the NEO terminates as
well.
Payments Upon
Termination or Change in Control. As noted above under
“- Overview of Compensation Program,” Capitol Federal Savings Bank does not
currently have an employment or change of control agreement with any of its
NEOs. As such, other than death benefits described above under “-
Retirement and Other Benefits,” there are currently no guaranteed payments to
any NEO in the event of termination of employment or a change in
control. The terms of our stock options and restricted stock awards
provide for accelerated vesting only in the case of a change in
control. As of September 30, 2009, our Chief Financial Officer was
the only NEO who had unvested stock options or restricted stock.
Other Tax and
Accounting Considerations. Section 162(m) of the Internal
Revenue Code limits the corporate federal income tax deduction for compensation
paid to a publicly held corporation’s covered employees (defined, per
the guidance of the Internal Revenue Service, as the principal executive officer
and the three other most highly compensated executive officers named in the
summary compensation table) to $1.0 million per year, to the extent such
compensation is not performance-based compensation under a plan approved by
stockholders. Income recognized by executives upon the exercise of
stock options granted by the Sub-Committee under the 2000 Stock Option and
Incentive Plan constitutes performance-based compensation that is exempt from
the 162(m) limitation. However, we have in the past awarded, and may
in the future award, compensation that causes a portion of one or more of our
executive’s total compensation for a particular year to not be tax
deductible. The Committee has reviewed and will continue to review on
an ongoing basis our executive compensation programs, and propose appropriate
modifications to these programs, if the Committee deems them necessary to
implement our compensation programs in a manner that avoids or minimizes any
disallowance of tax deductions under Section 162(m). The Committee
will balance these considerations against the need to be able to compensate
executives in a manner commensurate with performance and the competitive
environment for executive talent.
With our
adoption of ASC 718-10 on October 1, 2005, which requires the recognition of
compensation expense for stock options, we do not expect that the accounting
treatment of differing forms of equity awards to vary
significantly. Accordingly, accounting treatment is not expected to
have a material effect on the selection of forms of equity compensation in the
foreseeable future.
Executive
Compensation
Summary
Compensation Table. The following table sets forth information
concerning the compensation paid to or earned by the named executive officers
for fiscal year 2009:
114
|
Name
and
Principal
Position
|
Year
|
Salary
($)(3)
|
Bonus
($)(4)
|
Stock
Awards
($)(5)
|
Option
Awards
($)(6)
|
Non-Equity
Incentive
Plan Compensation
($)(7)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)(8)
|
Total
Compensation
($)
|
||||||||||||||||||
|
John
B. Dicus
|
2009
|
$
|
516,308
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
150,308
|
$
|
—
|
$
|
141,744
|
$
|
808,360
|
||||||||||
|
Chairman,
President
|
2008
|
506,492
|
—
|
—
|
—
|
338,999
|
—
|
251,735
|
1,097,226
|
||||||||||||||||||
|
and
CEO
|
2007
|
503,769
|
—
|
—
|
—
|
91,942
|
—
|
175,016
|
770,727
|
||||||||||||||||||
|
Morris
J. Huey II
|
2009
|
$
|
237,616
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
36,537
|
$
|
—
|
$
|
65,519
|
$
|
339,672
|
||||||||||
|
EVP
and Chief
|
|||||||||||||||||||||||||||
|
Lending
Officer(1)
|
|||||||||||||||||||||||||||
|
Kent
G. Townsend
|
2009
|
$
|
222,308
|
$
|
—
|
$
|
20,346
|
$
|
25,452
|
$
|
45,540
|
$
|
—
|
$
|
65,352
|
$
|
378,998
|
||||||||||
|
EVP
and CFO
|
2008
|
212,308
|
—
|
20,346
|
25,452
|
103,950
|
—
|
122,128
|
484,184
|
||||||||||||||||||
|
2007
|
202,308
|
—
|
20,346
|
25,452
|
27,200
|
—
|
81,379
|
356,685
|
|||||||||||||||||||
|
R.
Joe Aleshire
|
2009
|
$
|
221,039
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
36,432
|
$
|
—
|
$
|
65,930
|
$
|
323,401
|
||||||||||
|
EVP
for Retail
|
2008
|
215,385
|
—
|
—
|
—
|
84,316
|
—
|
117,321
|
417,022
|
||||||||||||||||||
|
Operations
|
2007
|
210,538
|
—
|
—
|
—
|
20,699
|
—
|
79,608
|
310,845
|
||||||||||||||||||
|
Larry
K. Brubaker
|
2009
|
$
|
221,039
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
36,432
|
$
|
—
|
$
|
61,288
|
$
|
318,759
|
||||||||||
|
EVP
for Corporate
|
2008
|
215,385
|
—
|
—
|
—
|
84,316
|
—
|
124,831
|
424,532
|
||||||||||||||||||
|
Services
|
2007
|
210,538
|
—
|
—
|
—
|
25,873
|
—
|
79,614
|
316,025
|
||||||||||||||||||
|
John
C. Dicus
|
2009
|
$
|
284,307
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
19,440
|
$
|
—
|
$
|
76,435
|
$
|
380,182
|
||||||||||
|
Former
Chairman(2)
|
2008
|
436,000
|
—
|
—
|
—
|
244,728
|
—
|
154,204
|
834,932
|
||||||||||||||||||
|
2007
|
436,000
|
—
|
—
|
—
|
63,530
|
—
|
85,683
|
585,213
|
|||||||||||||||||||
|
(1)
|
No
compensation information is provided for Mr. Huey for 2008 or 2007 because
he was not a named executive officer for either of those
years.
|
|
(2)
|
Mr.
John C. Dicus retired as Chairman in January 2009. Since his
retirement as Chairman, he has continued to work for CFF as a
non-executive employee and serves as Chairman Emeritus.
|
|
(3)
|
For
2009, includes fees of $24,000 for Mr. John B. Dicus for his service as a
director, $18,000 for Mr. Huey for his service as a director and $24,000
for Mr. John C. Dicus for his service as a director prior to his
retirement from the Board and thereafter for his service as Chairman
Emeritus. For 2008 and 2007, includes director fees of $24,000
for each of Mr. John B. Dicus and Mr. John C. Dicus.
|
|
(4)
|
Bonus
amounts are reported under the “Non-Equity Incentive Plan Compensation”
column.
|
|
(5)
|
Reflects
the dollar amount recognized for financial statement reporting purposes
for fiscal years ended September 30, 2009, 2008 and 2007, in accordance
with ASC 718-10, of restricted stock granted to the named executive
officer (disregarding for this purpose the estimate of forfeitures related
to service-based vesting conditions). The assumptions used in
the calculation of this amount are included in Note 10 of the Notes to
Consolidated Financial Statements. The restricted stock grant
for which expense is shown in the table consists of a grant of 3,000
shares to Mr. Townsend in fiscal 2005.
|
|
(6)
|
Reflects
the dollar amount recognized for financial statement reporting purposes
for the fiscal year ended September 30, 2009, 2008 and 2007, in accordance
with ASC 718-10, of stock options granted to the named executive officer
(disregarding for this purpose the estimate of forfeitures related to
service-based vesting conditions). The assumptions used in the
calculation of these amounts are included in Note 10 of the Notes to
Consolidated Financial Statements. The stock option grant for
which expense is shown in the table consists of an option to purchase
30,000 shares granted to Mr. Townsend in fiscal 2005.
|
|
(7)
|
Represents
incentive bonus amounts awarded for performance in fiscal years 2009, 2008
and 2007 under the STPP. The bonuses for fiscal 2009 were
approved by the Compensation Committee of CFF’s Board of Directors but not
paid until January 2010. The bonus amounts include Capitol Federal Savings
Bank’s matching contributions under CFF’s DIBP to those named executive
officers who elected to defer receipt of a portion of their bonus for
fiscal years 2009, 2008 and 2007, as
follows:
|
115
| 2009 | 2008 | 2007 | |||||||||
|
John
B. Dicus
|
$
|
30,062
|
$
|
50,000
|
$
|
18,388
|
|||||
|
Morris
J. Huey II
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
Kent
G. Townsend
|
$
|
9,108
|
$
|
20,790
|
$
|
5,440
|
|||||
|
R.
Joe Aleshire
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
Larry
K. Brubaker
|
$
|
—
|
$
|
—
|
$
|
5,175
|
|||||
|
John
C. Dicus
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
|
The
amount deferred, if any, plus the matching contribution on the deferred
amount is deemed to be invested in CFF’s common stock through the purchase
of phantom stock units. There will not be any reduction to the
payout amount of the phantom stock units if the stock price has
depreciated from the beginning of the deemed investment period of the
phantom stock units to the end of such period. Receipt of the
matching contribution is contingent on the executive officer remaining
employed with CFF for a period of three years following the award of the
phantom stock units. For additional information regarding this
plan, see “- Non-Qualified Deferred Compensation”
below.
|
|
(8)
|
Amounts
represent matching contributions under Capitol Federal Savings Bank’s
profit sharing plan, allocations under Capitol Federal Savings Bank’s
employee stock ownership plan, premiums on universal life insurance
policies, term life insurance premiums and earnings (in the form of CFF
stock price appreciation (depreciation) and dividend equivalents during
the last fiscal year) accrued by CFF on outstanding phantom stock units
awarded under the DIBP. For 2009, these include $1,150,
$66,561, $66,376, $775 and $(11,839) for Mr. John B. Dicus; $1,098,
$63,556, $0, $775 and $90 for Mr. Huey; $1,112, $64,335, $0, $775 and
$(3,402) for Mr. Townsend; $1,105, $63,967, $0, $775 and $83 for Mr.
Aleshire; $1,105, $63,967, $0, $775 and $(4,559) for Mr. Brubaker; and
$1,150, $66,561, $0, $727 and $7,997 for Mr. John C.
Dicus. Also includes, for Mr. John B. Dicus, the amount
reimbursed for all or part of the tax liability resulting from the payment
of premiums on a universal life insurance policy of $18,721, and for Mr.
Townsend, dividends paid on unvested shares of restricted stock totaling
$2,532.
|
Grants of
Plan-Based Awards. The following table provides information
concerning annual non-equity incentive plan awards made to the named executive
officers in 2009.
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan
Awards
|
||||||||||||||||
|
Name
|
Grant
Date
|
Threshold
($)(1)
|
Target
($)(1)
|
Maximum
($)(1)
|
||||||||||||
|
John
B. Dicus
|
n/a | $ | 58,800 | $ | 176,400 | $ | 294,000 | |||||||||
|
Morris
J. Huey II
|
n/a | $ | 17,440 | $ | 52,320 | $ | 87,200 | |||||||||
|
Kent
G. Townsend
|
n/a | $ | 17,600 | $ | 52,800 | $ | 88,000 | |||||||||
|
R.
Joe Aleshire
|
n/a | $ | 17,600 | $ | 52,800 | $ | 88,000 | |||||||||
|
Larry
K. Brubaker
|
n/a | $ | 17,600 | $ | 52,800 | $ | 88,000 | |||||||||
|
John
C. Dicus
|
n/a | $ | 10,800 | $ | 32,400 | $ | 54,000 | |||||||||
|
(1)
|
For
each named executive officer, represents the threshold (i.e. lowest),
target and maximum amounts that were potentially payable for fiscal 2009
under CFF’s STPP. The actual amounts earned under these awards
for fiscal 2009 are reflected in the Summary Compensation Table under the
“Non-Equity Incentive Plan Compensation” column. For additional
information regarding the STPP, see “- Compensation Discussion and
Analysis—Bonus Incentive Plans”
above.
|
Outstanding
Equity Awards at September 30, 2009. The following table provides
information regarding the unexercised stock options and stock awards held by
each of our named executive officers as of September 30,
2009.
116
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||||||||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|||||||||||||||||||||||||||
|
John
B. Dicus
|
— | — | — | — | — | — | — | 1,937 | (4) | 10,867 | (4) | |||||||||||||||||||||||||
| 1,779 | (5) | 9,838 | (5) | |||||||||||||||||||||||||||||||||
| 3,289 | (6) | 4,934 | (6) | |||||||||||||||||||||||||||||||||
|
Total
|
7,005 | 25,639 | ||||||||||||||||||||||||||||||||||
|
Morris
J. Huey II
|
— | — | — | — | — | — | — | 537 | (4) | 3,011 | (4) | |||||||||||||||||||||||||
|
Kent
G. Townsend
|
2,951 | (1) | 2,951 | (1) | — | 33.88 |
08/23/2015
|
600 | (3) | 19,752 | 542 | (4) | 3,038 | (4) | ||||||||||||||||||||||
| 3,049 | (2) | 3,049 | (2) | — | 33.88 |
08/23/2020
|
— | — | 526 | (5) | 2,909 | (5) | ||||||||||||||||||||||||
| — | — | — | — | — | — | — | 1,368 | (6) | 2,052 | (6) | ||||||||||||||||||||||||||
|
Total
|
6,000 | 6,000 | — | 600 | 19,752 | 2,436 | 7,999 | |||||||||||||||||||||||||||||
|
R.
Joe Aleshire
|
— | — | — | — | — | — | — | 571 | (4) | 3,201 | (4) | |||||||||||||||||||||||||
|
Larry
K. Brubaker
|
— | — | — | — | — | — | — | 571 | (4) | 3,201 | (4) | |||||||||||||||||||||||||
| 501 | (5) | 2,771 | (5) | |||||||||||||||||||||||||||||||||
|
Total
|
1,072 | 5,972 | ||||||||||||||||||||||||||||||||||
|
John
C. Dicus
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
(1)
|
Remaining
unexercised portion of option having the following vesting schedule: 2,951
shares on each of August 23, 2006, 2007, 2008, 2009 and
2010.
|
|
(2)
|
Remaining
unexercised portion of option having the following vesting schedule: 3,049
shares on each of August 23, 2006, 2007, 2008, 2009 and
2010.
|
|
(3)
|
Unvested
portion of restricted stock grant on August 23, 2005 having the following
vesting schedule: 600 shares on each of August 23, 2006, 2007, 2008, 2009
and 2010.
|
|
(4)
|
Represents
phantom stock award under Company’s DIBP as a result of deferring the
named executive officer’s annual bonus for fiscal 2006 under CFF’s
STPP. The number of phantom stock units was determined by the
portion of the bonus deferred plus CFF’s 50% match thereon, divided by
CFF’s stock price on December 31, 2006. The phantom stock award
will be paid in cash on January 25, 2010, in an amount equal to the
appreciation, if any, in CFF’s stock price from December 31, 2006 to
December 31, 2009, plus the amount of dividend equivalents credited during
that period. The payout value shown in the far right column
represents the stock price appreciation from December 31, 2006 through
September 30, 2009, plus the amount of dividend equivalents credited
during that period. See “- Non-Qualified Deferred Compensation”
below.
|
|
(5)
|
Represents
phantom stock award under Company’s DIBP as a result of deferring the
named executive officer’s annual bonus for fiscal 2007 under CFF’s
STPP. The number of phantom stock units was determined by the
portion of the bonus deferred plus CFF’s 50% match thereon, divided by
CFF’s stock price on December 31, 2007. The phantom stock award
will be paid in cash on January 25, 2011, in an amount equal to the
appreciation, if any, in CFF’s stock price from December 31, 2007 to
December 31, 2010, plus the amount of dividend equivalents credited during
that period. The payout value shown in the far right column
represents the stock price appreciation from December 31, 2007 through
September 30, 2009, plus the amount of dividend equivalents credited
during that period. See “- Non-Qualified Deferred Compensation”
below.
|
|
(6)
|
Represents
phantom stock award under Company’s DIBP as a result of deferring the
named executive officer’s annual bonus for fiscal 2008 under CFF’s
STPP. The number of phantom stock units was determined by the
portion of the bonus deferred plus CFF’s 50% match thereon, divided by
CFF’s stock price on December 31, 2008. The phantom stock award
will be paid in cash on January 25, 2012, in an amount equal to the
appreciation, if any, in CFF’s stock price from December 31, 2008 to
December 31, 2011, plus the amount of dividend equivalents credited during
that period. The payout value shown in the far right column
represents the stock price appreciation from December 31, 2008 through
September 30, 2009, plus the amount of dividend equivalents credited
during that period. See “- Non-Qualified Deferred Compensation”
below.
|
117
Option Exercises
and Stock Vested. The following table sets forth information
about stock options exercised and shares of restricted stock that vested during
the fiscal year ended September 30, 2009 with respect to each named executive
officer:
|
Option
Awards
|
Stock
Award
|
||||||||||||||||
|
Name
|
Number
of
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
on
Exercise
($)(1)
|
Number
of
Shares
Acquired
on
Vesting
(#)
|
Value
Realized
on
Vesting
($)(2)
|
|||||||||||||
|
John
B. Dicus
|
25,775 | $ | 858,952 | — | $ | — | |||||||||||
|
Morris
J. Huey II
|
— | $ | — | — | $ | — | |||||||||||
|
Kent
G. Townsend
|
18,000 | $ | 164,933 | 600 | $ | 20,622 | |||||||||||
|
R.
Joe Aleshire
|
10,000 | $ | 254,300 | — | $ | — | |||||||||||
|
Larry
K. Brubaker
|
4,775 | $ | 156,095 | — | $ | — | |||||||||||
|
John
C. Dicus
|
— | $ | — | — | $ | — | |||||||||||
|
|
(1)
|
Represents
amount realized upon exercise of stock options, based on the difference
between the market value of the shares acquired at the time of exercise
and the exercise price.
|
|
|
(2)
|
Represents
the value realized upon vesting of restricted stock award, based on the
market value of the shares on the vesting
date.
|
Non-Qualified
Deferred Compensation. The following table sets forth
information about compensation payable to each named executive officer under
CFF’s DIBP.
|
Name
|
Executive
Contributions
in
Last
FY(1)
|
Registrant
Contributions
in
Last
FY(2)
|
Aggregate
Earnings
in
Last
FY
(3)
|
Aggregate
Withdrawals/
Distributions(4)
|
Aggregate
Balance
at Last
FYE
|
|||||||||||||||
|
John
B. Dicus
|
$ | 100,000 | $ | 50,000 | $ | (11,839 | ) | $ | 196,503 | $ | 258,003 | |||||||||
|
Morris
J. Huey II
|
$ | — | $ | — | $ | 90 | $ | 58,702 | $ | 23,059 | ||||||||||
|
Kent
G. Townsend
|
$ | 41,580 | $ | 20,790 | $ | (3,402 | ) | $ | 40,917 | $ | 89,057 | |||||||||
|
R.
Joe Aleshire
|
$ | — | $ | — | $ | 83 | $ | 62,023 | $ | 24,516 | ||||||||||
|
Larry
K. Brubaker
|
$ | — | $ | — | $ | (4,559 | ) | $ | 62,491 | $ | 40,654 | |||||||||
|
John
C. Dicus
|
$ | — | $ | — | $ | 7,997 | $ | 220,351 | $ | — | ||||||||||
|
(1)
|
Represents
portion of bonus for fiscal 2008 (otherwise payable in fiscal 2009) under
the STPP deferred by the named executive officer. This amount
was previously reported as compensation for fiscal
2008.
|
|
(2)
|
Represents
50 percent match by Capitol Federal Savings Bank on portion of bonus for
fiscal 2008 (otherwise payable in fiscal 2009) under the STPP deferred by
the named executive officer. This amount was previously
reported as compensation for fiscal 2008. The named executive
officer was awarded phantom stock units under the DIBP in an amount equal
to the bonus amount deferred plus the 50 percent match, divided by the
closing price of CFF’s common stock on December 31,
2008.
|
|
(3)
|
Represents
stock price appreciation (depreciation) and dividend equivalents on
phantom stock units from deferrals (and 50 percent matches thereon) of
STPP bonuses for fiscal 2008 and prior years. This amount is
reported as compensation for fiscal 2009 under the “All Other
Compensation” column of the Summary Compensation Table. As
noted below, there will not be any reduction to the payout amount of the
phantom stock units if the stock price has depreciated from the beginning
of the deemed investment period of the phantom stock units to the end of
such period.
|
|
(4)
|
Represents
cash payout during fiscal 2009 of phantom stock units for deferral (and 50
percent match thereon) of the STPP bonus for fiscal 2005. The payout was
comprised of appreciation in CFF’s stock price from December 31, 2005
through December 31, 2008 plus dividend equivalents credited during that
period.
|
118
Under the DIBP, a participant may defer
from $2 thousand to as much as fifty percent (up to a maximum of $100 thousand)
of their award under the STPP, which is typically made in the January following
the end of the fiscal year for which the STPP award is earned. The
total amount deferred plus a fifty percent match by Capitol Federal Savings Bank
is deemed to be invested, in the form of phantom stock units, in CFF common
stock as of December 31st in the year prior to the STPP award
(e.g., December 31, 2009, in the case of the STPP award for fiscal year 2009
paid in January 2010). On the third anniversary date (e.g., December
31, 2012, in the case of the award for fiscal year 2009), the phantom stock
units are deemed sold and each participant will receive shortly thereafter a
cash payment equal to the amount deferred, the company match, the dividend
equivalents paid on CFF
common stock during the three-year period, plus the appreciation, if any, of CFF
common stock. There will not be any reduction to the amount of the
cash payment if the deemed investment in CFF common stock has depreciated in
value from the beginning of the deemed investment period to the end of such
period. The payment of these benefits (except for the amount
deferred) is subject to the participant’s continued employment through the end
of the deferral period.
Payments
Upon Termination or Change in Control. As noted above, CFF does not currently
have employment or change in control severance agreements with any of the named
executive officers or any other employees.
Under the general terms of stock
options granted under CFF’s 2000 Stock Option and Incentive Plan and restricted
stock granted under CFF’s 2000 Recognition and Retention Plan, upon the
occurrence of a change in control of CFF, all unvested stock options and
unvested shares of restricted stock will vest. Mr. Townsend is the
only named executive officer who held unvested stock options or restricted stock
as of September 30, 2009, holding unvested options to purchase 6,000 shares at
an exercise price of $33.88 and 600 unvested shares of restricted
stock. If a change in control of CFF had occurred on that date, the
aggregate value that would have been realized by Mr. Townsend as a result of the
acceleration of the vesting of his 6,000 unvested stock options and 600 shares
of restricted stock, based on the closing price of CFF’s common stock on that
date of $32.92 and the exercise price of his unvested stock options, would have
been $0 and $20 thousand respectively.
CFF’s STPP provides that if, within two
years following a change in control of CFF, a participant’s employment is
terminated other than due to death, disability, retirement, cause or resignation
by the participant (other than resignation due to reassignment to a job that is
not reasonably equivalent in responsibility or compensation, or that is not in
the same geographic area, or resignation within 30 days following a reduction in
pay), then the participant will be paid a pro rata award for the performance
year in which his or her termination of employment occurs, with the award amount
determined assuming all individual and corporate performance targets have been
met. Had any of Messrs. John B. Dicus, Huey, Townsend, Aleshire,
Brubaker or John C. Dicus experienced such a termination of employment on
September 30, 2009, they would have been entitled to the regular bonus earned
for the year, rather than a pro rata award with assumed maximum achievement of
performance targets, since the performance period for the year actually ended on
that date. The bonus amounts for fiscal 2009 are set forth in the
Summary Compensation Table under the “Non-Equity Incentive Plan Compensation”
column.
CFF’s DIBP provides that if, within two
years following a change in control of CFF, a participant’s employment is
terminated other than due to death, disability, retirement, cause or resignation
by the participant (other than resignation due to reassignment to a job that is
not reasonably equivalent in responsibility or compensation, or that is not in
the same geographic area, or resignation within 30 days following a reduction in
pay), then the participant will become fully vested in his or her plan account,
which shall be paid to him or her within 90 days after the termination
date. If Messrs. John B. Dicus, Huey, Townsend, Aleshire, Brubaker or
John C. Dicus had experienced such a termination of employment on September 30,
2009, the amounts of their DIBP accounts that would have vested and been payable
within 90 days would have been $258 thousand, $23 thousand, $89 thousand, $25
thousand, $41 thousand and $0, respectively.
As discussed under “- Compensation
Discussion and Analysis — Retirement and Other Benefits,” in September 2007,
Capitol Federal Savings Bank purchased Bank Owned Life
Insurance. Under the terms of the Bank Owned Life Insurance, each
insured employee was provided the opportunity to designate a beneficiary to
receive a death benefit equal to the insured employee’s base salary as of August
27, 2007 if the insured dies while employed by Capitol Federal Savings
Bank. All NEOs, except the former Chairman (due to his age), are
insured under the Bank Owned Life Insurance and have designated
beneficiaries. Had Messrs. John B. Dicus, Huey, Townsend, Aleshire or
Brubaker died on September 30, 2009, the death benefit payable would have been
$489,000, $208 thousand, $210 thousand, $214 thousand or $214 thousand,
respectively.
119
Benefits
to be Considered Following Completion of the Conversion
Following
the offering, we intend to adopt a new stock-based incentive plan that will
provide for grants of stock options and restricted common stock
awards. If the stock-based incentive plan is adopted within one year
following the conversion, the number of shares of common stock reserved for
issuance pursuant to option grants or restricted stock awards under the plan may
not exceed 10% and 4%, respectively, of the shares sold in the offering, subject
to adjustment as may be required by Office of Thrift Supervision regulations or
policy to reflect any stock options or restricted stock previously granted by
CFF.
We may
fund our plans through open market purchases, as opposed to issuing new shares
of common stock; however, if any options previously granted under our existing
stock option plans are exercised during the first year following completion of
the offering they will be funded with newly-issued shares, as Office of Thrift
Supervision regulations do not permit us to repurchase our shares during the
first year following the completion of this offering except to fund the grants
of restricted stock under the stock-based incentive plan or under extraordinary
circumstances. The Office of Thrift Supervision has previously
advised that the exercise of outstanding options and cancellation of treasury
shares in the conversion will not constitute an extraordinary circumstance or a
compelling business purpose for satisfying this test. The stock-based
incentive plan will not be established sooner than six months after the stock
offering and if adopted within one year after the stock offering would require
the approval by stockholders holding a majority of the outstanding votes of
Capitol Federal Financial, Inc. common stock eligible to be cast. If
the stock-based incentive plan is established after one year after the stock
offering, it would require the approval of our stockholders by a majority of
votes actually cast. The following additional restrictions would
apply to our stock-based incentive plan if the plan is adopted within one year
after the stock offering:
|
|
●
|
non-employee
directors in the aggregate may not receive more than 30% of the options
and restricted stock awards authorized under the
plan;
|
|
|
●
|
no
one non-employee director may receive more than 5% of the options and
restricted stock awards authorized under the
plan;
|
|
|
●
|
no
one officer or employee may receive more than 25% of the options and
restricted stock awards authorized under the
plan;
|
|
|
●
|
tax-qualified
employee stock benefit plans and management stock award plans, in the
aggregate, may not hold more than 10% of the shares sold in the offering,
unless Capitol Federal Savings Bank has tangible capital of 10% or more,
in which case any tax-qualified employee stock benefit plans and
management stock award plans may own up to 12% of the shares sold in the
offering;
|
|
|
●
|
stock
options and restricted stock awards may not vest more rapidly than 20% per
year, beginning on the first anniversary of the
grant;
|
|
|
●
|
accelerated
vesting is not permitted except for death, disability or upon a change in
control of Capitol Federal Savings Bank or Capitol Federal Financial,
Inc.; and
|
|
|
●
|
our
executive officers and directors must exercise or forfeit their options in
the event that Capitol Federal Savings Bank becomes critically
undercapitalized, is subject to enforcement action or receives a capital
directive.
|
In the
event federal regulators change their regulations or policies regarding
stock-based incentive plans, including any regulations or policies restricting
the size of awards and vesting of benefits as described above, the restrictions
described above may not be applicable.
120
Transactions
With Certain Related Persons
The
charter of the Audit Committee of CFF’s Board of Directors provides that the
Audit Committee is to review and approve all related party transactions (defined
as transactions requiring disclosure under Item 404 of Securities and Exchange
Commission Regulation S-K) on a regular basis. During the three years
ended September 30, 2009, there were no related party transactions between CFF
and any of its directors, executive officers and/or their related
interests.
Capitol
Federal Savings Bank has followed a policy of granting loans to officers and
directors. These loans 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 that Capitol Federal
Savings Bank makes to directors and executive officers are subject to Office of
Thrift Supervision regulations restricting loans and other transactions with
affiliated persons of Capitol Federal Savings Bank. Loans to all
directors and executive officers and their associates totaled approximately $5.7
million at September 30, 2009, which was 0.6% of our equity at that
date. All loans to directors and executive officers were
performing in accordance with their terms at September 30, 2009.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The
following table presents information regarding the beneficial ownership of CFF
common stock, as of April 16, 2010, by:
|
|
●
|
Capitol Federal Savings Bank MHC, which is the
only stockholder known by management to beneficially own more than five
percent of the outstanding common stock of
CFF;
|
|
|
●
|
each director of
CFF;
|
|
|
●
|
each executive officer of CFF named in the Summary
Compensation Table appearing above;
and
|
|
|
●
|
all of the executive officers and directors as a
group.
|
The
persons named in the following table have sole voting and investment powers for
all shares of common stock shown as beneficially owned by them, subject to
community property laws where applicable and except as indicated in the
footnotes to this table. The address of each of the beneficial
owners, except where otherwise indicated, is the same address as that of
CFF. An asterisk (*) in the table indicates that the individual
beneficially owns less than one percent of the outstanding common stock of
CFF. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission (the SEC). As of April 16,
2010, there were 74,099,355 shares of CFF common stock outstanding.
121
|
Name
of Beneficial Owner
|
Beneficial Ownership(1) |
Percent
of
Common
Stock
Outstanding
|
|||||
|
Significant
Stockholder
|
|||||||
|
Capitol
Federal Savings Bank MHC
|
|||||||
|
700
S. Kansas Avenue
|
|||||||
|
Topeka,
Kansas 66603
|
52,192,817 | (2) | 70.4 | % | |||
|
Directors
and Named Executive Officers
|
|||||||
|
John
C. Dicus, Former Chairman of the Board
|
584,102 | (3) | * | ||||
|
John
B. Dicus, Chairman, President, CEO
|
561,274 | (4) | * | ||||
|
B.
B. Andersen, Director
|
61,983 | (5) | * | ||||
|
Jeffrey
M. Johnson, Director
|
61,000 | (1)(6) | * | ||||
|
Michael
T. McCoy, M.D., Director
|
58,000 | (1) | * | ||||
|
Jeffrey
R. Thompson, Director
|
61,200 | (1)(7) | * | ||||
|
Marilyn
S. Ward, Director
|
71,714 | * | |||||
|
Morris
J. Huey, II, Director
|
106,312 | (10) | * | ||||
|
R.
Joe Aleshire, EVP for Retail Operations
|
190,098 | (8) | * | ||||
|
Larry
K. Brubaker, EVP for Corporate Services
|
182,286 | (9) | * | ||||
|
Kent
G. Townsend, EVP and CFO
|
70,659 | (1)(11) | * | ||||
|
Rick
C. Jackson, EVP and Chief Lending Officer
|
44,597 | (1) | |||||
|
Tara
D. Van Houweling, First Vice President and Principal Accounting
Officer
|
18,879 | (1) | |||||
|
Directors,
chairman emeritus and executive officers of CFF as a group (13
persons)
|
2,072,104 | (12) | 2.8 | % | |||
|
(1)
|
Included
in the shares beneficially owned by the named individuals are options to
purchase shares of CFF common stock which are currently exercisable or
which will become exercisable within 60 days after April 16, 2010, as
follows: Mr. Johnson – 50,000 shares; Dr. McCoy – 50,000 shares; Mr.
Thompson - 50,000 shares; Mr. Townsend – 6,000 shares; Mr. Jackson – 8,000
shares; and Ms. Van Houweling – 10,000
shares.
|
|
(2)
|
As
reported by Capitol Federal Savings Bank MHC in a Schedule 13D dated March
31, 1999, which reported sole voting and dispositive power with respect to
all 52,192,817 shares.
|
|
(3)
|
Includes
252,500 shares held in the Barbara B. Dicus Living Trust, of which John C.
Dicus is a co-trustee.
|
|
(4)
|
Includes
50,000 shares held jointly with Mr. John B. Dicus’ spouse. Mr.
John B. Dicus has pledged 40,000 of his shares for a line of credit with a
third party financial institution unaffiliated with
CFF.
|
|
(5)
|
Mr.
Andersen has pledged 60,000 of his shares as collateral for a loan from a
third party financial institution unaffiliated with
CFF.
|
|
(6)
|
Of
the shares beneficially owned by Mr. Johnson, 9,000 are held in brokerage
accounts pursuant to which they may serve as security for margin
loans.
|
|
(7)
|
Of
the shares beneficially owned by Mr. Thompson, 10,200 are held in a
brokerage account pursuant to which they may serve as security for a
margin loan.
|
|
(8)
|
Includes
18,025 shares held solely by Mr. Aleshire’s
spouse.
|
|
(9)
|
Includes
154,032 shares of common stock held in the Brubaker Family Trust of which
Mr. Brubaker is a co-trustee with his spouse, 1,873 shares held solely by
Mr. Brubaker’s spouse and 328 shares of common stock which Mr. Brubaker
holds jointly with his son. Excludes 20,000 shares held in a
trust of which Mr. Brubaker is a beneficiary, but not a
trustee.
|
|
(10)
|
Includes
84,949 shares held jointly with Mr. Huey’s
spouse.
|
|
(11)
|
Of
the shares beneficially owned by Mr. Townsend, 43,000 are held
in an account at a bank and have been pledged as security
for a loan.
|
|
(12)
|
Includes
shares held directly, as well as shares held by and jointly with certain
family members, shares held in retirement accounts, shares held by trusts
of which the individual or group member is a trustee or substantial
beneficiary or shares held in another fiduciary capacity with respect to
which shares the individual or group member may be deemed to have sole or
shared voting and/or investment powers. This amount also
includes an aggregate of 174,000 shares of common stock issuable upon
exercise of stock options which are currently exercisable or which will
become exercisable within 60 days after April 16,
2010.
|
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE
OFFICERS
The table
below sets forth, for each of Capitol Federal Financial, Inc.’s directors,
chairman emeritus and executive officers and for all of the directors, chairman
emeritus and executive officers as a group, the following
information:
|
|
(i)
|
the
number of exchange shares to be held upon consummation of the conversion,
based upon their beneficial ownership of CFF common stock as of April 16,
2010;
|
|
|
(ii)
|
the
proposed purchases of subscription shares, assuming sufficient shares of
common stock are available to satisfy their subscription;
and
|
122
|
|
(iii)
|
the
total amount of Capitol Federal Financial, Inc. common stock to be held
upon consummation of the
conversion.
|
In each
case, it is assumed that subscription shares are sold at the midpoint of the
offering range. See “The Conversion and Offering - Additional
Limitations on Common Stock Purchases.” Regulations of the Office of
Thrift Supervision prohibit our directors and officers from selling the shares
they purchase in the offering for one year after the date of
purchase.
|
Proposed
Purchases of Stock
in
the Offering(2)
|
Total
Common Stock to be Held
|
|||||||||||||||||||
|
Number
of
Exchange
Shares
to
be
Held(1)
|
Number
of
Shares
|
Amount
|
Number
of
Shares
|
Percentage
of
Total
Outstanding(1)
|
||||||||||||||||
|
Directors
and Chairman Emeritus
|
||||||||||||||||||||
|
John
C. Dicus
|
2,070,349 | 20,000 | $ | 200,000 | 2,090,349 | * | ||||||||||||||
|
John
B. Dicus
|
1,989,435 | 50,000 | 500,000 | 2,039,435 | * | |||||||||||||||
|
B.
B. Andersen
|
219,698 | 61,000 | 610,000 | 280,698 | * | |||||||||||||||
|
Jeffrey
M. Johnson
|
38,989 | 15,000 | 150,000 | 53,989 | * | |||||||||||||||
|
Michael
T. McCoy, M.D.
|
28,356 | 10,000 | 100,000 | 38,356 | * | |||||||||||||||
|
Jeffrey
R. Thompson
|
39,698 | 15,000 | 150,000 | 54,698 | * | |||||||||||||||
|
Marilyn
S. Ward
|
254,190 | 10,000 | 100,000 | 264,190 | * | |||||||||||||||
|
Morris
J. Huey, II
|
376,822 | 5,000 | 50,000 | 381,822 | ||||||||||||||||
|
Executive
Officers who are not Directors
|
||||||||||||||||||||
| * | ||||||||||||||||||||
|
R.
Joe Aleshire
|
673,802 | 5,000 | 50,000 | 678,802 | * | |||||||||||||||
|
Larry
K. Brubaker
|
646,112 | 5,000 | 50,000 | 651,112 | * | |||||||||||||||
|
Kent
G. Townsend
|
229,183 | 2,500 | 25,000 | 231,683 | * | |||||||||||||||
|
Rick
C. Jackson
|
129,718 | 5,000 | 50,000 | 134,718 | * | |||||||||||||||
|
Tara
D. Van Houweling
|
31,471 | 1,500 | 15,000 | 32,971 | * | |||||||||||||||
|
Total
for Directors, Chairman Emeritus and Executive Officers
|
6,727,823 | 205,000 | $ | 2,050,000 | 6,932,823 | 2.6 | % | |||||||||||||
|
*
|
Less
than 1%.
|
|
(1)
|
Based
on information presented in the Beneficial Ownership of Common Stock table
above. Assumes an exchange ratio of 3.5445 shares for each share of CFF
and that 262,380,200 shares are outstanding after the
conversion.
|
|
(2)
|
Includes
proposed subscriptions, if any, by associates of the director or
officer.
|
THE CONVERSION AND OFFERING
The
Boards of Directors of CFF and Capitol Federal Savings Bank MHC have approved
the plan of conversion and reorganization. The plan of conversion and
reorganization, as well as the contribution to the charitable foundation, must
also be approved by the members of Capitol Federal Savings Bank MHC (depositors
and certain borrowers of Capitol Federal Savings Bank) and the stockholders of
CFF. A special meeting of members of Capitol Federal Savings Bank MHC
and a special meeting of stockholders of CFF have been called for this
purpose. The Office of Thrift Supervision has conditionally approved
the plan of conversion and reorganization, however, this approval does not
constitute a recommendation or endorsement of the plan of conversion and
reorganization by that agency.
123
General
Pursuant
to the plan of conversion and reorganization, our organization will convert from
the mutual holding company form of organization to the fully stock
form. Capitol Federal Savings Bank MHC, the mutual holding company
parent of CFF, will be merged into CFF and Capitol Federal Savings Bank MHC will
no longer exist. CFF, which owns 100% of Capitol Federal Savings
Bank, will be succeeded by a new Maryland corporation named Capitol Federal
Financial, Inc.. As part of the conversion, the ownership interest of
Capitol Federal Savings Bank MHC in CFF will be offered for sale in the offering
by Capitol Federal Financial, Inc. When the conversion is completed,
all of the outstanding common stock of Capitol Federal Savings Bank will be
owned by Capitol Federal Financial, Inc., and all of the outstanding common
stock of Capitol Federal Financial, Inc. will be owned by public stockholders
(including the Capitol Federal Foundation). A diagram of our
corporate structure before and after the conversion is set forth in the
“Summary” section of this prospectus.
Under the
plan of conversion and reorganization, at the completion of the conversion each
share of CFF common stock owned by persons other than Capitol Federal Savings
Bank MHC will be canceled and converted automatically into shares of Capitol
Federal Financial, Inc. common stock determined pursuant to an exchange
ratio. The exchange ratio will ensure that immediately after the
exchange of existing shares of CFF for shares of Capitol Federal Financial,
Inc., the public stockholders will own the same percentage of shares of common
stock of Capitol Federal Financial, Inc. that they owned in CFF immediately
prior to the conversion, excluding any shares they purchased in the offering and
cash paid in lieu of fractional exchange shares.
Capitol
Federal Financial, Inc. intends to contribute between $757.3 million and $1.03
billion of net proceeds to Capitol Federal Savings Bank and to retain between
$654.4 million and $900.4 million of the net proceeds (excluding the portion of
the net proceeds loaned to our employee stock ownership plan). The
conversion will be consummated only upon the issuance of at least the minimum
number of shares of our common stock offered pursuant to the plan of conversion
and reorganization.
The plan
of conversion and reorganization provides that we will offer shares of common
stock in a subscription offering in the following descending order of
priority:
|
|
(i)
|
First,
to depositors with accounts at Capitol Federal Savings Bank with aggregate
balances of at least $50.00 at the close of business on March 31,
2009.
|
|
|
(ii)
|
Second,
to our tax-qualified employee benefit plans, including our employee stock
ownership plan, which will receive nontransferable subscription rights to
purchase in the aggregate up to 10% of the shares of common stock sold in
the offering.
|
|
|
(iii)
|
Third,
to depositors with accounts at Capitol Federal Savings Bank with aggregate
balances of at least $50.00 at the close of business on [ ],
2010.
|
|
|
(iv)
|
Fourth,
to depositors of Capitol Federal Savings Bank at the close of business on
[ ],
2010 and borrowers of Capitol Federal Savings Bank with an outstanding
balance as of January 6, 1993 and [ ],
2010.
|
If all
shares are not subscribed for in the subscription offering, we may, at our
discretion, offer shares of common stock for sale in a community offering to
members of the general public, with a preference given in the following
order:
|
|
(i)
|
Natural
persons residing in the counties and metropolitan statistical areas in
which we have offices;
|
|
|
(ii)
|
CFF’s
public stockholders as of [ ],
2010; and
|
|
|
(iii)
|
Other
members of the general public.
|
We have
the right to accept or reject, in whole or in part, any orders to purchase
shares of the common stock received in the community offering. The
community offering, if any, may begin at the same time as, during, or after the
subscription offering and must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the Office
of Thrift Supervision. See “— Community Offering.”
124
The
shares of common stock not purchased in the subscription offering or community
offering will be offered to the general public on a best efforts basis by
Sandler O’Neill & Partners, L.P., acting as sole book-running manager, and
Keefe, Bruyette & Woods, Inc., as co-manager, in a syndicated community
offering through a syndicate of selected dealers.
We have
the right to accept or reject orders received in the syndicated community
offering at our sole discretion. The syndicated community offering
may begin at any time following the commencement of the subscription offering
and must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by us, with approval of the
Office of Thrift Supervision. Alternatively, we may sell any
remaining shares in an underwritten public offering, which would be conducted on
a firm commitment basis. See “- Syndicated Community
Offering.”
We
determined the number of shares of common stock to be offered in the offering
based upon an independent valuation of the estimated pro forma market value of
Capitol Federal Financial, Inc. All shares of common stock to be sold
in the offering will be sold at $10.00 per share. Investors will not
be charged a commission to purchase shares of common stock in the
offering. The independent valuation will be updated and the final
number of shares of common stock to be issued in the offering will be determined
at the completion of the offering. See “- Stock Pricing and Number of
Shares to be Issued” for more information as to the determination of the
estimated pro forma market value of the common stock.
The
following is a brief summary of the conversion and is qualified in its entirety
by reference to the provisions of the plan of conversion and
reorganization. A copy of the plan of conversion and reorganization
is available for inspection at each banking office of Capitol Federal Savings
Bank and at the Western Regional and the Washington, D.C. offices of the Office
of Thrift Supervision. The plan of conversion and reorganization is
also filed as an exhibit to Capitol Federal Savings Bank MHC’s application to
convert from mutual to stock form, of which this prospectus is a part, copies of
which may be obtained from the Office of Thrift Supervision. The plan
of conversion and reorganization is also an exhibit to Capitol Federal
Financial, Inc.’s Registration Statement on Form S-1, which is accessible on the
Securities and Exchange Commission website, www.sec.gov. See “Where
You Can Find Additional Information.”
Reasons
for the Conversion and Offering
Our Board
of Directors decided at this time to convert to a fully public stock form of
ownership. Our primary reasons for converting and raising additional
capital through the offering are:
|
|
●
|
to
eliminate some of the uncertainties associated with proposed financial
regulatory reforms which may result in changes to our primary bank
regulator and holding company regulator as well as changes in regulations
applicable to us, including, but not limited to, capital requirements,
payment of dividends and conversion to full stock
form;
|
|
|
●
|
the
stock holding company structure is a more familiar form of organization,
which we believe will make our common stock more appealing to investors,
and will give us greater flexibility to access the capital markets through
possible future equity and debt offerings, although we have no current
plans, agreements or understandings regarding any additional securities
offerings;
|
|
|
●
|
to
improve the liquidity of our shares of common stock and provide more
flexible capital management strategies;
and
|
|
|
●
|
to
finance, where opportunities are presented, the acquisition of financial
institutions or their branches or other financial service companies
primarily in, or adjacent to, our market areas, although we do not
currently have any understandings or agreements regarding any specific
acquisition transaction.
|
As a
fully converted stock holding company, we will have greater flexibility in
structuring mergers and acquisitions, including the form of consideration that
we can use to pay for an acquisition. Our current mutual holding
company structure limits our ability to offer shares of our common stock as
consideration for a merger or acquisition since Capitol Federal Savings Bank MHC
is required to own a majority of our shares of common
stock. Potential sellers often want stock for at least part of the
purchase price. Our new stock holding company structure will enable
us to offer stock or cash consideration, or a combination of stock and cash, and
will therefore enhance our ability to compete with other bidders when
acquisition opportunities arise.
125
Approvals Required — Plan of
Conversion and
Reorganization
The
affirmative vote of a majority of the total eligible votes of the members of
Capitol Federal Savings Bank MHC as of [ ],
2010 is required to approve both the plan of conversion and reorganization and
the contribution to the charitable foundation. By their approval of
the plan of conversion and reorganization, the members of Capitol Federal
Savings Bank MHC (comprised of depositors and certain borrowers of Capitol
Federal Savings Bank) will also be approving the merger of Capitol Federal
Savings Bank MHC into CFF. The affirmative vote of the holders of at
least two-thirds of the outstanding shares of common stock of CFF, including
shares held by Capitol Federal Savings Bank MHC, and the affirmative vote of the
holders of a majority of the outstanding shares of common stock of CFF held by
the public stockholders as of [ ],
2010 are also required to approve the plan of conversion and reorganization and
the contribution to the charitable foundation. The plan of conversion
and reorganization also must be approved by the Office of Thrift Supervision,
which has given its conditional approval; however, this approval does not
constitute a recommendation or endorsement of the plan of conversion and
reorganization by such agency.
Share
Exchange Ratio for Current Stockholders
Office of
Thrift Supervision regulations provide that in a conversion of a mutual holding
company to fully stock form, the public stockholders will be entitled to
exchange their shares for common stock of the new holding company, provided that
the mutual holding company demonstrates to the satisfaction of the Office of
Thrift Supervision that the basis for the exchange is fair and
reasonable. Each publicly held share of CFF common stock will be
automatically converted into the right to receive a number of shares of Capitol
Federal Financial, Inc. common stock. The number of shares of common
stock will be determined pursuant to the exchange ratio, which ensures that the
public stockholders will own the same percentage of common stock in Capitol
Federal Financial, Inc. after the conversion as they held in CFF immediately
prior to the conversion, exclusive of their purchase of additional shares of
common stock in the offering and their receipt of cash in lieu of fractional
exchange shares. The exchange ratio is not dependent on the market
value of our currently outstanding CFF common stock. The exchange
ratio is based on the percentage of CFF common stock held by the public, the
independent valuation of CFF prepared by RP Financial, LC. and the number of
shares of common stock issued in the offering. The exchange ratio is expected to
range from approximately 3.0129 exchange shares for each publicly held share of
CFF at the minimum of the offering range to 4.0762 exchange shares for each
publicly held share of CFF at the maximum of the offering range.
If you
are a stockholder of CFF, at the conclusion of the conversion your shares will
be exchanged for shares of Capitol Federal Financial, Inc. The number
of shares you receive will be based on the number of shares of common stock you
own and the final exchange ratio determined as of the conclusion of the
conversion.
The
following table shows how the exchange ratio will adjust, based on the number of
shares of common stock issued in the offering and the shares of common stock
issued and outstanding on the date of this prospectus. The table also
shows how many whole shares of Capitol Federal Financial, Inc. a hypothetical
owner of CFF common stock would receive in the exchange for 100 shares of CFF
common stock owned at the consummation of the conversion, depending on the
number of shares issued in the offering.
126
|
New
Shares to be Sold
in
This Offering
|
New
Shares to be
Exchanged
for
Existing
Shares of
CFF
|
Total
Shares
of
Common
Stock
to be
Outstanding
After
the
Offering
|
Exchange
Ratio
|
New
Shares
That
Would
be
Received
for
100
Existing
Shares
|
||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
||||||||||||||||||||||||
|
Minimum
|
157,250,000 | 70.5 | % | 65,773,170 | 29.5 | % | 223,023,170 | 3.0129 | 301 | |||||||||||||||||||
|
Midpoint
|
185,000,000 | 70.5 | % | 77,380,200 | 29.5 | % | 262,380,200 | 3.5445 | 354 | |||||||||||||||||||
|
Maximum
|
212,750,000 | 70.5 | % | 88,987,230 | 29.5 | % | 301,737,230 | 4.0762 | 407 | |||||||||||||||||||
Options
to purchase shares of CFF common stock which are outstanding immediately prior
to the consummation of the conversion will be converted into options to purchase
shares of Capitol Federal Financial, Inc. common stock, with the number of
shares subject to the option and the exercise price per share to be adjusted
based upon the exchange ratio. The aggregate exercise price, term and
vesting period of the options will remain unchanged.
Exchange
of Existing Stockholders’ Stock Certificates
The
conversion of existing outstanding shares of CFF common stock into the right to
receive shares of Capitol Federal Financial, Inc. common stock will occur
automatically on the effective date of the conversion. As soon as practicable
after the effective date of the conversion, our exchange agent will send a
transmittal form to each public stockholder of CFF who holds stock certificates.
The transmittal forms will contain instructions on how to exchange stock
certificates of CFF common stock for common stock of Capitol Federal Financial,
Inc. All shares of Capitol Federal Financial, Inc. common stock being sold will
be in book entry form and paper stock certificates will not be issued. We expect
that a statement evidencing your ownership of Capitol Federal Financial, Inc.
common stock will be distributed within five business days after the exchange
agent receives properly executed transmittal forms, CFF stock certificates and
other required documents. You
should not forward your stock certificates until you have received transmittal
forms, which will include forwarding instructions. Shares held by public
stockholders through a brokerage or other account in “street name” will be
exchanged automatically upon the conclusion of the conversion; no transmittal
forms will be mailed relating to these shares.
No
fractional shares of Capitol Federal Financial, Inc. common stock will be issued
to any public stockholder of CFF when the conversion is
completed. For each fractional share that would otherwise be issued
to a stockholder who holds a stock certificate, we will pay by check an amount
equal to the product obtained by multiplying the fractional share interest to
which the holder would otherwise be entitled by the $10.00 offering purchase
price per share. Payment for fractional shares will be made as soon
as practicable after the receipt by the exchange agent of a properly executed
transmittal form, stock certificates and other required documents. If
your shares of common stock are held in street name (such as in a brokerage
account) you will automatically receive cash in lieu of fractional exchange
shares in your account.
After the
conversion, CFF stockholders who hold stock certificates will not receive shares
of Capitol Federal Financial, Inc. common stock and will not be paid dividends
on the shares of Capitol Federal Financial, Inc. common stock until existing
certificates representing shares of CFF common stock are surrendered for
exchange in compliance with the terms of the transmittal form. When
stockholders surrender their certificates, any unpaid dividends will be paid
without interest. For all other purposes, however, each certificate
that represents shares of CFF common stock outstanding at the effective date of
the conversion will be considered to evidence ownership of shares of Capitol
Federal Financial, Inc. common stock into which those shares have been converted
by virtue of the conversion.
If a
certificate for CFF common stock has been lost, stolen or destroyed, our
exchange agent will issue a new stock certificate upon receipt of appropriate
evidence as to the loss, theft or destruction of the certificate, appropriate
evidence as to the ownership of the certificate by the claimant, and appropriate
and customary indemnification, which is normally effected by the purchase of a
bond from a surety company at the stockholder’s expense.
127
All
shares of Capitol Federal Financial, Inc. common stock that we issue in exchange
for existing shares of CFF common stock will be considered to have been issued
in full satisfaction of all rights pertaining to such shares of common stock,
subject, however, to our obligation to pay any dividends or make any other
distributions with a record date prior to the effective date of the conversion
that may have been declared by us on or prior to the effective date, and which
remain unpaid at the effective date.
Effects
of Conversion on Depositors, Borrowers and Members
Continuity. While the
conversion is being accomplished, the normal business of Capitol Federal Savings
Bank of accepting deposits and making loans will continue without
interruption. Capitol Federal Savings Bank will continue to be a
federally chartered savings bank and will continue to be regulated by the Office
of Thrift Supervision. After the conversion, Capitol Federal Savings
Bank will continue to offer existing services to depositors, borrowers and other
customers. The directors and executive officers serving CFF at the
time of the conversion will be the directors and executive officers of Capitol
Federal Financial, Inc. after the conversion.
Effect on Deposit
Accounts. Pursuant to the
plan of conversion and reorganization, each depositor of Capitol Federal Savings
Bank at the time of the conversion will automatically continue as a depositor
after the conversion, and the deposit balance, interest rate and other terms of
such deposit accounts will not change as a result of the
conversion. Each such account will be insured by the Federal Deposit
Insurance Corporation to the same extent as before the
conversion. Depositors will continue to hold their existing
certificates and other evidences of their accounts.
Effect on
Loans. No loan
outstanding from Capitol Federal Savings Bank will be affected by the
conversion, and the amount, interest rate, maturity and security for each loan
will remain as it was contractually fixed prior to the conversion.
Effect on Voting
Rights of Members. At present, all depositors and certain
borrowers of Capitol Federal Savings Bank are members of, and have voting rights
in, Capitol Federal Savings Bank MHC as to all matters requiring membership
action. Upon completion of the conversion, depositors and those
certain borrower members will cease to be members of Capitol Federal Savings
Bank MHC and will no longer have voting rights, unless they purchase shares of
Capitol Federal Financial, Inc.’s common stock. Upon completion of
the conversion, all voting rights in Capitol Federal Savings Bank will be vested
in Capitol Federal Financial, Inc. as the sole stockholder of Capitol Federal
Savings Bank. The stockholders of Capitol Federal Financial, Inc.
will possess exclusive voting rights with respect to Capitol Federal Financial,
Inc. common stock.
Tax
Effects. We have received
an opinion of counsel or a tax advisor with regard to the federal and state
income tax consequences of the conversion to the effect that the conversion will
not be a taxable transaction for federal or state income tax purposes to Capitol
Federal Savings Bank MHC, CFF, public stockholders of CFF (except for cash paid
for fractional exchange shares), members of Capitol Federal Savings Bank MHC,
Eligible Account Holders, Supplemental Eligible Account Holders, or Capitol
Federal Savings Bank. See “- Material Income Tax
Consequences.”
Effect on
Liquidation Rights. Each depositor
in Capitol Federal Savings Bank has both a deposit account in Capitol Federal
Savings Bank and a pro rata ownership interest in the net worth of Capitol
Federal Savings Bank MHC based upon the deposit balance in his or her
account. This ownership interest is tied to the depositor’s account
and has no tangible market value separate from the deposit
account. This interest may only be realized in the event of a
complete liquidation of Capitol Federal Savings Bank MHC and Capitol Federal
Savings Bank. Any depositor who opens a deposit account obtains a pro
rata ownership interest in Capitol Federal Savings Bank MHC without any
additional payment beyond the amount of the deposit. A depositor who
reduces or closes his or her account receives a portion or all of the balance in
the deposit account but nothing for his or her ownership interest in the net
worth of Capitol Federal Savings Bank MHC, which is lost to the extent that the
balance in the account is reduced or closed.
128
Consequently,
depositors in a stock subsidiary of a mutual holding company normally have no
way of realizing the value of their ownership interest, which has realizable
value only in the unlikely event that Capitol Federal Savings Bank MHC and
Capitol Federal Savings Bank are liquidated. If this occurs, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of Capitol Federal Savings Bank MHC after other
claims, including claims of depositors to the amounts of their deposits and
payments to certain depositors of Capitol Federal Savings Bank under liquidation
accounts that have been established for the benefit of such depositors, are
paid.
Under the
plan of conversion and reorganization, however, depositors will receive rights
in a liquidation account maintained by Capitol Federal Financial, Inc.
representing the amount of Capitol Federal Savings Bank MHC’s ownership interest
in CFF’s total stockholders’ equity as of the date of the latest statement of
financial condition used in this prospectus. Capitol Federal
Financial, Inc. shall continue to hold the liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain deposits in Capitol Federal Savings Bank. The
liquidation account is designed to provide payments to depositors of their
liquidation interests in the event of a liquidation of Capitol Federal
Financial, Inc. and Capitol Federal Savings Bank. Specifically, in
the unlikely event that Capitol Federal Financial, Inc. and Capitol Federal
Savings Bank were to liquidate after the conversion, all claims of creditors,
including those of depositors, would be paid first, followed by distribution to
depositors as of March 31, 2009 and [ ],
2010 of the liquidation account maintained by Capitol Federal Financial,
Inc. Also, in a complete liquidation of both entities, or of just
Capitol Federal Savings Bank, when Capitol Federal Financial, Inc. has
insufficient assets to fund the liquidation account distribution due to Eligible
Account Holders and Supplemental Eligible Account Holders and Capitol Federal
Savings Bank has positive net worth, Capitol Federal Savings Bank shall
immediately pay amounts necessary to fund Capitol Federal Financial, Inc.’s
remaining obligations under the liquidation account. The plan of
conversion and reorganization also provides that if Capitol Federal Financial,
Inc. is completely liquidated or sold apart from a sale or liquidation of
Capitol Federal Savings Bank, then the rights of Eligible Account Holders
and Supplemental Account Holders in the liquidation
account maintained by Capitol Federal Financial, Inc. shall be surrendered and
treated as a liquidation account in Capitol Federal Savings Bank (the bank
liquidation account) and depositors shall have an equivalent interest in the
bank liquidation account and the same rights and terms as the liquidation
account.
Pursuant
to the plan of conversion and reorganization, after two years from the date of
conversion and upon the written request of the Office of
Thrift Supervision, Capitol Federal Financial, Inc. will eliminate or
transfer the liquidation account and the interests in such account to Capitol
Federal Savings Bank and the liquidation account shall thereupon become the
liquidation account of Capitol Federal Savings Bank and not subject in any
manner to the claims of Capitol Federal Financial, Inc.’s
creditors. Also, under the rules and regulations of the Office of
Thrift Supervision, no post-conversion merger, consolidation, or similar
combination or transaction with another depository institution in which Capitol
Federal Financial, Inc. or Capitol Federal Savings Bank is not the surviving
institution would be considered a liquidation and, in such a transaction, the
liquidation account would be assumed by the surviving
institution. See “- Liquidation Rights.”
Stock
Pricing and Number of Shares to be Issued
The plan
of conversion and reorganization and federal regulations require that the
aggregate purchase price of the common stock sold in the offering be based on
the appraised pro forma market value of the common stock, as determined by an
independent valuation. Capitol Federal Savings Bank and Capitol
Federal Savings Bank MHC have retained RP Financial, LC. to prepare an
independent valuation appraisal. For its services in preparing the
initial valuation, RP Financial, LC. will receive a fee of $350 thousand and $10
thousand for expenses and an additional $25 thousand for each valuation update,
as necessary. Capitol Federal Savings Bank and Capitol Federal
Savings Bank MHC have agreed to indemnify RP Financial, LC. and its employees
and affiliates against specified losses, including any losses in connection with
claims under the federal securities laws, arising out of its services as
independent appraiser, except where such liability results from its negligence
or bad faith.
The
independent valuation appraisal considered the pro forma impact of the
offering. Consistent with the Office of Thrift Supervision appraisal
guidelines, the appraisal applied three primary methodologies: the pro forma
price-to-book value approach applied to both reported book value and tangible
book value; the pro forma price-to-earnings approach applied to reported and
core earnings; and the pro forma price-to-assets approach. The market
value ratios applied in the three methodologies were based upon the current
market valuations of the peer group companies, subject to valuation adjustments
applied by RP Financial, LC. to account for differences between CFF and the peer
group. RP Financial, LC. placed the greatest emphasis on the
price-to- core earnings and price-to-tangible book approaches in estimating pro
forma market value.
129
The
independent valuation was prepared by RP Financial, LC. in reliance upon the
information contained in this prospectus, including the consolidated financial
statements of CFF. RP Financial, LC. also considered the following
factors, among others:
|
|
●
|
the
present results and financial condition of CFF and the projected results
and financial condition of Capitol Federal Financial,
Inc.;
|
|
|
●
|
the
economic and demographic conditions in CFF’s existing market
area;
|
|
|
●
|
certain
historical, financial and other information relating to
CFF;
|
|
|
●
|
the
impact of the offering on Capitol Federal Financial, Inc.’s stockholders’
equity and earnings potential;
|
|
|
●
|
the
proposed dividend policy of Capitol Federal Financial,
Inc.;
|
|
|
●
|
the
trading market for securities of comparable institutions and general
conditions in the market for such securities;
and
|
|
|
●
|
the
contribution of cash to the charitable
foundation.
|
Included
in RP Financial, LC.’s independent valuation were certain assumptions as to the
pro forma earnings of Capitol Federal Financial, Inc. after the conversion that
were utilized in determining the appraised value. These assumptions
included estimated expenses, an assumed after-tax rate of return on the net
offering proceeds of 1.66% and purchases in the open market of the common stock
issued in the offering by the stock-based incentive plan at the $10.00 per share
purchase price. See “Pro Forma Data” for additional information
concerning these assumptions. The use of different assumptions may
yield different results.
The
independent valuation states that as of April 16, 2010, the estimated pro forma
market value of Capitol Federal Financial, Inc. was $2.62
billion. Based on regulations, the market value is the midpoint of a
range with a minimum of $2.23 billion and a maximum of $3.02
billion. The Board of Directors of Capitol Federal Financial, Inc.
decided to offer the shares of common stock for a price of $10.00 per
share. The aggregate offering price of the shares of common stock
will be equal to the valuation range multiplied by the percentage of CFF common
stock owned by Capitol Federal Savings Bank MHC. The number of shares
offered will be equal to the aggregate offering price of the shares of common
stock divided by the price per share. Based on the valuation range,
the 70% of CFF common stock owned by Capitol Federal Savings Bank MHC and the
$10.00 price per share, the minimum of the offering range will be 157,250,000
shares, the midpoint of the offering range will be 185,000,000 shares and the
maximum of the offering range will 212,750,000 shares of common
stock.
The Board
of Directors of CFF reviewed the independent valuation and, in particular,
considered the following:
|
|
●
|
CFF’s
financial condition and results of
operations;
|
|
|
●
|
a
comparison of financial performance ratios of CFF to those of other
financial institutions of similar
size;
|
|
|
●
|
market
conditions generally and in particular for financial institutions;
and
|
|
|
●
|
the
historical trading price of the publicly held shares of CFF common
stock.
|
130
All of
these factors are set forth in the independent valuation. The Board
of Directors also reviewed the methodology and the assumptions used by RP
Financial, LC. in preparing the independent valuation and the Board believes
that these assumptions were reasonable. The offering range may be
amended with the approval of the Office of Thrift Supervision, if required, as a
result of subsequent developments in the financial condition of CFF or Capitol
Federal Savings Bank or market conditions generally. In the event the
independent valuation is updated to amend the pro forma market value of Capitol
Federal Financial, Inc. to less than $2.23 billion or more than $3.02 billion,
the appraisal will be filed with the Securities and Exchange Commission by a
post-effective amendment to Capitol Federal Financial, Inc.’s registration
statement.
The
independent valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing our shares of
common stock. RP Financial, LC. did not independently verify our
consolidated financial statements and other information that we provided to
them, nor did RP Financial, LC. independently value our assets or
liabilities. The independent valuation considers Capitol Federal
Savings Bank as a going concern and should not be considered as an indication of
the liquidation value of Capitol Federal Savings Bank. Moreover,
because the independent valuation is necessarily based upon estimates and
projections of a number of matters, all of which may change from time to time,
no assurance can be given that persons purchasing our common stock in the
offering will thereafter be able to sell their shares of common stock at prices
at or above the $10.00 price per share.
We
will not decrease the minimum of the valuation range and the minimum of the
offering range, or increase the maximum of the valuation range and the maximum
of the offering range, without a resolicitation of purchasers. The
subscription price of $10.00 per share of common stock will remain
fixed.
If the
update to the independent valuation at the conclusion of the offering results in
an increase in the maximum of the valuation range to more than $3.02 billion and
a corresponding increase in the offering range to more than 212,750,000 shares,
or a decrease in the minimum of the valuation range to less than $2.23 billion
and a corresponding decrease in the offering range to fewer than 157,250,000
shares, then, after consulting with the Office of Thrift Supervision, we may
terminate the plan of conversion and reorganization, cancel deposit account
withdrawal authorizations and promptly return by check all funds received, with
interest at Capitol Federal Savings Bank’s statement savings
rate. Alternatively, we may establish a new offering range, extend
the offering period and commence a resolicitation of purchasers or take other
actions as permitted by the Office of Thrift Supervision in order to complete
the offering. In the event that we extend the offering and conduct a
resolicitation, purchasers would have the opportunity to maintain, change or
cancel their stock orders within a specified period. If a purchaser
does not respond during the period, his or her stock order will be canceled and
payment will be returned promptly, with interest at Capitol Federal Savings
Bank’s statement savings rate, and deposit account withdrawal authorizations
will be canceled. Any single offering extension will not exceed
90 days; aggregate extensions may not conclude beyond
[ ], 2012, which is two years after the
special meeting of members to vote on the conversion.
An
increase in the number of shares of common stock to be issued in the offering
would decrease both a purchaser’s ownership interest and Capitol Federal
Financial, Inc.’s pro forma earnings and stockholders’ equity on a per share
basis while increasing pro forma earnings and stockholders’ equity on an
aggregate basis. A decrease in the number of shares to be issued in
the offering would increase both a purchaser’s ownership interest and Capitol
Federal Financial, Inc.’s pro forma earnings and stockholders’ equity on a per
share basis, while decreasing pro forma earnings and stockholders’ equity on an
aggregate basis. For a presentation of the effects of these changes,
see “Pro Forma Data.”
Copies of
the independent valuation appraisal report prepared by RP Financial, LC. and the
detailed memorandum setting forth the method and assumptions used in the
appraisal report are available for inspection at the main office of Capitol
Federal Savings Bank and as specified under “Where You Can Find Additional
Information.”
Subscription
Offering and Subscription Rights
In
accordance with the plan of conversion and reorganization, rights to subscribe
for shares of common stock in the subscription offering have been granted in the
following descending order of priority. The filling of all
subscriptions that we receive will depend on the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and subject to the minimum, maximum and overall
purchase and ownership limitations set forth in the plan of conversion and
reorganization and as described below under “—Additional Limitations on Common
Stock Purchases.”
131
Priority 1:
Eligible Account Holders. Each Capitol Federal Savings Bank
depositor with an aggregate deposit account balance of $50.00 or more (a
Qualifying Deposit) at the close of business on March 31, 2009 (an Eligible
Account Holder) will receive, without payment therefor, nontransferable
subscription rights to purchase up to the greater of: (i) $75.0 million
(7,500,000 shares) of our common stock; (ii) one-tenth of one percent of
the total number of shares of common stock issued in the offering; or (iii) 15
times the product, rounded down to the nearest whole number, obtained by
multiplying the total number of shares of common stock offered by a fraction,
the numerator of which is the amount of the Qualifying Deposit of the Eligible
Account Holder and the denominator of which is the total amount of Qualifying
Deposits of all Eligible Account Holders, subject to the overall purchase and
ownership limitations. See “- Additional Limitations on Common Stock
Purchases.” If there are not sufficient shares available to satisfy all
subscriptions, shares will first be allocated so as to permit each Eligible
Account Holder to purchase a number of shares sufficient to make his or her
total allocation equal to the lesser of 100 shares or the number of shares for
which he or she subscribed. Thereafter, unallocated shares will be
allocated to each Eligible Account Holder whose subscription remains unfilled in
the proportion that the amount of his or her Qualifying Deposit bears to the
total amount of Qualifying Deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. If an amount so allocated
exceeds the amount subscribed for by any one or more Eligible Account Holders,
the excess will be reallocated among those Eligible Account Holders whose
subscriptions are not fully satisfied until all available shares have been
allocated.
To ensure
proper allocation of our shares of common stock, each Eligible Account Holder
must list on his or her stock order form all deposit accounts in which he or she
had an ownership interest on March 31, 2009. In the event of
oversubscription, failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. In the event of an
oversubscription, the subscription rights of Eligible Account Holders who are
also directors or executive officers of CFF or their associates will be
subordinated to the subscription rights of other Eligible Account Holders to the
extent attributable to increased deposits in the twelve months preceding March
31, 2009.
Priority 2:
Tax-Qualified Plans. Our
tax-qualified employee stock benefit plan, consisting of our employee stock
ownership plan, will receive, without payment therefor, nontransferable
subscription rights to purchase up to 10% of the shares of common stock sold in
the offering, although our employee stock ownership plan intends to purchase
4.0% of the shares of common stock sold in the offering. If market
conditions warrant, in the judgment of its trustees, the employee stock
ownership plan may elect to purchase shares in the open market following the
completion of the conversion.
Priority 3:
Supplemental Eligible Account Holders. To the extent
that there are sufficient shares of common stock remaining after satisfaction of
subscriptions by Eligible Account Holders and our tax-qualified employee stock
benefit plans, each Capitol Federal Savings Bank depositor, other than directors
and executive officers of CFF, with a Qualifying Deposit at the close of
business on [ ],
2010 who is not an Eligible Account Holder (Supplemental Eligible Account
Holder) will receive, without payment therefor, nontransferable subscription
rights to purchase up to the greater of: (i) $75.0 million (7,500,000 shares) of
common stock; (ii) one-tenth of one percent of the total number of shares
of common stock issued in the offering; or (iii) 15 times the product,
rounded down to the nearest whole number, obtained by multiplying the total
number of shares of common stock to be offered by a fraction, the numerator of
which 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 subject to the overall
purchase and ownership limitations. See “— Additional Limitations on
Common Stock Purchases.” If there are not sufficient shares available to satisfy
all subscriptions, shares will be allocated so as to permit each Supplemental
Eligible Account Holder to purchase a number of shares sufficient to make his or
her total allocation equal to the lesser of 100 shares of common stock or the
number of shares for which he or she subscribed. Thereafter,
unallocated shares will be allocated to each Supplemental Eligible Account
Holder whose subscription remains unfilled in the proportion that the amount of
his or her Qualifying Deposit bears to the total amount of Qualifying Deposits
of all Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
To ensure
proper allocation of common stock, each Supplemental Eligible Account Holder
must list on the stock order form all deposit accounts in which he or she had an
ownership interest at [ ],
2010. In the event of oversubscription, failure to list an account
could result in fewer shares being allocated than if all accounts had been
disclosed.
132
Priority 4: Other
Members. To the extent that there are shares of common stock
remaining after satisfaction of subscriptions by Eligible Account Holders, our
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each depositor of Capitol Federal Savings Bank as of the close of
business on the voting record date of [ ],
2010, and each borrower of Capitol Federal Savings Bank with an outstanding
balance as of January 6, 1993 and on the voting date, who is not an Eligible
Account Holder or Supplemental Eligible Account Holder (Other Members) will
receive, without payment therefor, nontransferable subscription rights to
purchase up to $75.0 million (7,500,000 shares) of common stock or one-tenth of
one percent of the total number of shares of common stock issued in the
offering, subject to the overall purchase and ownership
limitations. See “— Additional Limitations on Common Stock
Purchases.” If there are not sufficient shares available to satisfy all
subscriptions, available shares will be allocated so as to permit each Other
Member to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of 100 shares of common stock or the number of
shares for which he or she subscribed. Any remaining shares will be
allocated among Other Members in the proportion that the amount of the
subscription of each Other Member whose subscription remains unsatisfied bears
to the total amount of subscriptions of all Other Members whose subscriptions
remain unsatisfied. To ensure proper allocation of common stock, each
Other Member must list on the stock order form all deposit accounts in which he
or she had an ownership interest at [ ],
2010. In the event of oversubscription, failure to list an account
could result in fewer shares being allocated than if all accounts had been
disclosed.
Expiration
Date. The subscription offering will expire at 4:00 p.m.,
Central Time, on [ ],
2010, unless extended by us for up to 45 days. This extension
may be made without notice to you, except that extensions beyond [ ],
2010 will require the approval of the Office of Thrift Supervision and a
resolicitation of subscribers in the offering. We may decide to
extend the expiration date of the subscription offering for any reason, whether
or not subscriptions have been received for shares at the minimum, midpoint or
maximum of the offering range. Subscription rights which have not
been exercised prior to the expiration date will become
void. Subscription rights will expire whether or not each eligible
depositor can be located.
Community
Offering
To the
extent that shares of common stock remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, our tax-qualified
employee stock benefit plans, Supplemental Eligible Account Holders and Other
Members, we expect to offer shares pursuant to the plan of conversion and
reorganization to members of the general public in a community
offering. Shares would be offered with the following
preferences:
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(i)
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Natural
persons residing in the counties and metropolitan statistical areas in
which we have a home or branch
office;
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(ii) CFF’s
public stockholders as of [ ],
2010; and
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(iii)
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Other
members of the general public.
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Purchasers
in the community offering may purchase up to $75.0 million (7,500,000 shares) of
common stock, subject to the overall purchase and ownership
limitations. See “- Limitations on Common Stock Purchases.” The
minimum purchase is 25 shares. The opportunity to
purchase shares of common stock in the community offering category is subject to
our right, in our sole discretion, to accept or reject any such orders in whole
or in part either at the time of receipt of an order or as soon as practicable
following the expiration date of the offering.
If we do
not have sufficient shares of common stock available to fill the accepted orders
of persons residing in the counties and metropolitan statistical areas in which
Capitol Federal Savings Bank has a home or branch office, we will allocate the
available shares among those persons in a manner that permits each of them, to
the extent possible, to purchase the lesser of 100 shares or the number of
shares subscribed for by such person. Thereafter, unallocated shares
will be allocated among such persons residing in the areas listed above whose
orders remain unsatisfied on an equal number of shares basis per
order. If an oversubscription occurs due to the orders of public
stockholders of CFF as of [ ],
2010, the allocation procedures described above will apply to the stock orders
of such persons. In the event of an oversubscription among members of
the general public, these same allocation procedures will also
apply. In connection with the allocation process, unless the Office
of Thrift Supervision permits otherwise, orders received for Capitol Federal
Financial, Inc. common stock in the community offering will first be filled up
to a maximum of two percent of the shares sold in the offering, and thereafter
any remaining shares will be allocated on an equal number of shares basis per
order until all shares have been allocated.
133
The term
“residing” or “resident” as used in this prospectus means any person who
occupies a dwelling within the counties and metropolitan statistical areas in
which Capitol Federal Savings Bank has a home or branch office; and has a
present intent to remain within such community for a period of time; and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the community, together with an indication that this presence
within the community is something other than merely transitory in
nature. We may utilize deposit or loan records or other evidence
provided to us to decide whether a person is a resident. In all
cases, however, the determination shall be in our sole discretion.
Expiration
Date. The community offering, if any, may begin during or
after the subscription offering, and is currently expected to terminate at the
same time as the subscription offering. Capitol Federal Financial,
Inc. may decide to extend the community offering for any reason and is not
required to give purchasers notice of any such extension unless such period
extends beyond [ ],
2010, in which case we will resolicit purchasers in the offering.
Syndicated
Community Offering
If
feasible, our Board of Directors may decide to offer for sale shares of common
stock not subscribed for or purchased in the subscription and community
offerings in a syndicated community offering, subject to such terms, conditions
and procedures as we may determine, in a manner that will achieve a wide
distribution of our shares of common stock. In the syndicated
community offering, any person may purchase up to $75.0 million (7,500,000
shares) of common stock, subject to the overall purchase and ownership
limitations. We retain the right to accept or reject in whole or in
part any orders in the syndicated community offering. Unless the
Office of Thrift Supervision permits otherwise, accepted orders for Capitol
Federal Financial, Inc. common stock in the syndicated community offering will
first be filled up to a maximum of two percent (2%) of the shares sold in the
offering, and thereafter any remaining shares will be allocated on an equal
number of shares basis per order until all shares have been
allocated. Unless the syndicated community offering begins during the
community offering, the syndicated community offering will begin as soon as
possible after the completion of the subscription and community
offerings.
If a
syndicated community offering is held, Sandler O’Neill & Partners, L.P. will
serve as sole book-running manager, Keefe, Bruyette & Woods, Inc. will serve
as co-manager, and each firm will assist us in selling our common stock on a
best efforts basis. Neither Sandler O’Neill & Partners, L.P. nor
any registered broker-dealer will have any obligation to take or purchase any
shares of the common stock in the syndicated community offering. The
syndicated community offering will be conducted in accordance with certain
Securities and Exchange Commission rules applicable to best efforts
offerings. The closing of the syndicated community offering is
subject to conditions set forth in an agency agreement among CFF, Capitol
Federal Savings Bank MHC and Capitol Federal Savings Bank on one hand and
Sandler O’Neill & Partners, L.P., as representative of the several agents,
on the other hand. If and when all the conditions for the closing are
met, funds for common stock sold in the syndicated community offering, less fees
and commissions payable, will be delivered promptly to us. If the
offering is consummated, but some or all of an interested investor’s funds are
not accepted by us, those funds will be returned to the interested investor
promptly after closing, without interest. If the offering is not
consummated, funds in the account will be returned promptly, without interest,
to the potential investor. Normal customer ticketing will be used for
order placement.
If for
any reason we cannot affect a syndicated community offering of shares of common
stock not purchased in the subscription and community offerings, or in the event
that there are a significant number of shares remaining unsold after such
offerings, we will try to make other arrangements for the sale of unsubscribed
shares, if possible. The Office of Thrift Supervision and the
Financial Industry Regulatory Authority must approve any such
arrangements.
134
Additional
Limitations on Common Stock Purchases
The plan
of conversion and reorganization includes the following limitations on the
number of shares of common stock that may be purchased in the
offering:
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(i)
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No
person may purchase fewer than 25 shares of common
stock;
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(ii)
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The
maximum number of shares of common stock that may be purchased by a person
or persons exercising subscription rights through a single qualifying
deposit account held jointly is 7,500,000
shares;
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(iii)
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Our
tax-qualified employee stock benefit plan, consisting of our employee
stock ownership plan, may purchase in the aggregate up to 10% of the
shares of common stock sold in the
offering;
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(iv)
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Except
for the tax-qualified employee stock benefit plans described above, no
person or entity, together with associates or persons acting in concert
with such person or entity, may purchase more than $75.0 million
(7,500,000 shares) of common stock in all categories of the offering
combined;
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(v)
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Current
stockholders of CFF are subject to an ownership limitation. As
previously described, current stockholders of CFF will receive shares of
Capitol Federal Financial, Inc. common stock in exchange for their
existing shares of CFF common stock at the conclusion of the
offering. The number of shares of common stock that a
stockholder may purchase in the offering, together with associates or
persons acting in concert with such stockholder, when combined with the
shares that the stockholder and his or her associates will receive in
exchange for existing CFF common stock, may not exceed 5% of the shares of
common stock of Capitol Federal Financial, Inc. to be issued and
outstanding at the completion of the conversion;
and
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(vi)
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The
maximum number of shares of common stock that may be purchased in all
categories of the offering by executive officers and directors of Capitol
Federal Savings Bank and their associates, in the aggregate, when combined
with shares of common stock issued in exchange for existing shares, may
not exceed 25% of the shares of Capitol Federal Financial, Inc. common
stock outstanding upon completion of the
conversion.
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Depending
upon market or financial conditions, our Board of Directors, with the approval
of the Office of Thrift Supervision and without further approval of members of
Capitol Federal Savings Bank MHC, may decrease or increase the purchase and
ownership limitations. If a purchase limitation is increased,
subscribers in the subscription offering who ordered the maximum amount will be
given, and, in our sole discretion, some other large subscribers who through
their subscriptions evidence a desire to purchase the maximum allowable number
of shares may be given, the opportunity to increase their subscriptions up to
the then applicable limit. The effect of this type of resolicitation
will be an increase in the number of shares of common stock owned by subscribers
who choose to increase their subscriptions. In the event that the
maximum purchase limitation is increased to 5% of the shares sold in the
offering, this limitation may be further increased to 9.99%, provided that
orders for Capitol Federal Financial, Inc. common stock exceeding 5% of the
shares issued in the offering shall not exceed in the aggregate 10% of the total
shares sold in the offering.
The term
associate of a person means:
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(i)
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any
corporation or organization, other than Capitol Federal Savings Bank MHC,
CFF, Capitol Federal Savings Bank or a majority-owned subsidiary of CFF or
Capitol Federal Savings Bank, of which the person is a senior officer,
partner or beneficial owner, directly or indirectly, of 10% or more of any
equity security;
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(ii)
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any
trust or other estate in which the person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity;
provided, however, that for the purposes of subscriptions in the offering
and restrictions on the sale of stock after the conversion, the term
associate does not include a person who has a substantial beneficial
interest in an employee stock benefit plan of Capitol Federal Savings
Bank, or who is a trustee or fiduciary of such plan, and for purposes of
aggregating total shares that may be held by officers and directors of
Capitol Federal Savings Bank MHC, CFF or Capitol Federal Savings Bank the
term associate does not include any tax-qualified employee stock benefit
plan of Capitol Federal Savings Bank;
and
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135
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(iii)
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any
blood or marriage relative of the person, who either has the same home as
the person or who is a director or officer of Capitol Federal Savings Bank
MHC, CFF or Capitol Federal Savings
Bank.
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The term
acting in concert means:
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(i)
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knowing
participation in a joint activity or interdependent conscious parallel
action towards a common goal whether or not pursuant to an express
agreement; or
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(ii)
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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.
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A person
or company that 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 any tax-qualified employee stock
benefit plan 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 common stock held by the trustee and common stock held by the employee
stock benefit plan will be aggregated.
We have
the sole discretion to determine whether prospective purchasers are associates
or acting in concert. Persons exercising subscription rights through a single
qualifying deposit account held jointly, whether or not related, will be deemed
to be acting in concert unless we determine otherwise.
Our
directors are not treated as associates of each other solely because of their
membership on the Board of Directors. Common stock purchased in the
offering will be freely transferable except for shares purchased by executive
officers and directors of Capitol Federal Financial, Inc. or Capitol Federal
Savings Bank and except as described below. Any purchases made by any
associate of Capitol Federal Financial, Inc. or Capitol Federal Savings Bank for
the explicit purpose of meeting the minimum number of shares of common stock
required to be sold in order to complete the offering shall be made for
investment purposes only and not with a view toward
redistribution. In addition, under Financial Industry Regulatory
Authority guidelines, members of the Financial Industry Regulatory Authority and
their associates are subject to certain reporting requirements upon purchase of
these securities. For a further discussion of limitations on
purchases of our shares of common stock at the time of conversion and
thereafter, see “— Certain Restrictions on Purchase or Transfer of Our Shares
after Conversion” and “Restrictions on Acquisition of Capitol Federal Financial,
Inc.”
Marketing
Arrangements
To assist
in the marketing of our common stock, we have retained Sandler O’Neill &
Partners, L.P., which is a broker-dealer registered with the Financial Industry
Regulatory Authority. In its role as financial advisor, Sandler
O’Neill & Partners, L.P. will assist us in the offering as
follows:
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consulting
with us as to the financial and securities market implications of the plan
of conversion and reorganization;
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consulting
with us as to the financial and securities market implications of proposed
or actual changes in laws or regulations affecting
us;
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reviewing
with our board of directors the financial impact of the offering on us,
based upon the independent appraiser’s appraisal of the common
stock;
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reviewing
all offering documents, including the prospectus, stock order forms and
related offering materials (we are responsible for the preparation and
filing of such documents);
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136
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assisting
in the design and implementation of a marketing strategy for the
offering;
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assisting
management in scheduling and preparing for meetings with potential
investors and other broker-dealers in connection with the offering,
including assistance in preparing presentation materials for such
meetings; and
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●
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providing
such other general advice and assistance we may request to promote the
successful completion of the
offering.
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For its
services as marketing agent, Sandler O’Neill & Partners, L.P. will receive
0.75% of the dollar amount of all shares of common stock sold in the
subscription and community offering. No sales fee will be payable to
Sandler O’Neill & Partners, L.P. with respect to shares purchased by
officers, directors and employees or their immediate families and shares
purchased by our tax-qualified and non-qualified employee benefit
plans. For its advisory services, we have paid $200 thousand, and
agreed to pay $75 thousand per month, beginning May 1, 2010, to Sandler O’Neill
& Partners, L.P. The advisory fee is paid in consideration for
Sandler O’Neill & Partners, L.P.’s work in advising us with respect to our
reorganization from the mutual holding company to the stock holding company form
of organization, including consultation as to the financial and securities
market implications of the plan of conversion and reorganization and proposed or
actual changes in laws or regulations affecting us, our contribution to the
charitable foundation, and the meetings of CFF’s shareholders and Capitol
Federal Savings Bank MHC’s members relating to approval of the plan of
conversion and reorganization. These advisory fees will not exceed
$500 thousand and will be credited against fees earned by Sandler O’Neill &
Partners, L.P. for shares sold in the subscription and community
offering. In the event that common stock is sold through a group of
broker-dealers in a syndicated community offering, we will pay (i) a management
fee of 1.00% of the aggregate dollar amount of the common stock sold in the
syndicated community offering, 75% of which will be paid to Sandler O’Neill
& Partners, L.P. and 25% of which will be paid to Keefe, Bruyette &
Woods, Inc. and (ii) a selling concession of 3.50% of the actual purchase price
of each security sold in the syndicated community offering, which shall be
allocated to dealers (including Sandler O’Neill & Partners, L.P. and Keefe,
Bruyette & Woods, Inc.) in accordance with the actual number of shares of
common stock sold by such dealers; provided however, that sales credit for a
minimum of 30% of shares sold in the syndicated community offering will be
reserved for syndicate member firms other than Sandler O’Neill & Partners,
L.P. Sandler O’Neill & Partners, L.P. will serve as sole
book-running manager and Keefe, Bruyette & Woods, Inc. will serve as
co-manager. Sandler O’Neill & Partners, L.P. and Keefe, Bruyette
& Woods, Inc. will be reimbursed for all reasonable out of pocket expenses,
including attorney’s fees, if the offering is not completed.
We will
indemnify Sandler O’Neill & Partners, L.P. against liabilities and expenses,
including legal fees, incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering materials for the common stock, including liabilities under the
Securities Act of 1933, as amended.
Some of
our directors and executive officers may participate in the solicitation of
offers to purchase common stock. These persons will be reimbursed for
their reasonable out-of-pocket expenses incurred in connection with the
solicitation. Other regular employees of Capitol Federal Savings Bank may assist
in the offering, but only in ministerial capacities, and may provide clerical
work in effecting a sales transaction. No offers or sales may be made
by tellers or at the teller counters. No sales activity will be
conducted in a Capitol Federal Savings Bank banking
office. Investment-related questions of prospective purchasers will
be directed to executive officers or registered representatives of Sandler
O’Neill & Partners, L.P. Our other employees have been instructed
not to solicit offers to purchase shares of common stock or provide advice
regarding the purchase of common stock. We will rely on
Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales
of common stock will be conducted within the requirements of Rule 3a4-1, so
as to permit officers, directors and employees to participate in the sale of
common stock. None of our officers, directors or employees will be
compensated in connection with their participation in the offering.
In
addition, we have engaged Sandler O’Neill & Partners, L.P. to act as our
records agent in connection with the conversion and offering. In its
role as records agent, Sandler O’Neill & Partners, L.P. will assist us in
the offering as follows: (1) consolidation of deposit accounts and vote
calculation; (2) design and preparation of order forms and proxy cards; (3)
organization and supervision of the Stock Information Center;
(4) assistance with proxy solicitation and special meeting services for
member meeting; and (5) subscription services. For these services,
Sandler O’Neill & Partners, L.P. will not receive any additional
fees.
137
Neither
Sandler O’Neill & Partners, L.P. nor Keefe, Bruyette & Woods, Inc.
has prepared any report or opinion constituting a recommendation or advice to us
or to persons who subscribe for common stock, nor have they prepared an opinion
as to the fairness to us of the purchase price or the terms of the common stock
to be sold in the conversion and offering. Neither Sandler
O’Neill & Partners, L.P. nor Keefe, Bruyette & Woods, Inc.
expresses any opinion as to the prices at which common stock to be issued may
trade.
Lock-up
Agreements
We, and each of our
directors and executive officers have agreed, that during the period beginning
on the date of this prospectus and ending 90 days after the closing of the
offering, without the prior written consent of Sandler O’Neill, directly or
indirectly, we will not (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of CFF or Capitol Federal Financial, Inc. stock or any
securities convertible into or exchangeable or exercisable for CFF or Capitol
Federal Financial, Inc. stock, whether owned on the date of the prospectus or
acquired after the date of the prospectus or with respect to which we or any of
our directors or executive officers has or after the date of the prospectus
acquires the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of CFF or Capitol Federal Financial, Inc. stock, whether any such swap or
transaction is to be settled by delivery of stock or other securities, in cash
or otherwise. In the event that either (1) during the period that
begins on the date that is 15 calendar days plus three business days before the
last day of the restricted period and ends on the last day of the restricted
period, we issue an earnings release or material news or a material event
relating to us occurs, or (2) prior to the expiration of the restricted period,
we announce that we will release earnings results during the 16-day period
beginning on the last day of the restricted period, the restrictions set forth
above will continue to apply until the expiration of the date that is 15
calendar days plus three business days after the date on which the earnings
release is issued or the material news or event related to us
occurs.
Offering
Deadline
The
subscription and community offerings will expire at 4:00 p.m., Central Time, on
[ ],
2010, unless extended, without notice to you, for up to
45 days. Any extension of the subscription and/or community
offering beyond [ ],
2010 would require the Office of Thrift Supervision’s approval. In
such event, we would conduct a resolicitation. Purchasers would have
the opportunity to maintain, change or cancel their stock orders within a
specified period. If a purchaser does not respond during the
resolicitation period, his or her stock order will be canceled and payment will
be returned promptly, with interest calculated at Capitol Federal Savings Bank’s
statement savings rate, and deposit account withdrawal authorizations will be
canceled. We will not execute orders until at least the minimum
number of shares offered has been sold. If we have not sold the
minimum by the expiration date or any extension thereof, we will terminate the
offering and cancel all orders, as described above. Any single
offering extension will not exceed 90 days; aggregate extensions may not
conclude beyond [ ],
2012, which is two years after the special meeting of members to vote on the
conversion. We reserve the right in our sole discretion to terminate
the offering at any time and for any reason, in which case we will cancel any
deposit account withdrawal orders and promptly return all funds submitted, with
interest calculated at Capitol Federal Savings Bank’s statement savings rate
from the date of receipt.
Procedure
for Purchasing Shares in the Subscription and Community Offerings
Use
of Stock Order Forms. In order to purchase shares of common
stock in the subscription offering and community offering, you must submit a
properly completed original stock order form and remit full
payment. Incomplete stock order forms or stock order forms that are
not signed are not required to be accepted. We are not required to
accept stock orders submitted on photocopied or facsimiled stock order
forms. All stock order forms must be received (not postmarked) prior
to 4:00 p.m. Central Time, on [ ],
2010 at our Stock Information Center. We are not required to accept
stock order forms that are not received by that time, are executed defectively
or are received without full payment or without appropriate withdrawal
instructions. We are not required to notify purchasers of incomplete
or improperly executed stock order forms. We have the right to waive
or permit the correction of incomplete or improperly executed stock order forms,
but we do not represent that we will do so. You may submit your stock
order form and payment by mail using the stock order reply envelope provided, by
bringing your stock order form to our Stock Information Center, or by overnight
delivery to the indicated address on the order form. Our Stock
Information Center is located at [ ],
Topeka, Kansas [ ]. Stock
order forms may not be delivered to Capitol Federal Savings Bank banking or
other offices. Once tendered, a stock order form cannot be modified
or revoked without our consent. We reserve the absolute right, in our
sole discretion, to reject orders received in the community offering, in whole
or in part, at the time of receipt or at any time prior to completion of the
offering.
138
If you
are ordering shares in the subscription offering, by signing the stock order
form you are representing that you are purchasing shares for your own account
and that you have no agreement or understanding with any person for the sale or
transfer of the shares. Our interpretation of the terms and
conditions of the plan of conversion and reorganization and of the acceptability
of the stock order forms will be final.
By
signing the stock order form, you will be acknowledging that the common stock is
not a deposit or savings account and is not federally insured or otherwise
guaranteed by Capitol Federal Savings Bank or any federal or state government,
and that you received a copy of this prospectus. However, signing the
stock order form will not cause you to waive your rights under the Securities
Act of 1933 or the Securities Exchange Act of 1934. We have the right
to reject any order submitted in the offering by a person who we believe is
making false representations or who we otherwise believe, either alone or acting
in concert with others, is violating, evading, circumventing, or intends to
violate, evade or circumvent the terms and conditions of the plan of conversion
and reorganization.
Payment
for Shares. Payment for all shares of common stock will be
required to accompany all completed order forms for the purchase to be
valid. You may not submit cash. Payment for shares may be
made by:
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(i)
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personal
check, bank check or money order, made payable to Capitol Federal
Financial, Inc.; or
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(ii)
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authorization
of withdrawal from the types of Capitol Federal Savings Bank deposit
accounts designated on the stock order
form.
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Appropriate
means for designating withdrawals from deposit accounts at Capitol Federal
Savings Bank are provided on the order forms. The funds designated
must be available in the account(s) at the time the stock order form is
received. A hold will be placed on these funds, making them
unavailable to the depositor. Funds authorized for withdrawal will
continue to earn interest within the account at the contract rate until the
offering is completed, at which time the designated withdrawal will be
made. Interest penalties for early withdrawal applicable to
certificate of deposit accounts will not apply to withdrawals authorized for the
purchase of shares of common stock; however, if a withdrawal results in a
certificate of deposit account with a balance less than the applicable minimum
balance requirement, the certificate of deposit will be canceled at the time of
withdrawal without penalty and the remaining balance will earn interest
calculated at the current statement savings rate subsequent to the
withdrawal. In the case of payments made by check or money order,
these funds must be available in the account(s) and will be immediately cashed
and placed in a segregated account at Capitol Federal Savings Bank or another
depository institution and will earn interest calculated at Capitol Federal
Savings Bank’s statement savings rate from the date payment is processed until
the offering is completed, at which time a subscriber will be issued a check for
interest earned.
You may
not remit Capitol Federal Savings Bank line of credit checks, and we will not
accept third-party checks, including those payable to you and endorsed over to
Capitol Federal Financial, Inc. You may not designate on your stock
order form a direct withdrawal from a Capitol Federal Savings Bank retirement
account. See “- Using Retirement Account Funds to Purchase Shares”
for information on using such funds. Additionally, you may not
designate on your stock order form a direct withdrawal from Capitol Federal
Savings Bank deposit accounts with check-writing privileges. Please
provide a check instead. Once we receive your executed stock order
form, it may not be modified, amended or rescinded without our consent, unless
the offering is not completed by [ ],
2010, in which event purchasers may be given the opportunity to increase,
decrease or rescind their orders for a specified period of time.
Regulations
prohibit Capitol Federal Savings Bank from lending funds or extending credit to
any persons to purchase shares of common stock in the offering.
139
We have
the right, in our sole discretion, to permit institutional investors to submit
irrevocable orders together with a legally binding commitment for payment and to
thereafter pay for the shares of common stock for which they subscribe in the
community offering at any time prior to 48 hours before the completion of the
conversion. This payment may be made by wire transfer.
If our
employee stock ownership plan purchases shares in the offering, it will not be
required to pay for such shares until consummation of the offering, provided
that there is a loan commitment from an unrelated financial institution or
Capitol Federal Financial, Inc. to lend to the employee stock ownership plan the
necessary amount to fund the purchase.
Using
Retirement Account Funds to Purchase Shares
Persons
interested in purchasing common stock using funds currently in an individual
retirement account (IRA) or any other retirement account, whether held through
Capitol Federal Savings Bank or elsewhere, should contact our Stock Information
Center for guidance. Please contact the Stock Information Center as
soon as possible, preferably at least two weeks prior to the [ ],
2010 offering deadline, because processing these transactions takes additional
time, and whether these funds can be used may depend on limitations imposed by
the institution where the funds are currently held. Additionally, if
these funds are not currently held in a self-directed retirement account, then
before placing your stock order, you will need to establish one with an
independent trustee or custodian, such as a brokerage firm. The new
trustee or custodian will hold the shares of common stock in a self-directed
account in the same manner as we now hold retirement account
funds. An annual administrative fee may be payable to the new trustee
or custodian. Assistance on how to transfer such retirement accounts
can be obtained from the Stock Information Center.
If you
wish to use some or all of your funds that are currently held in a Capitol
Federal Savings Bank IRA or other retirement account, you may not designate on
the stock order form that you wish funds to be withdrawn from the account(s) for
the purchase of common stock. Before you place your stock order, the
funds you wish to use must be transferred from those accounts to a self-directed
retirement account at an independent trustee or custodian, as described
above.
Delivery
of Stock Certificates
A statement reflecting
ownership of shares of common stock issued in the subscription and community
offering will be mailed to the persons entitled thereto at the certificate
registration address noted by them on the stock order form, as soon as
practicable following consummation of the conversion. All shares of
Capitol Federal Financial, Inc. common stock being sold will be in book entry
form and paper stock certificates will not be issued. Until
a statement reflecting ownership of shares of common stock is available and
delivered to purchasers, purchasers may not be able to sell the shares of common
stock which they ordered, even though the common stock will have begun
trading.
If you
are currently a stockholder of CFF, see “— Exchange of Existing Stockholders’
Stock Certificates.”
Other
Restrictions
Notwithstanding
any other provision of the plan of conversion and reorganization, no person is
entitled to purchase any shares of common stock to the extent the purchase would
be illegal under any federal or state law or regulation, including state blue
sky regulations, or would violate regulations or policies of the Financial
Industry Regulatory Authority. We may ask for an acceptable legal
opinion from any purchaser as to the legality of his or her purchase and we may
refuse to honor any purchase order if an opinion is not timely
furnished. In addition, we are not required to offer shares of common
stock to any person who resides in a foreign country, or in a state of the
United States with respect to which any of the following apply: (a) a small
number of persons otherwise eligible to subscribe for shares under the plan of
conversion and reorganization reside in the state; (b) the issuance of
subscription rights or the offer or sale of shares of common stock to such
persons would require us, under the securities laws of the state, to register as
a broker, dealer, salesman or agent or to register or otherwise qualify our
securities for sale in the state; or (c) registration or qualification
would be impracticable for reasons of cost or otherwise.
140
Restrictions
on Transfer of Subscription Rights and Shares
Office of
Thrift Supervision regulations prohibit any person with subscription rights,
including Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the plan of conversion and reorganization or the shares of common stock to
be issued upon their exercise. These rights may be exercised only by
the person to whom they are granted and only for his or her
account. When registering a stock purchase on the stock order form,
you must register the stock in the same name as appearing on the
account. You should not add the name(s) of persons who do not have
subscription rights or who qualify only in a lower purchase priority than you
do. Doing so may jeopardize your subscription rights. Each
person exercising subscription rights will be required to certify that he or she
is purchasing shares solely for his or her own account and that he or she has no
agreement or understanding regarding the sale or transfer of the
shares. The regulations also prohibit any person from offering or
making an announcement of an offer or intent to make an offer to purchase
subscription rights or shares of common stock to be issued upon their exercise
prior to completion of the offering.
We will
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights, and we will not honor orders that we
believe involve the transfer of subscription rights.
Stock
Information Center
Our
banking office personnel may not, by law, assist with investment-related
questions about the offering. If you have any questions regarding the
conversion or offering, please call or visit our Stock Information Center,
located at [ ],
Topeka, Kansas [ ]. The
toll-free telephone number is 1-800-[ ]-
[ ]. The Stock Information
Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m.,
Central Time. The Stock Information Center will be closed weekends
and bank holidays.
Liquidation
Rights
Liquidation
prior to the conversion. In the unlikely event of a complete
liquidation of Capitol Federal Savings Bank MHC or CFF prior to the conversion,
all claims of creditors of CFF, including those of depositors of Capitol Federal
Savings Bank (to the extent of their deposit balances), would be paid
first. Thereafter, if there were any assets of CFF remaining, these
assets would be distributed to stockholders, including Capitol Federal Savings
Bank MHC. Then, if there were any assets of Capitol Federal Savings
Bank MHC remaining, members of Capitol Federal Savings Bank MHC would receive
those remaining assets, pro rata, based upon the deposit balances in their
deposit account in Capitol Federal Savings Bank immediately prior to
liquidation.
Liquidation
following the conversion. In the unlikely event that Capitol
Federal Financial, Inc. and Capitol Federal Savings Bank were to liquidate after
the conversion, all claims of creditors, including those of depositors, would be
paid first, followed by distribution of the liquidation account maintained by
Capitol Federal Financial, Inc. pursuant to the plan of conversion and
reorganization to certain depositors, with any assets remaining thereafter
distributed to Capitol Federal Financial, Inc. as the holder of Capitol Federal
Savings Bank capital stock.
The plan
of conversion and reorganization provides for the establishment, upon the
completion of the conversion, of a liquidation account by Capitol Federal
Financial, Inc. for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders in an amount equal to Capitol Federal Savings Bank
MHC’s ownership interest in the total stockholder’s equity of Capitol Federal
Financial, Inc. as of the date of its latest balance sheet contained in this
prospectus. The plan of conversion and reorganization also provided
that Capitol Federal Financial, Inc. shall cause the establishment of a bank
liquidation account.
The
liquidation account established by Capitol Federal Financial, Inc. is designed
to provide payments to depositors of their liquidation interests in the event of
a liquidation of Capitol Federal Financial, Inc. and Capitol Federal Savings
Bank. Specifically, in the unlikely event that Capitol Federal
Financial, Inc. and Capitol Federal Savings Bank were to completely liquidate
after the conversion, all claims of creditors, including those of depositors,
would be paid first, followed by a distribution to Eligible Account Holders and
Supplemental Eligible Account Holders of the liquidation account maintained by
Capitol Federal Financial, Inc. In a liquidation of both entities, or
of Capitol Federal Savings Bank, when Capitol Federal Financial, Inc. has
insufficient assets to fund the distribution due to Eligible Account Holders and
Supplemental Eligible Account Holders and Capitol Federal Savings Bank has
positive net worth, Capitol Federal Savings Bank shall pay amounts necessary to
fund Capitol Federal Financial, Inc.’s remaining obligations under the
liquidation account. The plan of conversion and reorganization also
provides that if Capitol Federal Financial, Inc. is sold or liquidated apart
from a sale or liquidation of Capitol Federal Savings Bank, then the rights of
Eligible Account Holders and Supplemental Eligible Account Holders in the
liquidation account maintained by Capitol Federal Financial, Inc. shall be
surrendered and treated as a liquidation account in Capitol Federal Savings
Bank.
141
Pursuant
to the plan of conversion and reorganization, after two years from the date of
conversion and upon the written request of the Office of Thrift Supervision,
Capitol Federal Financial, Inc. will eliminate or transfer the liquidation
account and the interests in such account to Capitol Federal Savings Bank and
the liquidation account shall thereupon become the liquidation account of
Capitol Federal Savings Bank and not be subject in any manner or amount to
Capitol Federal Financial, Inc.’s creditors.
Also,
under the rules and regulations of the Office of Thrift Supervision, no
post-conversion merger, consolidation, or similar combination or transaction
with another depository institution in which Capitol Federal Financial, Inc. or
Capitol Federal Savings Bank is not the surviving institution would be
considered a liquidation and, in such a transaction, the liquidation account
would be assumed by the surviving institution.
Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in the liquidation account for each deposit account, including
savings accounts, transaction accounts such as negotiable order of withdrawal
accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50.00 or more held in Capitol Federal Savings Bank on March 31,
2009, or [ ],
2010. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have a pro rata interest in the total liquidation account for each
such deposit account, based on the proportion that the balance of each such
deposit account on March 31, 2009 or [ ],
2010 bears to the balance of all deposit accounts in Capitol Federal Savings
Bank on such dates.
If,
however, on any September 30 annual closing date commencing after the effective
date of the conversion, the amount in any such deposit account is less than the
amount in the deposit account on March 31, 2009 or [ ],
2010 or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced from time to time by
the proportion of any such reduction, and the interest will cease to exist if
the deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Payment pursuant to liquidation rights
of Eligible Account Holders and Supplemental Eligible Account Holders would be
separate and apart from the payment of any insured deposit accounts to such
depositor. Any assets remaining after the above liquidation rights of
Eligible Account Holders and Supplemental Eligible Account Holders are satisfied
would be distributed to Capitol Federal Financial, Inc. as the sole stockholder
of Capitol Federal Savings Bank.
Material
Income Tax Consequences
Although
the conversion may be effected in any manner approved by the Office of Thrift
Supervision that is consistent with the purposes of the plan of conversion and
reorganization and applicable law, regulations and policies, it is intended that
the conversion will be effected through various mergers. Completion
of the offering is conditioned upon the prior receipt of an opinion of counsel
or a tax advisor with respect to federal and Kansas tax laws to the effect that
no gain or loss will be recognized by Capitol Federal Savings Bank MHC, CFF or
Capitol Federal Savings Bank as a result of the conversion or by account holders
receiving subscription rights, except to the extent, if any, that subscription
rights are deemed to have fair market value on the date such rights are
issued. We have received an opinion from Silver, Freedman & Taff,
L.L.P. as to the federal tax consequences of the conversion. We have
also received an opinion from [ ]
to the effect that, more likely than not, the income tax consequences under
Kansas law of the offering are not materially different than for federal income
tax purposes.
Silver,
Freedman & Taff, L.L.P. has issued an opinion to Capitol Federal Savings
Bank MHC, CFF, Capitol Federal Savings Bank and Capitol Federal Financial, Inc.
that for federal income tax purposes:
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1.
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The
merger of Capitol Federal Savings Bank MHC with and into CFF will qualify
as a tax free reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code.
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142
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2.
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The
constructive exchange of the Eligible Account Holders’ and Supplemental
Eligible Account Holders’ voting and liquidation rights in Capitol Federal
Savings Bank MHC for liquidation interests in CFF in the merger will
satisfy the continuity of interest requirement of Section 1.368-1(b) of
the Federal Income Tax Regulations.
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3.
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Capitol
Federal Savings Bank MHC will not recognize any gain or loss on the
transfer of its assets to CFF and CFF’s assumption of its liabilities, if
any, in constructive exchange for liquidation interests in CFF or on the
constructive distribution of such liquidation interests to the members of
Capitol Federal Savings Bank MHC who are Eligible Account Holders or
Supplemental Eligible Account Holders of Capitol Federal Savings
Bank. (Section 361(a), 361(c) and 357(a) of the Internal
Revenue Code)
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4.
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No
gain or loss will be recognized by CFF upon the receipt of the assets of
Capitol Federal Savings Bank MHC in the merger in exchange for the
constructive transfer of liquidation interests in CFF to the members of
Capitol Federal Savings Bank MHC who are Eligible Account Holders and
Supplemental Eligible Account Holders. (Section 1032(a) of the
Internal Revenue Code)
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5.
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Eligible
Account Holders and Supplemental Eligible Account Holders will recognize
no gain or loss upon the constructive receipt of liquidation interests in
CFF in exchange for their voting and liquidation rights in Capitol Federal
Savings Bank MHC. (Section 354(a) of the Internal Revenue
Code)
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6.
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The
basis of the assets of Capitol Federal Savings Bank MHC to be received by
CFF in the merger will be the same as the basis of such assets in the
hands of Capitol Federal Savings Bank MHC immediately prior to the
transfer. (Section 362(b) of the Internal Revenue
Code)
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7.
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The
holding period of the assets of Capitol Federal Savings Bank MHC to be
received by CFF in the merger will include the holding period of those
assets in the hands of Capitol Federal Savings Bank MHC immediately prior
to the transfer. (Section 1223(2) of the Internal Revenue
Code)
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8.
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The
merger of CFF with and into Capitol Federal Financial, Inc. will
constitute a mere change in identity, form or place of organization within
the meaning of Section 368(a)(1)(F) of the Internal Revenue Code and will
qualify as a tax-free reorganization within the meaning of Section
368(a)(1)(F) of the Internal Revenue
Code.
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9.
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The
exchange of common stock of CFF held by stockholders other than Capitol
Federal Savings Bank MHC for Capitol Federal Financial, Inc. common
stock and the constructive exchange of the Eligible Account Holders’ and
Supplemental Eligible Account Holders’ liquidation interests in CFF for
interests in the liquidation account of Capitol Federal Financial,
Inc. will
satisfy the continuity of interest requirement of Section 1.368-1(b) of
the Federal Income Tax Regulations.
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10.
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CFF
will not recognize any gain or loss on the transfer of its assets to
Capitol Federal Financial, Inc. and Capitol Federal Financial, Inc.’s
assumption of its liabilities in the merger pursuant to which shares of
common stock will be received by stockholders of CFF other than Capitol
Federal Savings Bank MHC in exchange for their shares of CFF common stock
and Eligible Account Holders and Supplemental Eligible Account Holders
will receive interests in the liquidation account of Capitol Federal
Financial, Inc. in exchange for their liquidation interests in
CFF. (Sections 361(a), 361(c) and 357(a) of the Internal
Revenue Code)
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11.
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No
gain or loss will be recognized by Capitol Federal Financial, Inc. upon
the receipt of the assets of CFF in the merger. (Section
1032(a) of the Internal Revenue
Code)
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12.
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Eligible
Account Holders and Supplemental Eligible Account Holders will not
recognize any gain or loss upon their constructive exchange of their
liquidation interests in CFF for interests in the liquidation account of
Capitol Federal Financial, Inc. (Section 354 of the Internal
Revenue Code)
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13.
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No
gain or loss will be recognized by stockholders of CFF other than Capitol
Federal Savings Bank MHC upon their exchange of shares of CFF common stock
for Capitol Federal Financial, Inc. common
stock in the merger, except for cash paid in lieu of fractional share
interests. (Section 354 of the Internal Revenue
Code)
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14.
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The
basis of the assets of CFF to be received by Capitol Federal Financial,
Inc. in the merger will be the same as the basis of those assets in the
hands of CFF immediately prior to the transfer. (Section 362(b)
of the Internal Revenue Code)
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15.
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The
holding period of the assets of CFF to be received by Capitol Federal
Financial, Inc. in the merger will include the holding period of those
assets in the hands of CFF immediately prior to the
transfer. (Section 1223(2) of the Internal Revenue
Code)
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16.
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It
is more likely than not that the fair market value of the nontransferable
subscription rights to purchase Capitol Federal Financial, Inc. common
stock is zero. Accordingly, it is more likely than not that no
gain or loss will be recognized by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members upon distribution to them of
nontransferable subscription rights to purchase shares of Capitol Federal
Financial, Inc. common
stock. (Section 356(a) of the Internal Revenue
Code) Gain, if any, realized by these account holders and
members will not exceed the fair market value of the subscription rights
distributed. Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members will not recognize any gain as the
result of the exercise by them of nontransferable subscription
rights.
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17.
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It
is more likely than not that the fair market value of the benefit provided
by the liquidation account of Capitol Federal Savings Bank supporting the
payment of the liquidation account of Capitol Federal Financial, Inc. in
the event Capitol Federal Financial, Inc. lacks
sufficient net assets is zero. Accordingly, it is more likely
than not that no gain or loss will be recognized by Capitol Federal
Financial, Inc. or
Eligible Account Holders and Supplemental Eligible Account Holders from
the establishment or maintenance of the liquidation account of Capitol
Federal Savings Bank or the distribution to Capitol Federal Financial,
Inc. of
rights in, or deemed distribution to Eligible Account Holders and
Supplemental Eligible Account Holders of rights in the liquidation account
of Capitol Federal Savings Bank in the merger. (Section 356(a)
of the Internal Revenue Code)
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18.
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Each
stockholder’s aggregate basis in his or her Capitol Federal Financial,
Inc. common
stock received in exchange for shares of CFF common stock in the merger
will be the same as the aggregate basis of the shares surrendered in
exchange therefor, subject to the cash in lieu of the fractional share
interest provisions of Paragraph 23 below. (Section 358(a) of
the Internal Revenue Code)
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19.
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It
is more likely than not that the basis of the Capitol Federal Financial,
Inc. common
stock purchased in the offering through the exercise of nontransferable
subscription rights will be the purchase price
thereof. (Section 1012 of the Internal Revenue
Code)
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20.
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Each
stockholder’s holding period in his or her Capitol Federal Financial,
Inc. common
stock received in exchange for shares in CFF common stock in the merger
will include the period during which these shares were held, provided that
the shares are a capital asset in the hands of the stockholder on the date
of the exchange. (Section 1223(1) of the Internal Revenue
Code)
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21.
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The
holding period of the Capitol Federal Financial, Inc. common
stock purchased pursuant to the exercise of subscription rights will
commence on the date on which the right to acquire this stock was
exercised. (Section 1223(5) of the Internal Revenue
Code)
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22.
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No
gain or loss will be recognized by Capitol Federal Financial, Inc. on
the receipt of money in exchange for Capitol Federal Financial, Inc. common
stock sold in the offering. (Section 1032 of the Internal
Revenue Code)
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23.
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The
payment of cash to former holders of CFF common stock in lieu of
fractional share interests of Capitol Federal Financial, Inc. will
be treated as though fractional share interests of Capitol Federal
Financial, Inc. common
stock were distributed as part of the merger and then redeemed by Capitol
Federal Financial, Inc. The cash payments will be treated as
distributions in full payment for the fractional share interests deemed
redeemed under Section 302(a) of the Internal Revenue Code, with the
result that such stockholders will have short-term or long-term capital
gain or loss to the extent that the cash they receive differs from the
basis allocable to such fractional share
interests.
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We
believe that the tax opinions summarized above address all material federal
income tax consequences that are generally applicable to Capitol Federal Savings
Bank MHC, CFF, Capitol Federal Savings Bank, Capitol Federal Financial, Inc.,
persons receiving subscription rights and stockholders of CFF. The
tax opinion as to items 16 and 19 above is based on the position that
subscription rights to be received by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members do not have any economic value at the
time of distribution or the time the subscription rights are
exercised. In this regard, Silver, Freedman & Taff, L.L.P. noted
that the subscription rights will be granted at no cost to the recipients, are
legally non-transferable and of short duration, and will provide the recipient
with the right only to purchase shares of common stock at the same price to be
paid by members of the general public in any community offering. The
firm also noted that the Internal Revenue Service has not in the past concluded
that subscription rights have value. Based on the foregoing, Silver,
Freedman & Taff, L.L.P. believes that it is more likely than not that the
nontransferable subscription rights to purchase shares of common stock have no
value. However, the issue of whether or not the nontransferable
subscription rights have value is based on all the facts and
circumstances. If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members are deemed to
have an ascertainable value, receipt of these rights could result in taxable
gain to those Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members who exercise the subscription rights in an amount equal to the
ascertainable value, and we could recognize gain on a
distribution. Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are encouraged to consult with their own tax advisors
as to the tax consequences in the event that subscription rights are deemed to
have an ascertainable value.
We also
have received a letter from RP Financial, LC. stating its belief that the
subscription rights do not have any ascertainable fair market value and that the
price at which the subscription rights are exercisable will not be more or less
than the fair market value of the shares on the date of
exercise. This position is based on the fact that these rights are
acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the common stock
at the same price that will be paid by members of the general public in any
community offering.
The tax
opinion as to item 17 above is based on the position that the benefit provided
by the Capitol Federal Savings Bank liquidation account supporting the payment
of the liquidation account in the event Capitol Federal Financial, Inc. lacks
sufficient net assets has a fair market value of zero. We understand
that: (i) there is no history of any holder of a liquidation account
receiving any payment attributable to a liquidation account; (ii) the interests
in the liquidation accounts are not transferable; (iii) the amounts due under
the liquidation account with respect to each Eligible Account Holder and
Supplemental Eligible Account Holder will be reduced as their deposits in
Capitol Federal Savings Bank are reduced; and (iv) the Capitol Federal Savings
Bank liquidation account payment obligation arises only if Capitol Federal
Financial, Inc. lacks
sufficient net assets to fund the liquidation account.
In
addition, we have received a letter from RP Financial, LC. stating its belief
that the benefit provided by the Capitol Federal Savings Bank liquidation
account supporting the payment of the liquidation account in the event Capitol
Federal Financial, Inc. lacks
sufficient net assets does not have any economic value at the time of the merger
of CFF and Capitol Federal Financial, Inc. Based on the foregoing,
Silver, Freedman & Taff, L.L.P. believes it is more likely than not that
such rights in the Capitol Federal Savings Bank liquidation account have no
value. If these rights are subsequently found to have an economic
value, income may be recognized by each Eligible Account Holder and Supplemental
Eligible Account Holder in the amount of the fair market value as of the date of
the merger of CFF and Capitol Federal Financial, Inc.
145
We do not
plan to apply for a private letter ruling from the Internal Revenue Service
concerning the transactions described herein. Unlike private letter
rulings issued by the Internal Revenue Service, opinions of counsel are not
binding on the Internal Revenue Service or any state tax authority, and these
authorities may disagree with the opinions. In the event of a
disagreement, there can be no assurance that the conclusions reached in an
opinion of counsel would be sustained by a court if contested by the Internal
Revenue Service.
The
federal and state tax opinions have been filed with the Securities and Exchange
Commission as exhibits to Capitol Federal Financial, Inc.’s registration
statement.
Certain
Restrictions on Purchase or Transfer of Our Shares after the
Conversion
All
shares of common stock purchased in the offering by a director or an executive
officer of Capitol Federal Savings Bank generally may not be sold for a period
of one year following the closing of the conversion, except in the event of the
death of the director or executive officer. Instructions will be
issued to the transfer agent that any transfer within this time period of
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 as a
stock dividend, stock split, or otherwise, with respect to the restricted stock
will be similarly restricted. The directors and executive officers of
Capitol Federal Financial, Inc. also will be restricted by the insider trading
rules promulgated pursuant to the Securities Exchange Act of 1934.
Purchases
of shares of our common stock by any of our directors, executive officers and
their associates, during the three-year period following the closing of the
conversion may be made only through a broker or dealer registered with the
Securities and Exchange Commission, 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 our outstanding
common stock or to purchases of our common stock by our stock-based incentive
plans or any of our tax-qualified employee stock benefit plans or
non-tax-qualified employee stock benefit plans.
Office of
Thrift Supervision regulations prohibit Capitol Federal Financial, Inc. from
repurchasing its shares of common stock during the first year following the
conversion unless compelling business reasons exist for such
repurchases. After one year, the Office of Thrift Supervision does
not impose any repurchase restrictions.
General
In
furtherance of our commitment to our local community, the plan of conversion and
reorganization provides that we may fund our existing charitable foundation, the
Capitol Federal Foundation, a non-stock, nonprofit Kansas corporation, in
connection with the stock offering. Capitol Federal Financial, Inc.
will fund the charitable foundation with cash, as further described
below.
By
further enhancing our visibility and reputation in our local community, we
believe that our charitable foundation will continue to enhance the long-term
value of our community banking franchise. The stock offering presents
us with a unique opportunity to continue to provide a substantial and continuing
benefit to our communities through the Capitol Federal Foundation.
Purpose
of the Charitable Foundation
In
connection with the conversion, Capitol Federal Financial, Inc. intends to
contribute to the Capitol Federal Foundation $40.0 million
in cash. This amount will be added to the $[ ]
million in cash and [ ]
shares of CFF common stock, which will be converted into [ ]
shares of Capitol Federal Financial, Inc. common
stock based on the exchange ratio at the maximum of the offering range, held by
the Capitol Federal Foundation at April 16, 2010. The purpose of our
charitable foundation is to provide financial support to charitable
organizations in the communities in which we operate and to enable our
communities to share in our long-term growth. Capitol Federal
Foundation will also support our ongoing obligations to the community under the
Community Reinvestment Act.
Capitol Federal Savings Bank received a satisfactory rating in its most recent
Community Reinvestment Act examination by the Office of Thrift
Supervision. In addition, the Capitol Federal Foundation will
maintain close ties with Capitol Federal Savings Bank, thereby forming a
partnership within the communities in which Capitol Federal Savings Bank
operates.
146
Structure
of the Charitable Foundation
The
Capitol Federal Foundation is incorporated under Kansas law as a non-stock,
nonprofit corporation. The articles of incorporation of the Capitol
Federal Foundation provides that the corporation is organized exclusively for
charitable purposes as set forth in Section 501(c)(3) of the Internal
Revenue Code. The Capitol Federal Foundation’s articles of
incorporation further provide that no part of the net earnings of the charitable
foundation will inure to the benefit of, or be distributable to, its members,
trustees or officers or to private individuals.
The
charitable foundation is governed by a board of trustees, which currently
consists of John B. Dicus, who is a director of CFF and will be a director of
Capitol Federal Financial, Inc.,
John C. Dicus, past chairman of CFF and a non-executive employee of
CFF, Rick C. Jackson, an executive officer of CFF and two
individuals who are not affiliated with us. Office of Thrift
Supervision regulations require that we select one person to serve on the board
of trustees who is not one of our officers or directors and who has experience
with local charitable organizations and grant making, and our two
unaffiliated trustees satisfy these requirements. While there are no
plans to change the size of the board of trustees during the year following the
completion of the conversion, following the first anniversary of the conversion,
the charitable foundation may alter the size and composition of its board of
trustees. For five years after the stock offering, one seat on the
charitable foundation’s board of trustees will be reserved for a person from our
local community who has experience with local community charitable organizations
and grant making and who is not one of our officers, directors or employees, and
at least one seat on the charitable foundation’s board of trustees will be
reserved for one director from Capitol Federal Savings Bank’s board of directors
or the board of directors of an acquirer or resulting institution in the event
of a merger or acquisition of Capitol Federal Savings Bank. Trustees
of the charitable foundation serve for a one-year term.
The
business experience of our current directors is described in “Management.” The
business experience of the two trustees who are not affiliated with us is
described below.
Nancy J. Perry. Mrs. Perry has served as a trustee of the Capitol Federal
Foundation since its inception in 1999. She served as President and CEO of the
United Way of Greater Topeka since 1985. Mrs Perry retired from the United Way
in July 2008.
Dr. Ronald W. Roskens. Dr. Roskens has served as
a trustee of the Capitol Federal Foundation since its inception in 1999. Since
1996, he served as President of Global Communications, Inc., in Omaha, Nebraska.
From January 1993 to December 1995 he served as President of Action
International. Prior to that time, he held various positions with other
companies and also served as Chancellor and Professor of Education
Administration of the University of Nebraska-Omaha and as President of the
University of Nebraska.
The board
of trustees of the Capitol Federal Foundation is responsible for establishing
its grant and donation policies, consistent with the purposes for which it was
established. As trustees of a nonprofit corporation, trustees of the
Capitol Federal Foundation are at all times bound by their fiduciary duty to
advance the charitable foundation’s charitable goals, to protect its assets and
to act in a manner consistent with the charitable purposes for which the
charitable foundation is established. The trustees of the Capitol
Federal Foundation are also responsible for directing the activities of the
charitable foundation, including the management and voting of the shares of our
common stock held by the charitable foundation. However, as required
by Office of Thrift Supervision regulations, all shares of our common stock held
by the Capitol Federal Foundation must be voted in the same ratio as all other
shares of our common stock on all proposals considered by our
stockholders.
The
Capitol Federal Foundation’s place of business is the same as our administrative
offices. The board of trustees of the Capitol Federal Foundation
appoints such officers and employees as are necessary to manage its
operations. To the extent applicable, we comply with the affiliates
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act
and the Office of Thrift Supervision regulations governing transactions between
Capitol Federal Savings Bank and the Capitol Federal Foundation.
The
Capitol Federal Foundation will receive additional working capital from the cash
contribution and:
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(i)
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any
dividends that may be paid on Capitol Federal Financial, Inc. shares of
common stock in the future;
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(ii)
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within
the limits of applicable federal and state laws, loans collateralized by
the shares of common stock; or
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(iii)
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the
proceeds of the sale of any of the shares of common stock in the open
market from time to time.
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147
As a
private foundation under Section 501(c)(3) of the Internal Revenue Code,
the Capitol Federal Foundation is required to distribute annually in grants or
donations a minimum of 5% of the average fair market value of its net investment
assets.
Tax
Considerations
The
Capitol Federal Foundation currently qualifies as a Section 501(c)(3) exempt
organization under the Internal Revenue Code and is classified as a private
foundation. Capitol Federal Financial, Inc. and Capitol Federal
Savings Bank are authorized by federal law to make charitable
contributions. We believe that the stock offering presents a unique
opportunity to provide additional funds to the Capitol Federal Foundation given
the substantial amount of additional capital being raised. We believe
that the contribution to Capitol Federal Foundation is justified given Capitol
Federal Savings Bank’s capital position and its earnings, the substantial
additional capital being raised in the stock offering and the potential benefits
of the Capitol Federal Foundation to our community. See
“Capitalization,” “Historical and Pro Forma Regulatory Capital Compliance,” and
“Comparison of Valuation and Pro Forma Data With and Without the Charitable
Foundation.”
We
are permitted to deduct for charitable purposes only an amount equal to 10% of
our annual taxable income in any one year. We are permitted under the
Internal Revenue Code to carry the excess contribution over the five-year period
following the contribution to the Capitol Federal Foundation. We
estimate that all of the contribution should be deductible for federal tax
purposes over the six-year period (i.e., the year in which the contribution is
made and the succeeding five-year period). However, we do not have
any assurance we will have sufficient earnings to be able to use the deduction
in full. Any such decision to continue to make additional
contributions to the Capitol Federal Foundation in the future would be based on
an assessment of, among other factors, our financial condition at that time, the
interests of our stockholders and depositors, and the financial condition and
operations of the foundation.
As a
private foundation, earnings and gains, if any, from the sale of common stock or
other assets are exempt from federal and state income
taxation. However, investment income, such as interest, dividends and
capital gains, is generally taxed at a rate of 2%. The Capitol
Federal Foundation is required to file an annual return with the Internal
Revenue Service within four and one-half months after the close of its fiscal
year. The Capitol Federal Foundation is required to make its annual
return available for public inspection. The annual return for a
private foundation includes, 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.
Regulatory
Requirements Imposed on the Charitable Foundation
Office of
Thrift Supervision regulations require, in connection with our board’s adoption
of the plan of conversion and reorganization, that our directors who also serve
on the board of trustees of Capitol Federal Foundation not participate in the
board’s discussions concerning contributions to the charitable foundation and
not vote on the matter. Our board of directors complied with this
regulation in adopting the plan of conversion and reorganization.
Office of
Thrift Supervision regulations provide that the Office of Thrift Supervision
will generally not object if a well-capitalized savings bank contributes to a
charitable foundation an aggregate amount of 8% or less of the shares or
proceeds issued in a stock offering. Capitol Federal Savings Bank
qualifies as a well-capitalized savings bank for purposes of this limitation,
and the contribution to the charitable foundation will not exceed this
limitation.
Office of
Thrift Supervision regulations impose the following requirements with respect to
a charitable foundation:
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the
Office of Thrift Supervision may examine the charitable foundation at the
foundation’s expense;
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the
charitable foundation must comply with all supervisory directives imposed
by the Office of Thrift
Supervision;
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148
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the
charitable foundation must provide annually to the Office of Thrift
Supervision a copy of the annual report that the charitable foundation
submits to the Internal Revenue
Service;
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the
charitable foundation must operate according to written policies adopted
by its board of trustees, including a conflict of interest
policy;
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the
charitable foundation may not engage in self-dealing and must comply with
all laws necessary to maintain its tax-exempt status under the Internal
Revenue Code; and
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the
charitable foundation must vote its shares of our common stock in the same
ratio as all of the other shares voted on each proposal considered by our
stockholders.
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Within
six months of completing the stock offering, Capitol Federal Foundation must
submit to the Office of Thrift Supervision a three-year operating
plan.
COMPARISON OF
STOCKHOLDERS’ RIGHTS FOR
EXISTING
STOCKHOLDERS
OF CFF
General. As
a result of the conversion, existing stockholders of CFF will become
stockholders of Capitol Federal Financial, Inc. There are differences
in the rights of stockholders of CFF and stockholders of Capitol Federal
Financial, Inc. caused by differences between federal and Maryland law and
regulations and differences in CFF’s federal stock charter and bylaws and
Capitol Federal Financial, Inc.’s Maryland articles of incorporation and
bylaws.
This
discussion is not intended to be a complete statement of the differences
affecting the rights of stockholders, but rather summarizes the material
differences and similarities affecting the rights of
stockholders. See “Where You Can Find Additional Information” for
procedures for obtaining a copy of Capitol Federal Financial, Inc.’s articles of
incorporation and bylaws.
Authorized
Capital Stock. The authorized capital stock of CFF consists of
450,000,000 shares of common stock, $0.01 par value per share, and 50,000,000
shares of preferred stock, par value $0.01 per share.
The
authorized capital stock of Capitol Federal Financial, Inc. consists of
1,400,000,000 shares of common stock, $0.01 par value per share, and 100,000,000
shares of preferred stock, par value $0.01 per share.
CFF’s
charter and Capitol Federal Financial, Inc.’s articles of incorporation both
authorize the board of directors to establish one or more series of preferred
stock and, for any series of preferred stock, to determine the terms and rights
of the series, including voting rights, dividend rights, conversion and
redemption rates and liquidation preferences. As a result of the
ability to fix voting rights for a series of preferred stock, our board of
directors has the power, to the extent consistent with its fiduciary duty, to
issue a series of preferred stock to persons friendly to management in order to
attempt to block a hostile tender offer, merger or other transaction by which a
third party seeks control. We currently have no plans for the
issuance of additional shares for such purposes.
Issuance
of Capital Stock. Pursuant to applicable laws and regulations,
Capitol Federal Savings Bank MHC is required to own not less than a majority of
the outstanding shares of CFF common stock. Capitol Federal Savings
Bank MHC will no longer exist following consummation of the
conversion.
Capitol
Federal Financial, Inc.’s articles of incorporation do not contain restrictions
on the issuance of shares of capital stock to directors, officers or controlling
persons, whereas CFF’s stock charter restricts such issuances to general public
offerings, or to directors for qualifying shares, unless the share issuance or
the plan under which they would generally be issued has been approved by a
majority of the total votes eligible to be cast at a legal stockholders’
meeting. However, stock-based compensation plans, such as stock
option plans and restricted stock plans, would have to be submitted for approval
by Capitol Federal Financial, Inc. stockholders due to requirements of the
Nasdaq Stock Market and in order to qualify stock options for favorable federal
income tax treatment.
149
Voting
Rights. Neither CFF’s stock charter or bylaws nor Capitol
Federal Financial, Inc.’s articles of incorporation or bylaws provide for
cumulative voting for the election of directors. For additional
information regarding voting rights, see “— Limitations on Voting Rights of
Greater-than-10% Stockholders” below.
Payment
of Dividends. CFF’s ability to pay dividends depends on the
cash available at CFF and/or Capitol Federal Savings Bank’s ability to pay
dividends to CFF. The Office of Thrift Supervision
regulations state, in part, that dividends may be declared and paid by Capitol
Federal Savings Bank without an application only if the total amount of all
capital distributions for the calendar year is less than the net income for the
year to date plus the retained income of Capitol Federal Savings Bank for the
preceding two years. Dividends may also not be declared or paid if
Capitol Federal Savings Bank is in default in payment of any assessment due to
the Federal Deposit Insurance Corporation.
The same
restrictions will apply to Capitol Federal Savings Bank’s payment of dividends
to Capitol Federal Financial, Inc. In addition, Maryland law
generally provides that Capitol Federal Financial, Inc. is limited to paying
dividends in an amount equal to its capital surplus over payments that would be
owed upon dissolution to stockholders whose preferential rights upon dissolution
are superior to those receiving the dividend, and to an amount that would not
make it insolvent.
Board
of Directors. CFF’s
bylaws and Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws require the board of directors to be divided into three classes and that
the members of each class shall be elected for a term of three years and until
their successors are elected and qualified, with one class being elected
annually.
Under
CFF’s bylaws, any vacancies on the board of directors of CFF may be filled by
the affirmative vote of a majority of the remaining directors although less than
a quorum of the board of directors. Persons elected by the board of
directors of CFF to fill vacancies may only serve until the next annual meeting
of stockholders. Under Capitol Federal Financial, Inc.’s bylaws, any
vacancy occurring on the board of directors, including any vacancy created by
reason of an increase in the number of directors, may be filled only by a
majority of the remaining directors, and any director so chosen shall hold
office for the remainder of the term to which the director has been elected and
until his or her successor is elected and qualified.
Under
CFF’s bylaws, any director may be removed for cause by the holders of a majority
of the outstanding voting shares. Capitol Federal Financial, Inc.’s
articles of incorporation have the same provision.
Limitations
on Liability. The charter and bylaws of CFF do not limit the
personal liability of directors.
Capitol
Federal Financial, Inc.’s articles of incorporation provide that directors will
not be personally liable for monetary damages to Capitol Federal Financial, Inc.
for certain actions as directors, except for (i) receipt of an improper personal
benefit from their positions as directors, (ii) actions or omissions that are
determined to have involved active and deliberate dishonesty, or (iii) to the
extent allowed by Maryland law. These provisions might, in certain
instances, discourage or deter stockholders or management from bringing a
lawsuit against directors for a breach of their duties even though such an
action, if successful, might benefit Capitol Federal Financial,
Inc.
Indemnification
of Directors, Officers, Employees and Agents. Under current
Office of Thrift Supervision regulations, CFF shall indemnify its directors,
officers and employees for any costs incurred in connection with any litigation
involving the person’s activities as a director, officer or employee if such
person obtains a final judgment on the merits in his or her favor. In
addition, indemnification is permitted in the case of a settlement, a final
judgment against such person, or final judgment other than on the merits, if a
majority of disinterested directors determines that the person was acting in
good faith within the scope of his or her employment as he or she could
reasonably have perceived it under the circumstances and for a purpose he or she
could reasonably have believed under the circumstances was in the best interests
of CFF or its stockholders. CFF also is permitted to pay ongoing
expenses incurred by a director, officer or employee if a majority of
disinterested directors concludes that the person may ultimately be entitled to
indemnification. Before making any indemnification payment, CFF is
required to notify the Office of Thrift Supervision of its intention, and such
payment cannot be made if the Office of Thrift Supervision objects to such
payment.
150
The
articles of incorporation of Capitol Federal Financial, Inc. provide that it
shall indemnify its current and former directors and officers to the fullest
extent required or permitted by Maryland law, including the advancement of
expenses. Maryland law allows Capitol Federal Financial, Inc. to
indemnify any person for expenses, liabilities, settlements, judgments and fines
in suits in which such person has been made a party by reason of the fact that
he or she is or was a director, officer or employee of Capitol Federal
Financial, Inc. No such indemnification may be given if the acts or
omissions of the person are adjudged to be in bad faith and material to the
matter giving rise to the proceeding, if the person is liable to the corporation
for an unlawful distribution, or if such person personally received a benefit to
which he or she was not entitled. The right to indemnification
includes the right to be paid the expenses incurred in advance of final
disposition of a proceeding.
Special
Meetings of Stockholders. CFF’s bylaws provide that special
meetings of CFF’s stockholders may be called by the Chairman, the president, a
majority of the members of the board of directors or the holders of not less
than one-tenth of the outstanding capital stock of CFF entitled to vote at the
meeting. Capitol Federal Financial, Inc.’s bylaws provide that
special meetings of the stockholders of Capitol Federal Financial, Inc. may be
called by the president, by a majority vote of the total authorized directors,
or upon the written request of stockholders entitled to cast at least a majority
of all votes entitled to vote at the meeting.
Stockholder
Nominations and Proposals. CFF’s bylaws generally provide that
stockholders may submit nominations for election of directors at an annual
meeting of stockholders and may propose any new business to be taken up at such
a meeting by filing the proposal in writing with CFF at least five days before
the date of the meeting.
Capitol
Federal Financial, Inc.’s bylaws generally provide that any stockholder desiring
to make a nomination for the election of directors or a proposal for new
business at a meeting of stockholders must submit written notice to Capitol
Federal Financial, Inc. at least 90 days prior and not earlier than 120 days
prior to such meeting. However, if less than 90 days’ notice or prior
public disclosure of the date of the meeting is given to stockholders, the
written notice must be submitted by a stockholder not later than the tenth day
following the earlier of the day on which notice of the meeting was mailed to
stockholders or such public disclosure was made.
Management
believes that it is in the best interests of Capitol Federal Financial, Inc. and
its stockholders to provide sufficient time to enable management to disclose to
stockholders information about a dissident slate of nominations for
directors. This advance notice requirement may also give management
time to solicit its own proxies in an attempt to defeat any dissident slate of
nominations, should management determine that doing so is in the best interests
of stockholders generally. Similarly, adequate advance notice of
stockholder proposals will give management time to study the proposals and to
determine whether to recommend to the stockholders that the proposals be
adopted. In certain instances, the provisions could make it more
difficult to oppose management’s nominees or proposals, even if stockholders
believe the nominees or proposals are in their best interests.
Stockholder
Action Without a Meeting. The bylaws of CFF provide that any
action to be taken or which may be taken at any annual or special meeting of
stockholders may be taken if a consent in writing, setting forth the actions so
taken, is given by the holders of all outstanding shares entitled to
vote. The bylaws of Capitol Federal Financial, Inc. provide that,
action may be taken by stockholders without a meeting if all stockholders
entitled to vote on the action consent to taking the action without a
meeting.
Stockholder’s
Right to Examine Books and Records. A federal regulation which
is applicable to CFF provides that stockholders may inspect and copy specified
books and records after proper written notice for a proper
purpose. Maryland law provides that a stockholder may inspect a
company’s bylaws, stockholder minutes, annual statement of affairs and any
voting trust agreements. However, only a stockholder or group of
stockholders who together, for at least six months, hold at least 5% of the
company’s total shares, have the right to inspect a company’s stock ledger, list
of stockholders and books of accounts.
Limitations
on Voting Rights of Greater-than-10% Stockholders. Capitol
Federal Financial, Inc.’s articles of incorporation provide that no beneficial
owner, directly or indirectly, of more than 10% of the outstanding shares of
common stock will be permitted to vote any shares in excess of such 10%
limit. CFF’s charter does not provide such a limit on voting common
stock. This provision has been included in the articles of
incorporation in reliance on Section 2-507(a) of the Maryland General
Corporation Law, which entitles stockholders to one vote for each share of stock
unless the articles of incorporation provide for a greater or lesser number of
votes per share or limit or deny voting rights.
151
In
addition, Office of Thrift Supervision regulations provide that for a period of
three years following the date of the completion of the offering, no person,
acting singly or together with associates in a group of persons acting in
concert, may directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of a class of Capitol Federal Financial, Inc.’s
equity securities without the prior written approval of the Office of Thrift
Supervision. Where any person acquires beneficial ownership of more
than 10% of a class of Capitol Federal Financial, Inc.’s equity securities
without the prior written approval of the Office of Thrift Supervision, the
securities beneficially owned by such person in excess of 10% may not be voted
by any person or counted as voting shares in connection with any matter
submitted to the stockholders for a vote, and will not be counted as outstanding
for purposes of determining the affirmative vote necessary to approve any matter
submitted to the stockholders for a vote.
Mergers,
Consolidations and Sales of Assets. A federal regulation
applicable to CFF generally requires the approval of two-thirds of the board of
directors of CFF and the holders of two-thirds of the outstanding stock of CFF
entitled to vote thereon for mergers, consolidations and sales of all or
substantially all of CFF’s assets. Such regulation permits CFF to
merge with another corporation without obtaining the approval of its
stockholders if:
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(i)
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it
does not involve an interim savings
institution;
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(ii)
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CFF’s
federal stock charter is not
changed;
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(iii)
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each
share of CFF’s stock outstanding immediately prior to the effective date
of the transaction will be an identical outstanding share or a treasury
share of CFF after such effective date;
and
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(iv)
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either:
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(a)
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no
shares of voting stock of CFF and no securities convertible into such
stock are to be issued or delivered under the plan of combination;
or
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(b)
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the
authorized but unissued shares or the treasury shares of voting stock of
CFF to be issued or delivered under the plan of combination, plus those
initially issuable upon conversion of any securities to be issued or
delivered under such plan, do not exceed 15% of the total shares of voting
stock of CFF outstanding immediately prior to the effective date of the
transaction.
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Capitol
Federal Financial, Inc.’s articles of incorporation require the approval of the
board of directors and the affirmative vote of a majority of the votes entitled
to be cast by all stockholders entitled to vote thereon. However,
Maryland law provides that:
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a
merger of a 90% or more owned subsidiary with and into its parent may be
approved without stockholder approval; provided, however
that: (1) the charter of the successor is not amended in the
merger other than to change its name, the name or other designation or the
par value of any class or series of its stock or the aggregate par value
of its stock; and (2) the contractual rights of any stock of the successor
issued in the merger in exchange for stock of the other corporation
participating in the merger are identical to the contract rights of the
stock for which the stock of the successor was
exchanged;
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a
share exchange need not be approved by the stockholders of the
successor;
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a
transfer of assets need not be approved by the stockholders of the
transferee; and
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a
merger need not be approved by the stockholders of a Maryland successor
corporation provided that the merger does not reclassify or change the
terms of any class or series of its stock that is outstanding immediately
before the merger becomes effective or otherwise amend its charter, and
the number of shares of stock of such class or series outstanding
immediately after the effective time of the merger does not increase by
more than 20% of the number of shares of the class or series of stock that
is outstanding immediately before the merger becomes
effective.
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152
Business
Combinations with Interested Stockholders. The articles of
incorporation of Capitol Federal Financial, Inc. require the approval of the
holders of at least 80% of Capitol Federal Financial, Inc.’s outstanding shares
of voting stock entitled to vote to approve certain business combinations with
an interested stockholder. This supermajority voting requirement will
not apply in cases where the proposed transaction has been approved by a
majority of disinterested directors or where various fair price and procedural
conditions have been met.
Under
Capitol Federal Financial, Inc.’s articles of incorporation, the term interested
stockholder means any person who or which is:
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the
beneficial owner, directly or indirectly, of more than 10% of the voting
power of the then outstanding voting stock of Capitol Federal Financial,
Inc.;
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an
affiliate of Capitol Federal Financial, Inc. who or which at any time in
the two-year period before the date in question was the beneficial owner
of 10% or more of the voting power of the then outstanding voting stock of
Capitol Federal Financial, Inc.; or
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an
assignee of or an entity that has otherwise succeeded to any
shares of voting stock that were at any time within the two-year period
immediately before the date in question beneficially owned by any
interested stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933, as amended.
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A
business combination includes, but is not limited to:
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any
merger or consolidation of Capitol Federal Financial, Inc. or any of its
subsidiaries with: (1) any interested stockholder; or (2) any
other corporation, which is, or after such merger or consolidation would
be, an affiliate of an interested
stockholder;
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any
sale, lease, exchange or other disposition to or with any interested
stockholder, or any affiliate of any interested stockholder, of any assets
of Capitol Federal Financial, Inc. or any of its subsidiaries having an
aggregate fair market value equaling or exceeding 25% or more of the
combined assets of Capitol Federal Financial, Inc. and its
subsidiaries;
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the
issuance or transfer by Capitol Federal Financial, Inc. or any of its
subsidiaries of any securities of Capitol Federal Financial, Inc. or any
of its subsidiaries to any interested stockholder or any affiliate of any
interested stockholder in exchange for cash, securities or other property
having an aggregate fair market value equaling or exceeding 25% of the
combined fair market value of the outstanding common stock of Capitol
Federal Financial, Inc., except for any issuance or transfer pursuant to
an employee benefit plan of Capitol Federal Financial, Inc. or any of its
subsidiaries;
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the
adoption of any plan for the liquidation or dissolution of Capitol Federal
Financial, Inc. proposed by or on behalf of any interested stockholder or
any affiliate or associate of such interested stockholder;
or
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any
reclassification of securities, or recapitalization of Capitol Federal
Financial, Inc., or any merger or consolidation of Capitol Federal
Financial, Inc. with any of its subsidiaries or any other transaction
(whether or not with or into or otherwise involving an interested
stockholder) which has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class of equity
or convertible securities of Capitol Federal Financial, Inc. or any of its
subsidiaries, which is directly or indirectly owned by any interested
stockholder or any affiliate of any interested
stockholder.
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153
Neither
the charter and bylaws of CFF nor the federal laws and regulations applicable to
CFF contain a provision that restricts business combinations between CFF and any
interested stockholder in the manner set forth above.
Evaluation
of Offers. The articles of incorporation of Capitol Federal
Financial, Inc. provide that its board of directors, when evaluating a
transaction that would or may involve a change in control of Capitol Federal
Financial, Inc. (whether by purchases of its securities, merger, consolidation,
share exchange, dissolution, liquidation, sale of all or substantially all of
its assets, proxy solicitation or otherwise), may, in connection with the
exercise of its business judgment in determining what is in the best interests
of Capitol Federal Financial, Inc. and its stockholders and in making any
recommendation to the stockholders, give due consideration to all relevant
factors, including, but not limited to:
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the
economic effect, both immediate and long-term, upon Capitol Federal
Financial, Inc.’s stockholders, including stockholders, if any, who do not
participate in the transaction;
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the
social and economic effect on the present and future employees, creditors
and customers of, and others dealing with, Capitol Federal Financial, Inc.
and its subsidiaries and on the communities in which Capitol Federal
Financial, Inc. and its subsidiaries operate or are
located;
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whether
the proposal is acceptable based on the historical, current or projected
future operating results or financial condition of Capitol Federal
Financial, Inc.;
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whether
a more favorable price could be obtained for Capitol Federal Financial,
Inc.’s stock or other securities in the
future;
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the
reputation and business practices of the other entity to be involved in
the transaction and its management and affiliates as they would affect the
employees of Capitol Federal Financial, Inc. and its
subsidiaries;
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the
future value of the stock or any other securities of Capitol Federal
Financial, Inc. or the other entity to be involved in the proposed
transaction;
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any
antitrust or other legal and regulatory issues that are raised by the
proposal;
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the
business and historical, current or expected future financial condition or
operating results of the other entity to be involved in the transaction,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
proposed transaction, and other likely financial obligations of the other
entity to be involved in the proposed transaction;
and
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the
ability of Capitol Federal Financial, Inc. to fulfill its objectives as a
financial institution holding company and on the ability of its subsidiary
financial institution(s) to fulfill the objectives of a federally insured
financial institution under applicable statutes and
regulations.
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If the
board of directors determines that any proposed transaction should be rejected,
it may take any lawful action to defeat such transaction.
CFF’s
charter and bylaws do not contain a similar provision.
Dissenters’
Rights of Appraisal. Office
of Thrift Supervision regulations generally provide that a stockholder of a
federally chartered corporation, such as CFF, that engages in a merger,
consolidation or sale of all or substantially all of its assets shall have the
right to demand from the institution payment of the fair or appraised value of
his or her stock in the corporation, subject to specified procedural
requirements. The regulations also provide, however, that a
stockholder of a federally chartered corporation whose shares are listed on a
national securities exchange or quoted on the Nasdaq stock market are not
entitled to dissenters’ rights in connection with a merger if the stockholder is
required to accept only “qualified consideration” for his or her stock, which is
defined to include cash, shares of stock of any institution or corporation that
at the effective date of the merger will be listed on a national securities
exchange or quoted on the Nasdaq stock market, or any combination of such shares
of stock and cash.
154
Under
Maryland law, stockholders of Capitol Federal Financial, Inc. will not have
dissenters’ appraisal rights in connection with a plan of merger or
consolidation to which Capitol Federal Financial, Inc. is a party as long as the
common stock of Capitol Federal Financial, Inc. is listed on the Nasdaq stock
market or any other national securities exchange.
Amendment
of Governing Instruments. No
amendment of CFF’s stock charter may be made unless it is first proposed by the
board of directors of CFF, then preliminarily approved by the Office of Thrift
Supervision, and thereafter approved by the holders of a majority of the total
votes eligible to be cast at a legal meeting.
Capitol
Federal Financial, Inc.’s articles of incorporation may be amended, upon the
submission of an amendment by the board of directors to a vote of the
stockholders, by the affirmative vote of at least a majority of the outstanding
shares of common stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required to amend the following
provisions:
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(i)
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The
limitation on voting rights of persons who directly or indirectly
beneficially own more than 10% of the outstanding shares of common
stock;
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(ii)
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The
division of the board of directors into three staggered
classes;
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(iii)
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The
ability of the board of directors to fill vacancies on the
board;
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(iv)
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The
requirement that at least a majority of the votes eligible to be cast by
stockholders must vote to remove directors, and can only remove directors
for cause;
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(v)
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The
ability of the board of directors and stockholders to amend and repeal the
bylaws;
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(vi)
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The
authority of the board of directors to provide for the issuance of
preferred stock;
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(vii)
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The
validity and effectiveness of any action lawfully authorized by the
affirmative vote of the holders of a majority of the total number of
outstanding shares of common stock;
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(viii)
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The
number of stockholders constituting a quorum or required for stockholder
consent;
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(ix)
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The
indemnification of current and former directors and officers, as well as
employees and other agents, by Capitol Federal Financial,
Inc.;
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(x)
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The
limitation of liability of officers and directors to Capitol Federal
Financial, Inc. for money damages;
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(xi)
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The
inability of stockholders to cumulate their votes in the election of
directors;
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(xii)
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The
advance notice requirements for stockholder proposals and nominations;
and
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(xiii)
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The
provision of the articles of incorporation requiring approval of at least
80% of the outstanding voting stock to amend the provisions of the
articles of incorporation provided in (i) through (xiii) of this
list.
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The
articles of incorporation also provide that the bylaws may be amended by the
affirmative vote of a majority of our directors or by the stockholders by the
affirmative vote of at least 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders. Any amendment of this
super-majority requirement for amendment of the bylaws would also require the
approval of 80% of the outstanding voting stock.
155
The
provisions requiring the affirmative vote of 80% of outstanding shares for
certain stockholder actions have been included in the articles of incorporation
of Capitol Federal Financial, Inc. in reliance on Section 2-104(b)(4) of the
Maryland General Corporation Law. Section 2-104(b)(4) permits the
articles of incorporation to require a greater proportion of votes than the
proportion that would otherwise be required for stockholder action under the
Maryland General Corporation Law.
Although
the Board of Directors of Capitol Federal Financial, Inc. is not aware of any
effort that might be made to obtain control of Capitol Federal Financial, Inc.
after the conversion, the Board of Directors believes that it is appropriate to
include certain provisions as part of Capitol Federal Financial, Inc.’s articles
of incorporation to protect the interests of Capitol Federal Financial, Inc. and
its stockholders from takeovers which our Board of Directors might conclude are
not in the best interests of Capitol Federal Savings Bank, Capitol Federal
Financial, Inc. or Capitol Federal Financial, Inc.’s stockholders.
The
following discussion is a general summary of the material provisions of Capitol
Federal Financial, Inc.’s articles of incorporation and bylaws, Capitol Federal
Savings Bank’s charter and bylaws and certain other regulatory provisions that
may be deemed to have an anti-takeover effect. The following
description of certain of these provisions is necessarily general and is not
intended to be a complete description of the document or regulatory provision in
question. Capitol Federal Financial, Inc.’s articles of incorporation
and bylaws are included as part of Capitol Federal Savings Bank MHC’s
application for conversion filed with the Office of Thrift Supervision and
Capitol Federal Financial, Inc.’s registration statement filed with the
Securities and Exchange Commission. See “Where You Can Find
Additional Information.”
Articles
of Incorporation and Bylaws of Capitol Federal Financial,
Inc.
Capitol
Federal Financial, Inc.’s articles of incorporation and bylaws contain a number
of provisions relating to corporate governance and rights of stockholders that
may discourage future takeover attempts. As a result, stockholders
who might desire to participate in such transactions may not have an opportunity
to do so. In addition, these provisions will also render the removal
of the board of directors or management of Capitol Federal Financial, Inc. more
difficult.
Directors. The
board of directors will be divided into three classes. The members of
each class will be elected for a term of three years and only one class of
directors will be elected annually. Thus, it would take at least two
annual elections to replace a majority of our board of
directors. Further, the bylaws impose notice and information
requirements in connection with the nomination by stockholders of candidates for
election to the board of directors or the proposal by stockholders of business
to be acted upon at an annual meeting of stockholders.
Restrictions
on Call of Special Meetings. The
articles of incorporation and bylaws provide that special meetings of
stockholders can be called by the President, by a majority of the whole board of
directors or upon the written request of stockholders entitled to cast at least
a majority of all votes entitled to vote at the meeting.
Prohibition
of Cumulative Voting. The
articles of incorporation prohibit cumulative voting for the election of
directors.
Limitation
of Voting Rights. The
articles of incorporation provide that in no event will any person who
beneficially owns more than 10% of the then-outstanding shares of common stock
be entitled or permitted to vote any of the shares of common stock held in
excess of the 10% limit. This provision has been included in the
articles of incorporation in reliance on Section 2-507(a) of the Maryland
General Corporation Law, which entitles stockholders to one vote for each share
of stock unless the articles of incorporation provide for a greater or lesser
number of votes per share or limit or deny voting rights.
Restrictions
on Removing Directors from Office. The articles of
incorporation provide that directors may be removed only for cause, and only by
the affirmative vote of the holders of at least a majority of the voting power
of all of our then-outstanding common stock entitled to vote (after giving
effect to the limitation on voting rights discussed above in “—Limitation of
Voting Rights.”)
156
Authorized
but Unissued Shares. After the conversion, Capitol Federal
Financial, Inc. will have authorized but unissued shares of common and preferred
stock. See “Description of Capital Stock of Capitol Federal
Financial, Inc. Following the Conversion.” The articles of incorporation
authorize 100,000,000 shares of serial preferred stock. Capitol
Federal Financial, Inc. is authorized to issue preferred stock from time to time
in one or more series subject to applicable provisions of law, and the board of
directors is authorized to fix the designations, and relative preferences,
limitations, voting rights, if any, including without limitation, offering
rights of such shares (which could be multiple or as a separate
class). In the event of a proposed merger, tender offer or other
attempt to gain control of Capitol Federal Financial, Inc. that the board of
directors does not approve, it might be possible for the board of directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of the transaction. An
effect of the possible issuance of preferred stock therefore may be to deter a
future attempt to gain control of Capitol Federal Financial, Inc. The
board of directors has no present plan or understanding to issue any preferred
stock.
Amendments
to Articles of Incorporation and Bylaws. Amendments to the
articles of incorporation must be approved by our board of directors and also by
at least a majority of the outstanding shares of our voting stock; provided,
however, that approval by at least 80% of the outstanding voting stock is
generally required to amend certain provisions. A list of these
provisions is provided under “Comparison of Stockholders’ Rights For Existing
Stockholders of Capitol Federal Financial, Inc.—Amendment of Governing
Instruments” above.
The
articles of incorporation also provide that the bylaws may be amended by the
affirmative vote of a majority of Capitol Federal Financial, Inc.’s directors or
by the stockholders by the affirmative vote of at least 80% of the total votes
eligible to be voted at a duly constituted meeting of
stockholders. Any amendment of this super-majority requirement for
amendment of the bylaws would also require the approval of 80% of the
outstanding voting stock.
The
provisions requiring the affirmative vote of 80% of outstanding shares for
certain stockholder actions have been included in the articles of incorporation
of Capitol Federal Financial, Inc. in reliance on Section 2-104(b)(4) of
the Maryland General Corporation Law. Section 2-104(b)(4) permits the
articles of incorporation to require a greater proportion of votes than the
proportion that would otherwise be required for stockholder action under the
Maryland General Corporation Law.
Business
Combinations with Interested Stockholders. The
articles of incorporation require the approval of the holders of at least 80% of
Capitol Federal Financial, Inc.’s outstanding shares of voting stock entitled to
vote to approve certain business combinations with an interested
stockholder. This supermajority voting requirement will not apply in
cases where the proposed transaction has been approved by a majority of those
members of Capitol Federal Financial, Inc.’s board of directors who are
unaffiliated with the interested stockholder and who were directors before the
time when the interested stockholder became an interested stockholder or if the
proposed transaction meets certain conditions that are designed to afford the
stockholders a fair price in consideration for their shares. In each
such case, where stockholder approval is required, the approval of only a
majority of the outstanding shares of voting stock is
sufficient.
The term
interested stockholder includes any individual, group acting in concert,
corporation, partnership, association or other entity (other than Capitol
Federal Financial, Inc. or its subsidiary) who or which is the beneficial owner,
directly or indirectly, of 10% or more of the outstanding shares of voting stock
of Capitol Federal Financial, Inc.
A
business combination includes:
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any
merger or consolidation of Capitol Federal Financial, Inc. or any of its
subsidiaries with any interested stockholder or affiliate of an interested
stockholder or any corporation which is, or after such merger or
consolidation would be, an affiliate of an interested
stockholder;
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any
sale or other disposition to or with any interested stockholder of 25% or
more of the assets of Capitol Federal Financial, Inc. or combined assets
of Capitol Federal Financial, Inc. and its
subsidiaries;
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the
issuance or transfer to any interested stockholder or its affiliate by
Capitol Federal Financial, Inc. (or any subsidiary) of any securities of
Capitol Federal Financial, Inc. (or any subsidiary) in exchange for cash,
securities or other property the value of which equals or exceeds 25% of
the fair market value of the common stock of Capitol Federal Financial,
Inc.;
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the
adoption of any plan for the liquidation or dissolution of Capitol Federal
Financial, Inc. proposed by or on behalf of any interested stockholder or
its affiliate; and
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any
reclassification of securities, recapitalization, merger or consolidation
of Capitol Federal Financial, Inc. with any of its subsidiaries which has
the effect of increasing the proportionate share of common stock or any
class of equity or convertible securities of Capitol Federal Financial,
Inc. or subsidiary owned directly or indirectly, by an interested
stockholder or its affiliate.
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Evaluation
of Offers. The articles of incorporation of Capitol Federal
Financial, Inc. provide that its board of directors, when evaluating a
transaction that would or may involve a change in control of Capitol Federal
Financial, Inc. (whether by purchases of its securities, merger, consolidation,
share exchange, dissolution, liquidation, sale of all or substantially all of
its assets, proxy solicitation or otherwise), may, in connection with the
exercise of its business judgment in determining what is in the best interests
of Capitol Federal Financial, Inc. and its stockholders and in making any
recommendation to the stockholders, give due consideration to all relevant
factors, including, but not limited to:
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the
economic effect, both immediate and long-term, upon Capitol Federal
Financial, Inc.’s stockholders, including stockholders, if any, who do not
participate in the transaction;
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the
social and economic effect on the present and future employees, creditors
and customers of, and others dealing with, Capitol Federal Financial, Inc.
and its subsidiaries and on the communities in which Capitol Federal
Financial, Inc. and its subsidiaries operate or are
located;
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whether
the proposal is acceptable based on the historical, current or projected
future operating results or financial condition of Capitol Federal
Financial, Inc.;
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whether
a more favorable price could be obtained for Capitol Federal Financial,
Inc.’s stock or other securities in the
future;
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the
reputation and business practices of the other entity to be involved in
the transaction and its management and affiliates as they would affect the
employees of Capitol Federal Financial, Inc. and its
subsidiaries;
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any
antitrust or other legal and regulatory issues that are raised by the
proposal;
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the
business and historical, current or expected future financial condition or
operating results of the other entity to be involved in the transaction,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
proposed transaction, and other likely financial obligations of the other
entity to be involved in the proposed transaction;
and
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the
ability of Capitol Federal Financial, Inc. to fulfill its objectives as a
financial institution holding company and on the ability of its subsidiary
financial institution(s) to fulfill the objectives of a federally insured
financial institution under applicable statutes and
regulations.
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If the
board of directors determines that any proposed transaction should be rejected,
it may take any lawful action to defeat such transaction.
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158
Purpose
and Anti-Takeover Effects of Capitol Federal Financial, Inc.’s Articles of
Incorporation and Bylaws. Our
board of directors believes that the provisions described above are prudent and
will reduce our vulnerability to takeover attempts and certain other
transactions that have not been negotiated with and approved by our board of
directors. These provisions also will assist us in the orderly
deployment of the offering proceeds into productive assets during the initial
period after the conversion. Our board of directors believes these
provisions are in the best interests of Capitol Federal Financial, Inc. and its
stockholders. Our board of directors believes that it will be in the
best position to determine the true value of Capitol Federal Financial, Inc. and
to negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, our board of directors believes that it is
in the best interests of Capitol Federal Financial, Inc. and its stockholders to
encourage potential acquirers to negotiate directly with the board of directors
and that these provisions will encourage such negotiations and discourage
hostile takeover attempts. It is also the view of our board of
directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price reflective of the true value of Capitol
Federal Financial, Inc. and that is in the best interests of all
stockholders.
Takeover
attempts that have not been negotiated with and approved by our board of
directors present the risk of a takeover on terms that may be less favorable
than might otherwise be available. A transaction that is negotiated
and approved by our board of directors, on the other hand, can be carefully
planned and undertaken at an opportune time in order to obtain maximum value of
Capitol Federal Financial, Inc. for our stockholders, with due consideration
given to matters such as the management and business of the acquiring
corporation and maximum strategic development of Capitol Federal Financial,
Inc.’s assets.
Although
a tender offer or other takeover attempt may be made at a price substantially
above the current market price, these offers are sometimes made for less than
all of the outstanding shares of a target company. As a result,
stockholders may be presented with the alternative of partially liquidating
their investment at a time that may be disadvantageous, or retaining their
investment in an enterprise that is under different management and whose
objectives may not be similar to those of the remaining
stockholders.
Despite
our belief as to the benefits to stockholders of these provisions of Capitol
Federal Financial, Inc.’s articles of incorporation and bylaws, these provisions
may also have the effect of discouraging a future takeover attempt that would
not be approved by our board of directors, but pursuant to which stockholders
may receive a substantial premium for their shares over then current market
prices. As a result, stockholders who might desire to participate in
such a transaction may not have any opportunity to do so. These
provisions will also make it more difficult to remove our board of directors and
management. Our board of directors, however, has concluded that the
potential benefits outweigh the possible disadvantages.
Following
the conversion, pursuant to applicable law and, if required, following the
approval by stockholders, we may adopt additional anti-takeover provisions in
our articles of incorporation or other devices regarding the acquisition of our
equity securities that would be permitted for a Maryland business
corporation.
The
cumulative effect of the restrictions on acquisition of Capitol Federal
Financial, Inc. contained in our articles of incorporation and bylaws and in
Maryland law may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain stockholders of Capitol Federal
Financial, Inc. may deem a potential acquisition to be in their best interests,
or deem existing management not to be acting in their best
interests.
Charter
of Capitol Federal Savings Bank
The
charter of Capitol Federal Savings Bank provides that for a period of five years
from the closing of the conversion and offering, no person other than Capitol
Federal Financial, Inc. may offer directly or indirectly to acquire the
beneficial ownership of more than 10% of any class of equity security of Capitol
Federal Savings Bank. This provision does not apply to any
tax-qualified employee benefit plan of Capitol Federal Savings Bank or Capitol
Federal Financial, Inc. or to an underwriter or member of an underwriting or
selling group involving the public sale or resale of securities of Capitol
Federal Financial, Inc. 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,
directly or indirectly, of more than 10% of any class of equity securities of
Capitol Federal Savings Bank. In addition, during this five-year
period, all shares owned over the 10% limit may not be voted on any matter
submitted to stockholders for a vote.
159
Conversion
Regulations
Office of
Thrift Supervision regulations prohibit any person from making an offer,
announcing an intent to make an offer or participating in any other arrangement
to purchase stock or acquiring stock or subscription rights in a converting
institution or its holding company from another person prior to completion of
its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make an offer or announcement of an
offer to purchase shares or actually acquire shares of an Office of Thrift
Supervision regulated holding company of a converted institution for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, the person would become
the beneficial owner of more than 10% of the outstanding stock of the holding
company. The Office of Thrift Supervision has defined person to
include any individual, group acting in concert, corporation, partnership,
association, joint stock company, trust, unincorporated organization or similar
company, a syndicate or any other group formed for the purpose of acquiring,
holding or disposing of securities of an insured
institution. However, offers made exclusively to a bank or its
holding company, or an underwriter or member of a selling group acting on the
converting institution’s or its holding company’s behalf for resale to the
general public, are excepted. The regulation also provides civil
penalties for willful violation or assistance in any such violation of the
regulation by any person connected with the management of the converting
institution or its holding company or who controls more than 10% of the
outstanding shares or voting rights of a converted institution or its holding
company.
Change
in Control Regulations
Under the
Change in Bank Control Act, no person may acquire control of an insured federal
savings bank or its parent holding company unless the Office of Thrift
Supervision has been given 60 days’ prior written notice and has not issued
a notice disapproving the proposed acquisition. In addition, Office
of Thrift Supervision regulations provide that no company may acquire control of
a savings bank 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.
Control,
as defined under federal law, means ownership, control of or holding irrevocable
proxies representing more than 25% of any class of voting stock, control in any
manner of the election of a majority of the institution’s directors, or a
determination by the Office of Thrift Supervision that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings bank’s voting stock, if the acquiror is
also subject to any one of eight control factors, constitutes a rebuttable
determination of control under the regulations. These control factors
include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the Office of Thrift
Supervision, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings bank’s stock who do not intend
to participate in or seek to exercise control over a savings bank’s management
or policies may qualify for a safe harbor by filing with the Office of Thrift
Supervision a certification form that states, among other things, that the
holder is not in control of the institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the Office of Thrift Supervision, as applicable. There
are also rebuttable presumptions in the regulations concerning whether a group
acting in concert exists, including presumed action in concert among members of
an immediate family.
The
Office of Thrift Supervision may prohibit an acquisition of control if it finds,
among other things, that:
|
|
(i)
|
the
acquisition would result in a monopoly or substantially lessen
competition;
|
|
|
(ii)
|
the
financial condition of the acquiring person might jeopardize the financial
stability of the institution; or
|
|
|
(iii)
|
the
competence, experience or integrity of the acquiring person indicates that
it would not be in the interest of the depositors or the public to permit
the acquisition of control by such
person.
|
160
FOLLOWING
THE CONVERSION
General
Capitol Federal Financial,
Inc. is authorized to issue 1,400,000,000 shares of common stock, par value of
$0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per
share. Capitol Federal Financial, Inc. currently expects to issue in
the offering up to 212,750,000 shares of common stock, and up to 88,987,230
shares in exchange for the publicly held shares of CFF. Capitol
Federal Financial, Inc. will not issue shares of preferred stock in the
conversion. Each share of Capitol Federal Financial, Inc. common
stock will have the same relative rights as, and will be identical in all
respects to, each other share of common stock. Upon payment of the
subscription price for the common stock, in accordance with the plan of
conversion and reorganization, all of the shares of common stock will be duly
authorized, fully paid and nonassessable.
The
shares of common stock of Capitol Federal Financial, Inc. will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
Common
Stock
Dividends. Capitol
Federal Financial, Inc. may pay dividends up to an amount equal to the excess of
our capital surplus over payments that would be owed upon dissolution to
stockholders whose preferential rights upon dissolution are superior to those
receiving the dividend, and up to an amount that would not make us insolvent, as
and when declared by our board of directors. The payment of dividends
by Capitol Federal Financial, Inc. is subject to limitations that are imposed by
law and applicable regulation. The holders of common stock of Capitol
Federal Financial, Inc. will be entitled to receive and share equally in
dividends as may be declared by our board of directors out of funds legally
available therefor. If Capitol Federal Financial, Inc. issues shares
of preferred stock, the holders thereof may have a priority over the holders of
the common stock with respect to dividends.
Voting
Rights. Upon
consummation of the conversion, the holders of common stock of Capitol Federal
Financial, Inc. will have exclusive voting rights in Capitol Federal Financial,
Inc. They will elect Capitol Federal Financial, Inc.’s board of
directors and act on other matters as are required to be presented to them under
Maryland law or as are otherwise presented to them by the board of
directors. Generally, 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. Any person who beneficially owns more than 10% of the
then-outstanding shares of Capitol Federal Financial, Inc.’s common stock,
however, will not be entitled or permitted to vote any shares of common stock
held in excess of the 10% limit. If Capitol Federal Financial, Inc.
issues shares of preferred stock, holders of the preferred stock may also
possess voting rights. Certain matters require an 80% stockholder
vote.
As a
federally chartered stock savings bank, corporate powers and control of Capitol
Federal Savings Bank are vested in its board of directors, which elects the
officers of Capitol Federal Savings Bank and fills any vacancies on the board of
directors. Voting rights of Capitol Federal Savings Bank are vested
exclusively in the owners of the shares of capital stock of Capitol Federal
Savings Bank, which will be Capitol Federal Financial, Inc., and voted at the
direction of Capitol Federal Financial, Inc.’s board of
directors. Consequently, the holders of the common stock of Capitol
Federal Financial, Inc. will not have direct control of Capitol Federal Savings
Bank.
Liquidation. Capitol
Federal Financial, Inc. will own 100% of the common stock of Capitol Federal
Savings Bank. In the event of a liquidation or dissolution of Capitol
Federal Financial, Inc. or Capitol Federal Savings Bank, certain rights would be
available to stockholders of Capitol Federal Financial, Inc. and Eligible
Account Holders and Supplemental Eligible Account Holders of Capitol Federal
Savings Bank. See “The Conversion and Offering – Liquidation Rights –
Liquidation following the conversion.”
Preemptive
Rights. Holders
of the common stock of Capitol Federal Financial, Inc. will not be entitled to
preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
161
Preferred
Stock
None of
the shares of Capitol Federal Financial, Inc.’s authorized preferred stock will
be issued as part of the offering or the conversion. Preferred stock
may be issued with preferences and designations as our board of directors may
from time to time determine. Our board of directors may, without
stockholder approval, issue shares of preferred stock with voting, dividend,
liquidation and conversion rights that could dilute the voting strength of the
holders of the common stock and may assist management in impeding an unfriendly
takeover or attempted change in control.
The transfer agent and
registrar for Capitol Federal Financial, Inc.’s common stock is American Stock
Transfer & Trust Company, New York, New York.
The consolidated financial
statements as of September 30, 2009 and 2008, and for each of the three years in
the period ended September 30, 2009, included in this Prospectus have been
audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report appearing herein. Such
financial statements are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The
discussions related to state income taxes included under the “Material Income
Tax Consequences” heading of the Conversion and Offering Section were prepared
by
[ ], and have been included herein
upon the authority of said firm as experts in tax matters.
RP
Financial, LC. has consented to the publication herein of the summary of its
report to Capitol Federal Financial, Inc. setting forth its opinion as to the
estimated pro forma market value of the shares of common stock upon completion
of the offering and its letter with respect to subscription rights.
Silver, Freedman &
Taff, L.L.P., Washington, D.C., counsel to Capitol Federal Financial, Inc.,
Capitol Federal Savings Bank MHC, CFF and Capitol Federal Savings Bank, will
issue to Capitol Federal Financial, Inc. its opinion regarding the legality of
the common stock, the federal income tax consequences of the conversion and the
contribution to the charitable foundation. Certain legal matters will be passed
upon for Sandler O’Neill & Partners L.P. by Kilpatrick Stockton
LLP.
Capitol
Federal Financial, Inc. has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 with respect to the
shares of common stock offered hereby. As permitted by the rules and
regulations of the Securities and Exchange Commission, 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 Securities and Exchange Commission located at
100 F Street, N.E., Washington, D.C. 20549, and copies of such material can be
obtained from the Securities and Exchange Commission at prescribed
rates. The Securities and Exchange Commission telephone number is
1-800-SEC-0330. In addition, the Securities and Exchange Commission
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 Securities and Exchange
Commission, including Capitol Federal Financial, Inc. 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
of the material terms of, and should be read in conjunction with, such contract
or document.
162
Capitol
Federal Savings Bank MHC has filed with the Office of Thrift Supervision an
Application on Form AC with respect to the conversion. This
prospectus omits certain information contained in the
application. The application 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 Western Regional Office of the Office of Thrift Supervision,
225 E. John Carpenter Freeway, Suite 500, Irving, Texas 75062. Our
plan of conversion and reorganization is available, upon request, at each of our
banking offices.
In
connection with the offering, Capitol Federal Financial, Inc. will register its
common stock under Section 12(b) of the Securities Exchange Act of 1934 and,
upon such registration, Capitol Federal Financial, Inc. and the holders of its
common stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on common 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 of conversion and reorganization, Capitol
Federal Financial, Inc. has undertaken that it will not terminate such
registration for a period of at least three years following the
offering.
163
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
F-2
|
|
|
F-3
|
|
|
F-5
|
|
|
F-7
|
|
|
F-11
|
|
|
F-14
|
F-1
To the
Board of Directors and Stockholders of
Capitol
Federal Financial and Subsidiary
Topeka,
Kansas
We have
audited the accompanying consolidated balance sheets of Capitol Federal
Financial and Subsidiary (the “Company”) as of September 30, 2009 and 2008, and
the related consolidated statements of income, stockholders’ equity, and cash
flows for each of the three years in the period ended September 30,
2009. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 Capitol Federal Financial and Subsidiary as
of September 30, 2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2009,
in conformity with accounting principles generally accepted in the United States
of America.
/S/
Deloitte & Touche LLP
Kansas
City, Missouri
November
30, 2009
F-2
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
December
31,
|
September
30,
|
|||||||||||
|
ASSETS
|
2009
|
2009
|
2008
|
|||||||||
|
(unaudited)
|
||||||||||||
|
CASH
AND CASH EQUIVALENTS (includes interest-earning deposits of
$80,895, $32,319 and $77,246)
|
$ | 105,128 | $ | 41,154 | $ | 87,138 | ||||||
|
INVESTMENT
SECURITIES:
|
||||||||||||
|
Available-for-sale
(“AFS”), at fair value (amortized cost of $234,500, $235,185 and
$51,700)
|
234,001 | 234,784 | 49,586 | |||||||||
|
Held-to-maturity
(“HTM”), at cost (fair value of $419,352, $248,929 and
$92,211)
|
417,942 | 245,920 | 92,773 | |||||||||
|
MORTGAGE-BACKED
SECURITIES (“MBS”):
|
||||||||||||
|
AFS,
at fair value (amortized cost of $1,254,958, $1,334,357 and
$1,491,536)
|
1,305,096 | 1,389,211 | 1,484,055 | |||||||||
|
HTM,
at cost (fair value of $594,365, $627,829 and $743,764)
|
572,873 | 603,256 | 750,284 | |||||||||
|
LOANS
RECEIVABLE, net (less allowance for loan losses of $12,207, $10,150
and $5,791 )
|
5,423,923 | 5,603,965 | 5,320,780 | |||||||||
|
BANK-OWNED
LIFE INSURANCE (“BOLI”)
|
53,777 | 53,509 | 52,350 | |||||||||
|
CAPITAL
STOCK OF FEDERAL HOME LOAN BANK (“FHLB”), at cost
|
134,064 | 133,064 | 124,406 | |||||||||
|
ACCRUED
INTEREST RECEIVABLE
|
31,048 | 32,640 | 33,704 | |||||||||
|
PREMISES
AND EQUIPMENT, net
|
39,901 | 37,709 | 29,874 | |||||||||
|
REAL
ESTATE OWNED, (“REO”) net
|
6,637 | 7,404 | 5,146 | |||||||||
|
PREPAID
FEDERAL INSURANCE PREMIUM
|
25,735 | — | — | |||||||||
|
OTHER
ASSETS
|
24,637 | 21,064 | 25,153 | |||||||||
|
TOTAL
ASSETS
|
$ | 8,374,762 | $ | 8,403,680 | $ | 8,055,249 | ||||||
(Continued)
F-3
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(in
thousands, except share amounts)
|
|
December
31,
|
September
30,
|
|||||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
2009
|
2009
|
2008
|
|||||||||
|
(unaudited)
|
||||||||||||
|
LIABILITIES:
|
||||||||||||
|
Deposits
|
$ | 4,227,252 | $ | 4,228,609 | $ | 3,923,883 | ||||||
|
Advances
from FHLB
|
2,394,214 | 2,392,570 | 2,447,129 | |||||||||
|
Other
borrowings
|
713,609 | 713,609 | 713,581 | |||||||||
|
Advance
payments by borrowers for taxes and insurance
|
21,339 | 55,367 | 53,213 | |||||||||
|
Income
taxes payable, net
|
13,881 | 6,016 | 6,554 | |||||||||
|
Deferred
income taxes, net
|
31,740 | 30,970 | 3,223 | |||||||||
|
Accounts
payable and accrued expenses
|
30,728 | 35,241 | 36,450 | |||||||||
|
Total
liabilities
|
7,432,763 | 7,462,382 | 7,184,033 | |||||||||
|
COMMITMENTS
AND CONTINGENCIES (NOTE 13)
|
||||||||||||
|
STOCKHOLDERS’
EQUITY:
|
||||||||||||
|
Preferred
stock, $.01 par value; 50,000,000 shares authorized, no shares issued or
outstanding
|
— | — | — | |||||||||
|
Common
stock, $.01 par value; 450,000,000 shares authorized, 91,512,287 shares
issued; 74,023,577, 74,099,355 and 74,079,868 shares outstanding as of
December 31, 2009 (unaudited), September 30, 2009 and 2008,
respectively
|
915 | 915 | 915 | |||||||||
|
Additional
paid-in capital
|
453,975 | 452,872 | 445,391 | |||||||||
|
Unearned
compensation - Employee Stock Ownership Plan (“ESOP”)
|
(7,561 | ) | (8,066 | ) | (10,082 | ) | ||||||
|
Unearned
compensation - Recognition and Retention Plan (“RRP”)
|
(260 | ) | (330 | ) | (553 | ) | ||||||
|
Retained
earnings
|
785,914 | 781,604 | 759,375 | |||||||||
|
Accumulated
other comprehensive income (loss), net of tax
|
30,875 | 33,870 | (5,968 | ) | ||||||||
| 1,263,858 | 1,260,865 | 1,189,078 | ||||||||||
|
Treasury
stock, at cost; 17,488,710, 17,412,932 and 17,432,419 shares as of
December 31, 2009 (unaudited), September 30, 2009 and 2008,
respectively
|
(321,859 | ) | (319,567 | ) | (317,862 | ) | ||||||
|
Total
stockholders’ equity
|
941,999 | 941,298 | 871,216 | |||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 8,374,762 | $ | 8,403,680 | $ | 8,055,249 | ||||||
| See notes to consolidated financial statements. | (Concluded) |
F-4
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
|||||||||
|
(in
thousands, except share and per share amounts)
|
|||||||||
|
For
the Quarter ended
|
For
the Year Ended
|
|||||||||||||||||||
|
December
31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
INTEREST
AND DIVIDEND INCOME:
|
||||||||||||||||||||
|
Loans
receivable
|
$ | 74,526 | $ | 76,716 | $ | 305,782 | $ | 302,020 | $ | 294,744 | ||||||||||
|
MBS
|
20,754 | 26,402 | 97,926 | 88,395 | 68,752 | |||||||||||||||
|
Investment
securities
|
2,559 | 1,326 | 5,533 | 9,917 | 30,849 | |||||||||||||||
|
Capital
stock of FHLB
|
1,001 | 780 | 3,344 | 6,921 | 10,017 | |||||||||||||||
|
Cash
and cash equivalents
|
47 | 49 | 201 | 3,553 | 7,188 | |||||||||||||||
|
Total
interest and dividend income
|
98,887 | 105,273 | 412,786 | 410,806 | 411,550 | |||||||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||||||||
|
FHLB
advances
|
24,819 | 29,545 | 106,551 | 125,748 | 153,363 | |||||||||||||||
|
Deposits
|
22,105 | 26,785 | 100,471 | 133,435 | 147,279 | |||||||||||||||
|
Other
borrowings
|
7,109 | 7,725 | 29,122 | 17,455 | 4,468 | |||||||||||||||
|
Total
interest expense
|
54,033 | 64,055 | 236,144 | 276,638 | 305,110 | |||||||||||||||
|
NET
INTEREST AND DIVIDEND INCOME
|
44,854 | 41,218 | 176,642 | 134,168 | 106,440 | |||||||||||||||
|
PROVISION
(RECOVERY) FOR LOAN LOSSES
|
3,115 | 549 | 6,391 | 2,051 | (225 | ) | ||||||||||||||
|
NET
INTEREST AND DIVIDEND INCOME AFTER
PROVISION
(RECOVERY) FOR LOAN LOSSES
|
||||||||||||||||||||
| 41,739 | 40,669 | 170,251 | 132,117 | 106,665 | ||||||||||||||||
|
OTHER
INCOME:
|
||||||||||||||||||||
|
Retail
fees and charges
|
4,723 | 4,530 | 18,023 | 17,805 | 16,120 | |||||||||||||||
|
Insurance
commissions
|
582 | 491 | 2,440 | 2,238 | 2,059 | |||||||||||||||
|
Loan
fees
|
581 | 569 | 2,327 | 2,325 | 2,467 | |||||||||||||||
|
Income
from BOLI
|
268 | 384 | 1,158 | 2,323 | 27 | |||||||||||||||
|
Gains
on securities and loans receivable, net
|
6,472 | 24 | 2,171 | 829 | 75 | |||||||||||||||
|
Other,
net
|
505 | 644 | 2,475 | 4,507 | 3,218 | |||||||||||||||
|
Total
other income
|
13,131 | 6,642 | 28,594 | 30,027 | 23,966 | |||||||||||||||
|
(Continued)
|
||||||||||||||||||||
F-5
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
|||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|||||||||
|
(in
thousands, except share and per share amounts)
|
|||||||||
|
For
the Quarter ended
|
For
the Year Ended
|
|||||||||||||||||||
|
December
31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
OTHER
EXPENSES:
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
10,532 | 11,164 | 43,318 | 43,498 | 41,269 | |||||||||||||||
|
Occupancy
of premises
|
3,942 | 3,722 | 15,226 | 13,957 | 13,135 | |||||||||||||||
|
Federal
insurance premium
|
1,814 | 166 | 7,558 | 735 | 490 | |||||||||||||||
|
Advertising
|
1,644 | 1,742 | 6,918 | 4,925 | 4,317 | |||||||||||||||
|
Deposit
and loan transaction costs
|
1,380 | 1,303 | 5,434 | 5,240 | 4,709 | |||||||||||||||
|
Regulatory
and outside services
|
1,448 | 1,149 | 4,318 | 5,457 | 7,078 | |||||||||||||||
|
Mortgage
servicing activity, net
|
284 | 721 | 3,148 | 1,108 | 1,421 | |||||||||||||||
|
Office
supplies and related expenses
|
625 | 713 | 2,636 | 2,234 | 2,913 | |||||||||||||||
|
Other,
net
|
1,080 | 1,507 | 5,065 | 4,835 | 2,393 | |||||||||||||||
|
Total
other expenses
|
22,749 | 22,187 | 93,621 | 81,989 | 77,725 | |||||||||||||||
|
INCOME
BEFORE INCOME TAX EXPENSE
|
32,121 | 25,124 | 105,224 | 80,155 | 52,906 | |||||||||||||||
|
INCOME
TAX EXPENSE
|
11,141 | 9,272 | 38,926 | 29,201 | 20,610 | |||||||||||||||
|
NET
INCOME
|
$ | 20,980 | $ | 15,852 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
|
Basic
earnings per share
|
$ | 0.29 | $ | 0.22 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Diluted
earnings per share
|
$ | 0.29 | $ | 0.22 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Dividends
declared per public share
|
$ | 0.79 | $ | 0.61 | $ | 2.11 | $ | 2.00 | $ | 2.09 | ||||||||||
|
Basic
weighted average common shares
|
73,266,676 | 73,062,885 | 73,144,116 | 72,938,871 | 72,849,095 | |||||||||||||||
|
Diluted
weighted average common shares
|
73,277,905 | 73,162,044 | 73,208,101 | 73,012,666 | 72,970,388 | |||||||||||||||
(Concluded)
See notes
to consolidated financial statements.
F-6
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008, and 2007
|
|
(in
thousands, except share amounts)
|
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
|
Additional
|
Unearned
|
Unearned
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Compensation-
|
Compensation-
|
Retained
|
Comprehensive
|
Treasury
Stock
|
Stockholders’
|
|||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
ESOP
|
RRP
|
Earnings
|
Income
(Loss)
|
Shares
|
Amount
|
Equity
|
|||||||||||||||||||||||||||||||
|
BALANCE,
October 1, 2006
|
91,512,287 | $ | 915 | $ | 429,286 | $ | (14,784 | ) | $ | (825 | ) | $ | 760,890 | $ | (1,543 | ) | 17,480,357 | $ | (310,720 | ) | $ | 863,219 | ||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||||||
|
Net
income for the year ended, September 30, 2007
|
32,296 | 32,296 | ||||||||||||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||
|
Changes
in unrealized gains/losses on securities AFS, net of deferred income taxes
of $1,730
|
2,830 | 2,830 | ||||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
35,126 | |||||||||||||||||||||||||||||||||||||||
|
ESOP
activity, net
|
5,497 | 2,686 | 8,183 | |||||||||||||||||||||||||||||||||||||
|
RRP
activity, net
|
180 | 195 | (4,600 | ) | 42 | 417 | ||||||||||||||||||||||||||||||||||
|
Stock
based compensation – stock options and RRP
|
294 | 294 | ||||||||||||||||||||||||||||||||||||||
|
Acquisition
of treasury stock
|
88,188 | (3,198 | ) | (3,198 | ) | |||||||||||||||||||||||||||||||||||
|
Stock
options exercised
|
3,707 | (310,635 | ) | 2,883 | 6,590 | |||||||||||||||||||||||||||||||||||
|
Dividends
on common stock to stockholders ($2.09 per public share)
|
(43,000 | ) | (43,000 | ) | ||||||||||||||||||||||||||||||||||||
|
BALANCE,
September 30, 2007
|
91,512,287 | 915 | 438,964 | (12,098 | ) | (630 | ) | 750,186 | 1,287 | 17,253,310 | (310,993 | ) | 867,631 | |||||||||||||||||||||||||||
|
See
notes to consolidated financial statements.
|
(Continued)
|
|||||||||||||||||||||||||||||||||||||||
F-7
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008, and 2007
|
|
(in
thousands, except share amounts)
|
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Additional
|
Unearned
|
Unearned
|
Other
|
Total
|
|||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Compensation-
|
Compensation-
|
Retained
|
Comprehensive
|
Treasury
Stock
|
Stockholders’
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
ESOP
|
RRP
|
Earnings
|
Income
(Loss)
|
Shares
|
Amount
|
Equity
|
||||||||||||||||||||||
|
Cumulative
effect of adopting Accounting Standards Codification (“ASC”) 740 “Income
Taxes”
|
(339
|
)
|
(339
|
)
|
|||||||||||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||||
|
Net
income for the year ended, September 30, 2008
|
50,954
|
50,954
|
|||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||||||||||||
|
Changes
in unrealized gains/losses on securities AFS, net of deferred income taxes
of $4,414
|
(7,255
|
)
|
(7,255
|
)
|
|||||||||||||||||||||||||||
|
Total
comprehensive
income
|
43,699
|
||||||||||||||||||||||||||||||
|
ESOP
activity, net
|
5,471
|
2,016
|
7,487
|
||||||||||||||||||||||||||||
|
RRP
activity, net
|
238
|
77
|
(10,000
|
)
|
96
|
411
|
|||||||||||||||||||||||||
|
Stock
based compensation – stock options and RRP
|
323
|
323
|
|||||||||||||||||||||||||||||
|
Acquisition
of treasury stock
|
225,042
|
(7,307
|
)
|
(7,307
|
)
|
||||||||||||||||||||||||||
|
Stock
options exercised
|
395
|
(35,933
|
)
|
342
|
737
|
||||||||||||||||||||||||||
|
Dividends
on common stock to stockholders ($2.00 per public share)
|
(41,426
|
)
|
(41,426
|
)
|
|||||||||||||||||||||||||||
|
BALANCE,
September 30, 2008
|
91,512,287
|
915
|
445,391
|
(10,082
|
)
|
(553
|
)
|
759,375
|
(5,968
|
)
|
17,432,419
|
(317,862
|
)
|
871,216
|
|||||||||||||||||
| See notes to consolidated financial statements. |
(Continued)
|
F-8
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008, and 2007
|
|
(in
thousands, except share amounts)
|
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Additional
|
Unearned
|
Unearned
|
Other
|
Total
|
|||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Compensation-
|
Compensation-
|
Retained
|
Comprehensive
|
Treasury
Stock
|
Stockholders’
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
ESOP
|
RRP
|
Earnings
|
Income
(Loss)
|
Shares
|
Amount
|
Equity
|
||||||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||||
|
Net
income for the year ended, September 30, 2009
|
66,298
|
66,298
|
|||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||||||||||||
|
Changes
in unrealized gains/losses on securities AFS, net of deferred income taxes
of $24,210
|
39,838
|
39,838
|
|||||||||||||||||||||||||||||
|
Total
comprehensive income
|
106,136
|
||||||||||||||||||||||||||||||
|
ESOP
activity, net
|
5,913
|
2,016
|
7,929
|
||||||||||||||||||||||||||||
|
RRP
activity, net
|
131
|
(100
|
)
|
(2,500
|
)
|
24
|
55
|
||||||||||||||||||||||||
|
Stock
based compensation – stock options and RRP
|
281
|
323
|
604
|
||||||||||||||||||||||||||||
|
Acquisition
of treasury stock
|
56,063
|
(2,426
|
)
|
(2,426
|
)
|
||||||||||||||||||||||||||
|
Stock
options exercised
|
1,156
|
(73,050
|
)
|
697
|
1,853
|
||||||||||||||||||||||||||
|
Dividends
on common stock to stockholders
($2.11 per public share)
|
(44,069
|
)
|
(44,069
|
)
|
|||||||||||||||||||||||||||
|
BALANCE,
September 30, 2009
|
91,512,287
|
$
|
915
|
$
|
452,872
|
$
|
(8,066
|
)
|
$
|
(330
|
)
|
$
|
781,604
|
$
|
33,870
|
17,412,932
|
$
|
(319,567
|
)
|
$
|
941,298
|
||||||||||
|
See
notes to consolidated financial statements.
|
(Concluded)
|
F-9
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE QUARTER ENDED DECEMBER 31, 2009 (UNAUDITED)
(in
thousands, except share amounts)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
|
Additional
|
Unearned
|
Unearned
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Common
|
Paid-In
|
Compensation-
|
Compensation-
|
Retained
|
Comprehensive
|
Treasury
Stock
|
Stockholders’
|
|||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
ESOP
|
RRP
|
Earnings
|
Income
|
Shares
|
Amount
|
Equity
|
|||||||||||||||||||||||||||||||
|
Balance
at October 1, 2009
|
91,512,287 | $ | 915 | $ | 452,872 | $ | (8,066 | ) | $ | (330 | ) | $ | 781,604 | $ | 33,870 | 17,412,932 | $ | (319,567 | ) | $ | 941,298 | |||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||||||
|
Net
income
|
20,980 | 20,980 | ||||||||||||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||
|
Changes
in unrealized gain/losses on securities AFS, net of
deferred income taxes of
$1,819
|
(2,995 | ) | (2,995 | ) | ||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
17,985 | |||||||||||||||||||||||||||||||||||||||
|
ESOP
activity, net
|
1,039 | 505 | 1,544 | |||||||||||||||||||||||||||||||||||||
|
RRP
activity, net
|
3 | 3 | ||||||||||||||||||||||||||||||||||||||
|
Stock
based compensation - stock options and RRP
|
61 | 70 | 131 | |||||||||||||||||||||||||||||||||||||
|
Acquisition
of treasury stock
|
75,778 | (2,292 | ) | (2,292 | ) | |||||||||||||||||||||||||||||||||||
|
Dividends
on common stock to stockholders ($0.79 per public
share)
|
(16,670 | ) | (16,670 | ) | ||||||||||||||||||||||||||||||||||||
|
Balance,
December 31, 2009
|
91,512,287 | $ | 915 | $ | 453,975 | $ | (7,561 | ) | $ | (260 | ) | $ | 785,914 | $ | 30,875 | 17,488,710 | $ | (321,859 | ) | $ | 941,999 | |||||||||||||||||||
See notes
to consolidated financial statements
F-10
|
|
||||||||||||||||||||
|
For
the Quarter ended
December
31, (unaudited)
|
For
the Year Ended
September
30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
|
Net
income
|
$ | 20,980 | $ | 15,852 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||||||||||
|
FHLB
stock dividends
|
(1,000 | ) | (780 | ) | (3,344 | ) | (6,921 | ) | (10,017 | ) | ||||||||||
|
Provision
(recovery) for loan losses
|
3,115 | 549 | 6,391 | 2,051 | (225 | ) | ||||||||||||||
|
Originations
of loans receivable held-for-sale (“LHFS”)
|
(1,701 | ) | (738 | ) | (851 | ) | (47,062 | ) | (4,062 | ) | ||||||||||
|
Proceeds
from sales of LHFS
|
575 | 1,508 | 97,838 | 48,444 | 3,405 | |||||||||||||||
|
Amortization
and accretion of premiums and discounts on MBS and investment
securities
|
1,453 | 220 | 2,644 | 717 | (177 | ) | ||||||||||||||
|
Principal
collected on trading securities
|
— | — | — | — | 7,729 | |||||||||||||||
|
Proceeds
from sale of trading securities
|
— | — | — | — | 389,209 | |||||||||||||||
|
Depreciation
and amortization of premises and equipment
|
1,272 | 1,156 | 5,132 | 5,428 | 4,510 | |||||||||||||||
|
Deferred
gain on termination of interest rate swaps
|
— | — | — | 1,665 | — | |||||||||||||||
|
Amortization
of deferred amounts related to FHLB advances, net
|
1,644 | (165 | ) | 3,829 | (536 | ) | — | |||||||||||||
|
Common
stock committed to be released for allocation - ESOP
|
1,544 | 2,170 | 7,929 | 7,487 | 7,513 | |||||||||||||||
|
Stock
based compensation - stock options and RRP
|
131 | 177 | 604 | 722 | 669 | |||||||||||||||
|
Gain
on the sale of trading securities received in the loan swap
transaction
|
(6,454 | ) | — | — | — | — | ||||||||||||||
|
Prepaid
federal insurance premium
|
(25,735 | ) | — | — | — | — | ||||||||||||||
|
Provision
for deferred income taxes
|
2,589 | 1,049 | 3,548 | 8,160 | 18,714 | |||||||||||||||
|
Other,
net
|
(537 | ) | 66 | (1,947 | ) | (1,271 | ) | (648 | ) | |||||||||||
|
Changes
in:
|
||||||||||||||||||||
|
Accrued
interest receivable
|
1,592 | 1,280 | 1,064 | 2,165 | 2,163 | |||||||||||||||
|
Other
assets
|
(387 | ) | 1,303 | 2,784 | (4,871 | ) | 2,241 | |||||||||||||
|
Income
taxes payable/receivable
|
7,868 | 4,806 | 8 | 12,978 | (1,239 | ) | ||||||||||||||
|
Accounts
payable and accrued expenses
|
(5,257 | ) | (1,327 | ) | (1,209 | ) | 1,610 | (5,367 | ) | |||||||||||
|
Net
cash provided by operating activities
|
1,692 | 27,126 | 190,718 | 81,720 | 446,714 | |||||||||||||||
|
(Continued)
|
||||||||||||||||||||
F-11
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
For
the Quarter ended
|
For
the Year Ended
|
||||||||||||||||||
|
|
December
31 (unaudited),
|
September
30,
|
||||||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Proceeds
from sale of trading securities received in the loan swap
transaction
|
199,144 | — | — | — | — | |||||||||||||||
|
Proceeds
from maturities or calls of investment securities AFS
|
23 | 28 | 70,057 | 99,810 | 88,990 | |||||||||||||||
|
Purchases
of investment securities AFS
|
— | — | (255,046 | ) | (49,248 | ) | (1,520 | ) | ||||||||||||
|
Proceeds
from maturities or calls of investment securities HTM
|
1,010 | 37,400 | 39,703 | 514,208 | 511,500 | |||||||||||||||
|
Purchases
of investment securities HTM
|
(173,431 | ) | (886 | ) | (193,507 | ) | (185,138 | ) | (689,519 | ) | ||||||||||
|
Principal
collected on MBS AFS
|
78,991 | 49,459 | 326,044 | 233,225 | 230,934 | |||||||||||||||
|
Purchases
of MBS AFS
|
— | — | (169,452 | ) | (1,324,872 | ) | (91,294 | ) | ||||||||||||
|
Proceeds
from sale of MBS AFS
|
— | — | — | — | 15,237 | |||||||||||||||
|
Principal
collected on MBS HTM
|
33,389 | 40,735 | 168,888 | 266,853 | 256,083 | |||||||||||||||
|
Purchases
of MBS HTM
|
(2,990 | ) | — | (21,756 | ) | (5,483 | ) | (136,798 | ) | |||||||||||
|
Proceeds
from the redemption of capital stock of FHLB
|
— | 2,958 | 3,688 | 35,261 | 38,287 | |||||||||||||||
|
Purchases
of capital stock of FHLB
|
— | (9,002 | ) | (9,002 | ) | (13,085 | ) | (2,801 | ) | |||||||||||
|
Loan
originations, net of principal collected
|
(5,082 | ) | (25,289 | ) | (293,947 | ) | (92,656 | ) | (144,710 | ) | ||||||||||
|
Loan
purchases, net of principal collected
|
(13,151 | ) | (112,860 | ) | (102,939 | ) | 51,872 | 71,399 | ||||||||||||
|
Purchase
of BOLI
|
— | — | — | — | (50,000 | ) | ||||||||||||||
|
Net
deferred fee activity
|
(925 | ) | (35 | ) | 2,101 | 195 | 574 | |||||||||||||
|
Purchases
of premises and equipment
|
(3,473 | ) | (3,088 | ) | (13,053 | ) | (8,721 | ) | (4,625 | ) | ||||||||||
|
Proceeds
from sales of REO
|
3,124 | 2,131 | 7,669 | 5,197 | 4,929 | |||||||||||||||
|
Net
cash provided by (used in) investing activities
|
116,629 | (18,449 | ) | (440,552 | ) | (472,582 | ) | 96,666 | ||||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Dividends
paid
|
(16,670 | ) | (12,737 | ) | (44,069 | ) | (41,426 | ) | (43,000 | ) | ||||||||||
|
Dividends
in excess of debt service cost of ESOP, net
|
— | — | — | — | 670 | |||||||||||||||
|
Deposits,
net of withdrawals
|
(1,357 | ) | (56,579 | ) | 304,726 | 1,101 | 22,351 | |||||||||||||
|
Proceeds
from advances/line of credit from FHLB
|
— | 312,682 | 1,561,612 | 834,700 | 206,901 | |||||||||||||||
|
Repayments
on advances/line of credit from FHLB
|
— | (162,682 | ) | (1,581,612 | ) | (1,134,700 | ) | (756,901 | ) | |||||||||||
|
Deferred
FHLB prepayment penalty
|
— | — | (38,388 | ) | — | — | ||||||||||||||
|
Proceeds
from repurchase agreements
|
— | — | — | 660,000 | — | |||||||||||||||
|
Change
in advance payments by borrowers for taxes and insurance
|
(34,028 | ) | (33,883 | ) | 2,154 | 2,104 | 2,756 | |||||||||||||
|
Acquisitions
of treasury stock
|
(2,292 | ) | (859 | ) | (2,426 | ) | (7,307 | ) | (3,198 | ) | ||||||||||
|
Stock
options exercised and excess tax benefits from stock
options
|
— | 1,377 | 1,853 | 737 | 6,590 | |||||||||||||||
|
Net
cash (used in) provided by financing activities
|
(54,347 | ) | 47,319 | 203,850 | 315,209 | (563,831 | ) | |||||||||||||
|
(Continued)
|
||||||||||||||||||||
F-12
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
For
the Quarter ended
|
For
the Year Ended
|
||||||||||||||||||
|
December
31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
63,974 | 55,996 | (45,984 | ) | (75,653 | ) | (20,451 | ) | ||||||||||||
|
CASH
AND CASH EQUIVALENTS:
|
||||||||||||||||||||
|
Beginning
of Period
|
41,154 | 87,138 | 87,138 | 162,791 | 183,242 | |||||||||||||||
|
End
of Period
|
$ | 105,128 | $ | 143,134 | $ | 41,154 | $ | 87,138 | $ | 162,791 | ||||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||||||||||
|
Income
tax payments, net of refunds
|
$ | 682 | $ | 3,417 | $ | 35,334 | $ | 8,050 | $ | 711 | ||||||||||
|
|
||||||||||||||||||||
|
Interest
payments, net of interest credited to deposits of $23,725,
$29,589 $102,245, $134,545 and $143,383,
respectively
|
$ | 30,004 | $ | 36,542 | $ | 133,892 | $ | 140,774 | $ | 163,158 | ||||||||||
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||||||||||||||
|
Loans
transferred to REO
|
$ | 2,196 | $ | 1,846 | $ | 10,730 | $ | 8,159 | $ | 4,008 | ||||||||||
|
Market
value change related to fair value hedge:
|
||||||||||||||||||||
|
Interest
rate swaps hedging FHLB advances
|
$ | — | $ | — | $ | — | $ | (13,817 | ) | $ | (13,478 | ) | ||||||||
|
Transfer
of loans receivable to LHFS, net
|
$ | — | $ | — | $ | 94,672 | $ | — | $ | — | ||||||||||
|
Swap
of loans for trading securities
|
$ | 193,889 | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
(Concluded)
|
||||||||||||||||||||
See notes
to consolidated financial statements.
F-13
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS QUARTER ENDED DECEMBER 31, 2009
(UNAUDITED)
AND
YEARS ENDED SEPTEMBER 30, 2009, 2008, and
2007
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description
of Business – Capitol Federal Financial (the “Company”) provides a full
range of retail banking services through its wholly-owned subsidiary Capitol
Federal Savings Bank (the “Bank”) which has 34 traditional and 10 in-store
banking offices serving primarily the metropolitan areas of Topeka, Wichita,
Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the
metropolitan area of greater Kansas City. The Bank emphasizes mortgage lending,
primarily originating and purchasing one- to four-family mortgage loans and
providing personal retail financial services. The Bank is subject to
competition from other financial institutions and other companies that provide
financial services. The Company is subject to the regulations of the Office of
Thrift Supervision (the “OTS”) and the Federal Deposit Insurance Corporation
(the “FDIC”) and undergoes periodic examinations by those regulatory
authorities.
The Bank
has an expense sharing agreement with the Company that covers the reimbursement
of certain expenses that are allocable to the Company. These expenses
include compensation, rent for leased office space and general overhead
expenses.
The
Company’s ability to pay dividends is dependent, in part, upon its ability to
obtain capital distributions from the Bank. The future dividend policy of the
Company is subject to the discretion of the board of directors and will depend
upon a number of factors, including the Company’s financial condition and
results of operations, Bank’s regulatory capital requirements, regulatory
limitations on the Bank’s ability to make capital distributions to the Company,
the amount of cash at the holding company and the continued waiver of dividends
by Capitol Federal Savings Bank MHC (the “MHC”). Holders of common
stock will be entitled to receive dividends as and when declared by the board of
directors of the Company out of funds legally available for that
purpose.
Basis
of Presentation - The Company is organized as a mid-tier holding company
chartered as a federal savings and loan holding company. The Company
owns 100% of the stock of the Bank. The Company is majority owned by
MHC, a federally chartered mutual holding company. At December 31,
2009 (unaudited), MHC owned approximately 70% of the stock of the
Company. The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, the Bank. The Bank has a wholly
owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a
wholly owned subsidiary, Capitol Federal Mortgage Reinsurance
Company. All intercompany accounts and transactions have been
eliminated.
These
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”), and require 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 allowance for loan losses and other-than-temporary
impairments in the fair value of securities. Actual results could differ from
those estimates. Interim results are not necessarily indicative of
results for a full year. In preparing these financial statements,
management has evaluated events occurring subsequent to December 31, 2009
(unaudited), for potential recognition and disclosure. There have
been no material events or transactions which would require adjustments and/or
disclosures to the consolidated financial statements at December 31, 2009
(unaudited).
Cash
and Cash Equivalents - Cash and cash equivalents include cash on hand and
amounts due from banks. The Bank has acknowledged informal agreements
with other banks where it maintains deposits. Under these agreements, service
fees charged to the Bank are waived provided certain average compensating
balances are maintained throughout each month. Federal Reserve Board
(“FRB”) regulations require federally chartered savings banks to maintain cash
reserves against their transaction accounts. Required reserves must
be maintained in the form of vault cash, an account at a Federal Reserve Bank,
or a pass-through account as defined by the FRB. The Bank is in
compliance with the FRB requirements. Effective October 9, 2008, as
part of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the
Federal Reserve Bank may pay interest on balances held at the Federal Reserve
Bank to satisfy reserve requirements and on balances held in excess of required
reserve balances and clearing balances. For the quarter ended
December 31, 2009 (unaudited) and the years ended September 30, 2009 and 2008,
the average balance of required reserves at the Federal Reserve Bank was $12.0
million, $11.6 million and $25.0 million, respectively.
F-14
Securities
- Securities include mortgage-backed and agency securities issued primarily by
United States Government Sponsored Enterprises (“GSE”), including Federal
National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation
(“FHLMC”) and FHLB, United States Government agencies, including Government
National Mortgage Association (“GNMA”), and municipal
bonds. Securities are classified as HTM, AFS, or trading based on
management’s intention on the date of purchase. Generally,
classifications are made in response to liquidity needs, asset/liability
management strategies, and the market interest rate environment at the time of
purchase.
Securities
that management has the intent and ability to hold to maturity are classified as
HTM and reported at amortized cost. Such securities are adjusted for
amortization of premiums and discounts which are recognized as adjustments to
interest income over the life of the securities using the level-yield
method.
Securities
that management may sell if necessary for liquidity or asset management purposes
are classified as AFS and reported at fair value, with unrealized gains and
losses reported as a component of accumulated other comprehensive income (loss),
within stockholders’ equity net of deferred income taxes. Premiums
and discounts are recognized as adjustments to interest income over the life of
the securities using the level-yield method. Gains or losses on the
disposition of AFS securities are recognized using the specific identification
method. Estimated fair values of AFS securities are based on one of three
methods: 1) quoted market prices where available, 2) quoted market
prices for similar instruments if quoted market prices are not available, and 3)
unobservable data that represents the Bank’s assumptions about items that market
participants would consider in determining fair value where no market data is
available. See additional discussion of fair value of AFS securities
in Note 15.
Securities
that are purchased and held principally for resale in the near future are
classified as trading securities and are reported at fair value, with unrealized
gains and losses included in other income in the consolidated statements of
income. During the quarter ended, December 31, 2009 (unaudited), the
Bank held $193.9 million of trading securities for a limited
time. The securities were received in conjunction with swapping
originated fixed-rate mortgage loans with the Federal Home Loan Mortgage
Corporation (“FHLMC”). For the years ended September 30, 2009 and
2008 we did not maintain a trading portfolio.
Management
monitors the securities portfolio for impairment on an ongoing basis and
performs a formal review quarterly. The process involves monitoring market
events and other items that could impact issuers. The evaluation
includes, but is not limited to, such factors as: the nature of the
investment, the length of time the security has had a fair value less than the
amortized cost basis, the cause(s) and severity of the loss, expectation of an
anticipated recovery period, recent events specific to the issuer or industry
including the issuer’s financial condition and current ability to make future
payments in a timely manner, external credit ratings and recent downgrades in
such ratings, management’s intent to sell and whether it is more likely than not
management would be required to sell prior to recovery for debt securities.
Management determines whether other-than-temporary losses should be recognized
for impaired securities by assessing all known facts and circumstances
surrounding the securities. If management intends to sell an impaired
security or if it is more likely than not that management will be required to
sell an impaired security before recovery of its amortized cost basis, an
other-than-temporary impairment (“OTTI”) has occurred and the difference between
amortized cost and fair value will be recognized as a loss in
earnings. Such losses would be included in other income in the
consolidated statements of income.
Loans
Receivable - Loans receivable that management
has the intent and ability to hold for the foreseeable future are carried
at the amount of unpaid principal, net of allowance for loan losses, undisbursed
loan funds, unamortized premiums and discounts, and deferred loan origination
fees and costs. Net loan origination fees and costs and premiums and
discounts are amortized as yield adjustments to interest income using the
level-yield method, adjusted for the estimated prepayment speeds of the related
loans when applicable. Interest on loans is credited to income as
earned and accrued only if deemed collectible.
Existing
loan customers, whose loans have not been sold to third parties and who have
been current on their contractual loan payments for the previous 12 months, have
the opportunity, for a fee, to modify their original loan terms to terms
currently offered for fixed-rate products with an equal or reduced period to
maturity than the current remaining period of their existing
loan. The modified terms of these loans are similar to the terms
offered to new customers. The fee assessed for modifying the mortgage
loan is deferred and amortized over the life of the modified loan using the
level-yield method and is reflected as an adjustment to interest
income. Each modification is examined on a loan-by-loan basis and if
the modification of terms represents a more than minor change to the loan, then
pre-modification deferred fees or costs associated with the mortgage loan are
recognized in interest income at the time of the modification. If the
modification of terms does not represent a more than minor change to the loan,
then the pre-modification deferred fees or costs continue to be
deferred.
F-15
A loan is
considered delinquent when payment has not been received within 30 days of
its contractual due date. The accrual of income on loans is generally
discontinued when interest or principal payments are 90 days in arrears or
when the timely collection of such income is doubtful. Loans on which
the accrual of income has been discontinued are designated as non-accrual loans
and outstanding interest previously credited beyond 90 days is
reversed. A non-accrual loan is returned to accrual status when
factors indicating doubtful collection no longer exist.
A
condition in which the Bank grants a concession to a borrower due to financial
difficulties that it would not otherwise consider is a troubled debt
restructuring. The majority of the Bank’s troubled debt
restructurings involve a modification in loan terms such as a temporary
reduction in the payment amount to require only interest and escrow (if
required) and extending the maturity date of the loan.
A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due, including
principal and interest, according to the contractual terms of the loan
agreement. Interest income on impaired loans is recognized in the
period collected unless the ultimate collection of principal is considered
doubtful. Management considers all non-accrual loans and troubled
debt restructurings that have not been performing under the new terms for 12
consecutive months to be impaired loans.
Allowance
for Loan Losses - The
allowance for loan losses represents management’s best estimate of the amount of
known and inherent losses in the loan portfolio as of the balance sheet
date. Management’s methodology for assessing the appropriateness of
the allowance for loan losses consists of a formula analysis for general
valuation allowances and specific valuations for identified problem loans and
portfolio segments. Management considers quantitative and qualitative factors
when determining the appropriateness of the allowance for loan
losses. Such factors include changes in the Bank’s underwriting
standards, credit quality trends, trends in collateral values, loan volumes and
concentrations, historical charge-offs, results of foreclosed property
transactions, changes in interest rates and the current status and trends of
local and national economies and housing markets. Management
maintains the allowance for loan losses through provisions for loan losses that
are charged to income.
The Bank’s primary lending
emphasis is the origination and purchase of one- to four-family first mortgage
loans on residential properties and, to a lesser extent, second mortgage loans
on one- to four-family residential properties resulting in a loan concentration
in residential first mortgage loans. As a result of the Bank’s
lending practices, the Bank also has a concentration of loans secured by real
property located in Kansas and Missouri. Based on the composition of
the loan portfolio, management believes the primary credit risks inherent in the
loan portfolio are increases in interest rates as applicable to adjustable-rate
loans, a decline in the economy, an increase in unemployment and a decline in
real estate market values. Any one or a combination of these events
may adversely affect the credit quality of the loan portfolio resulting in
increased
delinquencies, charge-offs
and future loan loss provisions.
Each
quarter, the loan portfolio is segregated into categories in the formula
analysis based on certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.), interest payments (fixed-rate,
adjustable-rate), loan source (originated or purchased), loan-to-value ratios,
borrower’s credit scores and payment status (i.e., current or number of days
delinquent). Consumer loans, such as second mortgages and home
equity lines of credit, with the same underlying collateral as a one- to
four-family loan are combined with the one- to four-family loan in the formula
analysis to calculate a combined loan-to-value ratio. Loss
factors are assigned to each category in the formula analysis based on
management’s assessment of the potential risk inherent in each
category. The greater the risks associated with a particular
category, the higher the loss factor. These factors are periodically
reviewed by management for appropriateness giving consideration to historical
loss experience, delinquency and non-performing loan trends, the results of
foreclosed property transactions, and the status of the local and national
economies and housing markets, in order to ascertain that the loss factors cover
probable and estimable losses inherent in the loan
portfolio. Impaired loans are not included in the formula
analysis.
Specific
valuation allowances are established in connection with individual loan reviews
of specifically identified problem loans and impaired
loans. Evaluations of loans for which full collectability is not
reasonably assured include evaluation of the estimated fair value of the
underlying collateral based on current appraisals, real estate broker values or
list prices. Additionally, trends and composition of similar
non-performing loans, results of foreclosed property transactions and the
current status and trends in economic and market conditions are also
considered. Specific valuation allowances are established if the
estimated fair value, less estimated selling costs, is less than the current
loan balance.
F-16
Loans
with an outstanding balance of $1.5 million or more are reviewed annually if
secured by property in one of the following categories: multi-family
(five or more units) property, unimproved land, other improved commercial
property, acquisition and development of land projects, developed building lots,
office building, single-use building, or retail building. Specific
valuation allowances are established if the individual loan review determines a
quantifiable impairment.
Assessing
the adequacy of the allowance for loan losses is inherently
subjective. Actual results could differ from estimates as a result of
changes in economic or market conditions. Changes in estimates could
result in a material change in the allowance for loan losses. In the
opinion of management, the allowance for loan losses, when taken as a whole, is
adequate to absorb estimated losses inherent in the loan
portfolio. However, future adjustments may be necessary if portfolio
performance or economic or market conditions differ substantially from the
conditions that existed at the time of the initial determinations.
Capital
Stock of Federal Home Loan Bank – As a member of the FHLB Topeka, the
Bank is required to acquire and hold shares of FHLB stock. The Bank’s
holding requirement varies based on the Bank’s activities, primarily the Bank’s
outstanding advances, with the FHLB. FHLB stock is carried at
cost. Management conducts a periodic review and evaluation of the
Bank’s investment in FHLB stock to determine if any impairment
exists. Dividends received on FHLB stock are reflected as interest
and dividend income in the consolidated statements of
income.
Premises
and Equipment - Land is carried at cost. Buildings, leasehold
improvements and furniture, fixtures and equipment are carried at cost less
accumulated depreciation and leasehold amortization. Buildings,
furniture, fixtures and equipment are depreciated over their estimated useful
lives using the straight-line or accelerated method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the term of the respective leases. The costs for major improvements
and renovations are capitalized, while maintenance, repairs and minor
improvements are charged to operating expenses as incurred. Gains and
losses on dispositions are recorded as other income or other expense as
incurred.
Real
Estate Owned - REO represents foreclosed assets held for sale and is
reported at the lower of cost or estimated fair value less estimated selling
costs (“realizable value.”) At acquisition, write downs to realizable
value are charged to the allowance for loan losses. After
acquisition, any additional write downs are charged to operations in the period
they are identified and are recorded in other expenses on the consolidated
statements of income. 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. Gains and losses on
the sale of REO are recognized upon disposition of the property and are recorded
in other expenses in the consolidated statements of income.
Income
Taxes - The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred income tax assets and
liabilities are recognized for the tax consequences of temporary differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. The provision for deferred income taxes
represents the change in deferred income tax assets and liabilities excluding
the tax effects of the change in net unrealized gain (loss) on AFS securities
and changes in the market value of vested RRP shares.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Certain tax benefits attributable to
stock options and RRP shares are credited to additional paid-in
capital. The Company will record a valuation allowance to
reduce its deferred income tax assets when there is uncertainty regarding the
ability to realize their benefit.
The
Company adopted the section of Accounting Standards Codification 740
Income
Taxes related
to the accounting for uncertainty in income taxes on October 1,
2007. ASC 740 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken, or expected to be taken, in a tax return. Accruals of interest
and penalties related to unrecognized tax benefits are recognized in income tax
expense.
Employee
Stock Ownership Plan - The funds
borrowed by the ESOP from the Company to purchase the Company’s common stock are
being repaid from the Bank’s contributions and dividends paid on unallocated
ESOP shares. The shares pledged as collateral are reported as a
reduction of stockholders’ equity at cost. As ESOP shares are
committed to be released from collateral each quarter, the Company records
compensation expense based on the average market price of the Company’s stock
during the quarter. Additionally, the shares become outstanding for
earnings per share computations once they are committed to be
released.
F-17
Stock-based
Compensation - At
December 31, 2009 (unaudited), the Company had a Stock Option and Incentive Plan
(the “Option Plan”) and an RRP which are considered share-based payment
awards. Compensation expense is recognized over the service period of
each share-based payment award. The Company applies a
fair-value-based measurement method in accounting for share-based payment
transactions with employees, except for equity instruments held by employee
share ownership plans. On
October 1, 2005, the Company adopted the modified prospective method in which
compensation cost is recognized over the service period for all awards granted
subsequent to the Company’s adoption of the modified prospective method, as well
as, for the unvested portion of shares outstanding on the adoption
date.
Borrowed
Funds - The Bank
enters into sales of securities under agreements to repurchase with selected
brokers (“repurchase agreements”). These agreements are recorded as
financing transactions as the Bank maintains effective control over the
transferred securities. The dollar amount of the securities underlying the
agreements continues to be carried in the Bank’s securities portfolio. The
obligations to repurchase the securities are reported as a liability in the
consolidated balance sheet. The securities underlying the agreements are
delivered to the party with whom each transaction is executed. They agree to
resell to the Bank the same securities at the maturity of the agreement. The
Bank retains the right to substitute similar or like securities throughout the
terms of the agreements. The collateral is subject to valuation at
current market levels and the Bank may ask for the return of excess collateral
or be required to post additional collateral due to market value
changes.
The Bank
has also obtained advances from FHLB. FHLB advances are secured by
certain qualifying mortgage loans pursuant to a blanket collateral agreement
with FHLB and all of the capital stock of FHLB owned by the Bank. Per
the FHLB lending guidelines, total FHLB borrowings cannot exceed 40% of total
Bank assets without pre-approval from the FHLB president.
The Bank
is authorized to borrow from the Federal Reserve Bank’s “discount
window.” The Bank had no outstanding Federal Reserve Bank borrowings
at December 31, 2009 (unaudited), September 30, 2009 or 2008.
Derivative
Instruments - The Bank uses derivative instruments as a means of managing
interest rate risk. Before entering into a derivative instrument,
management formally documents its risk management objectives, strategy and the
relationship between the hedging instruments and the hedged
items. For those derivative instruments that are designated and
qualify as hedging instruments, management designates the hedging instrument as
either a fair value or cash flow hedge, based upon the exposure being
hedged. Both at the inception of the hedge and on an ongoing basis,
management evaluates the effectiveness of its hedging relationships in
accordance with its risk management policy.
Interest
rate swaps are derivative instruments the Bank has used as part of its interest
rate risk management strategy. Interest rate swaps are contractual
agreements between two parties to exchange interest payments, based on a common
notional amount and maturity date. The interest rate swaps in effect
for a portion of the year during fiscal year 2008 were designated and qualified
as fair value hedges. The Bank assumed no ineffectiveness in the
hedging relationship as all of the terms in the interest rate swap agreements
matched the terms of the FHLB advances. The Bank accounted for the
interest rate swap agreements using the shortcut method, whereby any gain or
loss in the fair value of the interest rate swaps was offset by the gain or loss
on the hedged FHLB advances.
The Bank
may enter into fixed commitments to originate and sell mortgage loans held for
sale when the market conditions are appropriate or for risk management purposes,
such as instances where holding the loans would increase interest rate or credit
risk to levels above which management believes are appropriate for the
Bank. Pursuant to clarifying guidance, such commitments are
considered derivative instruments. All related derivatives are
reported as either assets or liabilities on the balance sheet and are measured
at fair value. As of December 31, 2009 (unaudited), September 30,
2009 and 2008, there were no significant loan-related commitments that met the
definition of derivatives or commitments to sell mortgage loans.
Comprehensive
Income - Comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income includes changes in unrealized
gains and losses on securities AFS, net of tax. Comprehensive income
is presented in the consolidated statements of changes in stockholders’
equity.
Segment
Information - As a community-oriented financial institution,
substantially all of the Bank’s operations involve the delivery of loan and
deposit products to customers. Management makes operating decisions and assesses
performance based on an ongoing review of these community banking operations,
which constitute the Company’s only operating segment for financial reporting
purposes.
F-18
Earnings
Per Share (“EPS”) - Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock (such as stock options)
were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted average
number of shares outstanding for the period using the treasury stock
method. Shares issued and shares reacquired during any period are
weighted for the portion of the period that they were
outstanding.
In
computing both basic and diluted EPS, the weighted average number of common
shares outstanding includes the ESOP shares previously allocated to participants
and shares committed to be released for allocation to participants and the RRP
shares which have vested or have been allocated to participants. ESOP and RRP
shares that have not been committed to be released or have not vested are
excluded from the computation of basic and diluted EPS.
Public
Shares - Shares
eligible to receive dividends because of the waiver of dividends by
MHC. Public shares represent voting shares less unvested ESOP shares
and MHC shares. The following table shows the number of shares
eligible to receive dividends (“public shares”) because of the waiver of
dividends by MHC at December 31, 2009 (unaudited).
|
Total
voting shares outstanding at December 31, 2009
|
74,023,577 | ||||
|
Unvested
shares in ESOP
|
(806,556 | ) | |||
|
Shares
held by MHC
|
(52,192,817 | ) | |||
|
Total
public shares at December 31, 2009
|
21,024,204 |
Recent
Accounting Pronouncements - In
June 2009, the Financial Accounting Standards Board (“FASB”)
issued ASC 105, Generally
Accepted Accounting Principles. This
standard establishes the FASB Accounting Standards Codification as the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. This standard
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009, which for the Company was September 30,
2009. The adoption of the standard as of September 30, 2009 did not
have a material impact on the Company’s consolidated financial position or
results of operations as it did not alter existing U.S. GAAP. All
references to specific U.S. GAAP contained within the consolidated financial
statements, notes thereto and information contained in the Company’s filings
with the SEC have been changed.
In
September 2006, the FASB issued ASC 820, Fair
Value Measurements and Disclosures. This standard defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This standard establishes a fair value hierarchy
for the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. No
additional fair value measurements are required under this standard. The Company
adopted this standard effective October 1, 2008. Since the provisions of
the standard are disclosure related, the Company’s adoption of this standard did
not have an impact on its financial condition or results of
operations.
In
February 2007, FASB issued ASC 825, Financial
Instruments. This standard permits an entity to measure
certain financial assets and financial liabilities at fair value. The objective
is to improve financial reporting by allowing entities to mitigate volatility in
reported earnings caused by the measurement of related assets and liabilities
using different attributes, without having to apply complex hedge accounting
provisions. If elected, the standard is effective for fiscal years
beginning after November 15, 2007, which for the Company was October 1,
2008. Upon adoption of this standard, the Company elected not to use
the fair value option for any financial asset or liability.
In
December 2007, the FASB issued ASC 805, Business
Combinations and ASC 810, Consolidation. The
standards change the way companies account for business combinations and
noncontrolling interests (minority interests in current GAAP.) These
standards should both be applied prospectively for fiscal years beginning on or
after December 15, 2008, which for the Company was October 1,
2009. However, ASC 810 requires entities to apply the presentation
and disclosure requirements retrospectively to comparative financial statements,
if presented. Both standards prohibit early adoption. The
Company’s adoption of these standards did not have a material impact on its
financial condition or results of operations.
F-19
In March
2008, the FASB issued ASC 815, Derivatives
and Hedging. The standard requires an entity with derivatives
to describe how and why it uses derivative instruments, how derivative
instruments and related hedged items are accounted for, and how derivative
instruments and related hedged items affect the entity’s financial position,
financial performance, and cash flows. This standard was effective
for the Company beginning January 1, 2009. The Company’s adoption of
this standard did not have a material impact on its financial condition or
results of operations.
Effective
October 1, 2009, the Company adopted new authoritative accounting guidance
under ASC 260, Earnings
Per Share, which provides that unvested share-based payment awards
containing nonforfeitable rights to dividends or dividend equivalents are
participating securities and should be included in the computation of earnings
per share pursuant to the two-class method. The Company determined that its
unvested RRP awards are participating securities. This new guidance
requires retrospective adjustment to all prior-period EPS data
presented. The Company has participating securities related to the
Company’s stock incentive plans in the form of unvested restricted common
shares. However, these participating securities do not have an impact
on the Company’s EPS.
In
January 2009, the FASB issued ASC 310, Loans
and Debt Securities. This standard eliminates the requirement
that a security holder’s best estimate of cash flows be based upon those that “a
market participant” would use. Instead, an OTTI should be recognized
as a realized loss through earnings when it is probable there has been an
adverse change in the security holder’s estimated cash flows from previous
projections. This treatment is consistent with the impairment model
in ASC 320 Investments
– Debt and Equity Securities. This standard was
effective for the Company beginning in the period ended December 31,
2008. The Company’s adoption of this standard did not have a material
impact on its financial condition or results of operations.
In April
2009, the FASB issued ASC 820, Fair
Value Measurements and Disclosures. This standard provides additional
guidance for estimating fair value in accordance with ASC 820, when the
transaction volume and level of market activity for the asset or liability have
significantly decreased. This standard also includes guidance on identifying
circumstances that indicate a transaction is not orderly. The standard
emphasizes that the notation of exit price in an orderly transaction (that is,
not a forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions remains
unchanged. The standard was effective for the Company beginning with
the quarter ended June 30, 2009. The Company’s adoption of the
standard did not have a material impact on its financial condition or results of
operations.
In April
2009, the FASB issued ASC 320, Investments
– Debt and Equity Securities. This standard amends the OTTI guidance in
U.S. GAAP for debt securities to make it more operational and to improve the
presentation and disclosure of OTTI on debt and equity securities. An OTTI
exists for a security which has a fair value less than amortized cost if an
entity has the intent to sell the impaired security, it is more likely than not
that the entity will be required to sell the impaired security before recovery,
or if the entity does not expect to recover the entire amortized cost basis of
the impaired security. If the entity has the intent to sell the
security or it is more likely than not that it will be required to sell the
security, the entire impairment (amortized cost basis over fair value) should be
recognized in earnings as an impairment. If an entity does not intend
to sell the security and it is not more likely than not that the entity will be
required to sell the security, the credit component of the impairment should be
recognized in earnings, and the non-credit component should be recognized in
other comprehensive income. The standard does not amend existing
recognition and measurement guidance related to OTTI of equity
securities. The standard expands and increases the frequency of
existing disclosures about OTTI for debt and equity securities and requires new
disclosures to help users of financial statements understand the significant
inputs used in determining credit losses, as well as a rollforward of that
amount each period. The standard was effective for the Company
beginning with the quarter ended June 30, 2009. The Company’s
adoption of this standard did not have a material impact on its financial
condition or results of operations.
In April
2009, the FASB issued ASC 825, Financial
Instruments. This standard requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This standard also amends ASC 270,
Interim
Reporting,
to require those disclosures in summarized financial information at interim
reporting periods. The standard requires an entity to disclose in the body or in
the accompanying footnotes of its interim financial statements and its annual
financial statements the fair value of all financial instruments, whether
recognized or not recognized in the consolidated balance sheet. The
standard also requires entities to disclose the methods and significant
assumptions used to estimate the fair value of financial instruments, and to
disclose significant changes in methods or assumptions used to estimate fair
values. The standard was effective for the Company beginning with the
quarter ended June 30, 2009. Since the provisions of the standard are
disclosure related, the Company’s adoption of this standard did not have an
impact on its financial condition or results of operations. See
related disclosure in Note 15.
F-20
In May 2009, the FASB
issued ASC 855, Subsequent
Events. This
standard is intended to assist management in assessing and disclosing subsequent
events by establishing general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. Financial
statements are considered to be available to be issued when they are complete in
a form and format that complies with U.S. GAAP and all necessary approvals for
issuance, such as from management, the board of directors, and/or significant
shareholders, have been obtained. The date through which an entity
has evaluated subsequent events and the basis for that date should also be
disclosed. Management must perform its assessment of subsequent
events for both interim and annual financial reporting periods. The
standard was effective for the Company beginning with the quarter ended June 30,
2009. The Company’s adoption of the standard did not have a material
impact on its financial condition or results of
operations.
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
166, Accounting
for Transfers of Financial Assets an Amendment of FASB Statement No.
140. SFAS No. 166 amends ASC 860, Transfers
of Servicing Assets. The objective of SFAS No. 166 is to
improve the relevance, representational faithfulness, and comparability of the
information provided in the financial statements related to the transfer of
financial assets; the effects of a transfer on the company’s financial position,
financial performance and cash flows; and a transferor’s continuing involvement
in transferred financial assets. SFAS No. 166 is effective for
financial asset transfers occurring after the beginning of an entity’s first
fiscal year that begins after November 15, 2009, which for the Company is
October 1, 2010. Early adoption is prohibited. The Company
has not yet completed its assessment of the impact of SFAS No. 166.
In June
2009, the FASB issued SFAS No. 167, Amendments
to FASB Interpretation No. 46(R). SFAS No. 167 has not been
included in the ASC and does not change many of the key principles for
determining whether an entity is a variable interest entity consistent with the
ASC on “Consolidation.” SFAS No. 167 does amend many important provisions of the
existing guidance on “Consolidation.” SFAS No. 167 is effective as of
the beginning of the first fiscal year that begins after November 15, 2009,
which for the Company is October 1, 2010. Early adoption is
prohibited. The Company has not yet completed its assessment of the
impact of SFAS No. 167.
F-21
The
Company accounts for the 3,024,574 shares acquired by its ESOP and the shares
awarded pursuant to its RRP in accordance with ASC 260, which requires that our
unvested RRP awards that contain nonforfeitable rights to dividends be treated
as participating securities in the computation of EPS pursuant to the two-class
method. The two-class method is an earnings allocation that determines EPS for
each class of common stock and participating security. Shares acquired by the
ESOP are not considered in the basic average shares outstanding until the shares
are committed for allocation or vested to an employee’s individual
account. The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations (Dollars
in thousands).
|
For
the Quarter ended
|
For
the Year Ended
|
|||||||||||||||||||
|
December
31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Net income(1)
|
$ | 20,980 | $ | 15,852 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
|
Average
common shares outstanding
|
73,266,128 | 73,062,337 | 73,067,880 | 72,862,705 | 72,772,859 | |||||||||||||||
|
Average
committed ESOP shares outstanding
|
548 | 548 | 76,236 | 76,166 | 76,236 | |||||||||||||||
|
Total
basic average common shares outstanding
|
73,266,676 | 73,062,885 | 73,144,116 | 72,938,871 | 72,849,095 | |||||||||||||||
|
Effect
of dilutive RRP
|
5,396 | 8,716 | 5,378 | 5,460 | 5,902 | |||||||||||||||
|
Effect
of dilutive stock options
|
5,833 | 90,443 | 58,607 | 68,335 | 115,391 | |||||||||||||||
|
Total
diluted average common shares outstanding
|
73,277,905 | 73,162,044 | 73,208,101 | 73,012,666 | 72,970,388 | |||||||||||||||
|
Net
EPS:
|
||||||||||||||||||||
|
Basic
|
$ | 0.29 | $ | 0.22 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Diluted
|
$ | 0.29 | $ | 0.22 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Antidilutive
stock options and RRP, excluded
|
||||||||||||||||||||
|
from
the diluted average common shares
|
||||||||||||||||||||
|
outstanding
calculation
|
243,350 | 25,500 | 74,050 | 31,100 | 31,500 | |||||||||||||||
|
(1)
|
Net
income available to participating securities (unvested RRP shares) was
inconsequential for the quarter ended December 31, 2009 and 2008
(unaudited) and for the years ended September 30, 2009, 2008 and
2007.
|
F-22
|
3.
|
SECURITIES
|
The
following tables reflect the amortized cost, estimated fair value, and gross
unrealized gains and losses of AFS and HTM securities at December 31, 2009
(unaudited), September 30, 2009 and 2008. The majority of the
securities portfolio is composed of securities issued by U.S.
government-sponsored enterprises.
|
December
31, 2009 (unaudited)
|
|||||||||||||||||
|
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
AFS:
|
|||||||||||||||||
|
U.S.
government-sponsored enterprises
|
$ | 228,075 | $ | 766 | $ | 1 | $ | 228,840 | |||||||||
|
Municipal
bonds
|
2,663 | 103 | 13 | 2,753 | |||||||||||||
|
Trust
preferred securities
|
3,762 | — | 1,354 | 2,408 | |||||||||||||
|
MBS
|
1,254,958 | 50,339 | 201 | 1,305,096 | |||||||||||||
| 1,489,458 | 51,208 | 1,569 | 1,539,097 | ||||||||||||||
|
HTM:
|
|||||||||||||||||
|
U.S.
government-sponsored enterprises
|
348,623 | 245 | 628 | 348,240 | |||||||||||||
|
Municipal
bonds
|
69,319 | 1,893 | 100 | 71,112 | |||||||||||||
|
MBS
|
572,873 | 21,628 | 136 | 594,365 | |||||||||||||
| 990,815 | 23,766 | 864 | 1,013,717 | ||||||||||||||
| $ | 2,480,273 | $ | 74,974 | $ | 2,433 | $ | 2,552,814 | ||||||||||
|
September
30, 2009
|
|||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||
|
|
(Dollars
in thousands)
|
||||||||||||||||
|
AFS:
|
|||||||||||||||||
|
U.S.
government-sponsored enterprises
|
$ | 228,743 | $ | 1,132 | $ | — | $ | 229,875 | |||||||||
|
Municipal
bonds
|
2,668 | 131 | — | 2,799 | |||||||||||||
|
Trust
preferred securities
|
3,774 | — | 1,664 | 2,110 | |||||||||||||
|
MBS
|
1,334,357 | 55,552 | 698 | 1,389,211 | |||||||||||||
| 1,569,542 | 56,815 | 2,362 | 1,623,995 | ||||||||||||||
|
HTM:
|
|||||||||||||||||
|
U.S.
government-sponsored enterprises
|
175,394 | 535 | — | 175,929 | |||||||||||||
|
Municipal
bonds
|
70,526 | 2,514 | 40 | 73,000 | |||||||||||||
|
MBS
|
603,256 | 24,645 | 72 | 627,829 | |||||||||||||
| 849,176 | 27,694 | 112 | 876,758 | ||||||||||||||
| $ | 2,418,718 | $ | 84,509 | $ | 2,474 | $ | 2,500,753 | ||||||||||
F-23
|
September
30, 2008
|
|||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
AFS:
|
|||||||||||||||||
|
U.S.
government-sponsored enterprises
|
$ | 45,155 | $ | — | $ | 967 | $ | 44,188 | |||||||||
|
Municipal
bonds
|
2,686 | 61 | 4 | 2,743 | |||||||||||||
|
Trust
preferred securities
|
3,859 | — | 1,204 | 2,655 | |||||||||||||
|
MBS
|
1,491,536 | 3,940 | 11,421 | 1,484,055 | |||||||||||||
| 1,543,236 | 4,001 | 13,596 | 1,533,641 | ||||||||||||||
|
HTM:
|
|||||||||||||||||
|
U.S.
government-sponsored enterprises
|
37,397 | 19 | 647 | 36,769 | |||||||||||||
|
Municipal
bonds
|
55,376 | 408 | 342 | 55,442 | |||||||||||||
|
MBS
|
750,284 | 2,105 | 8,625 | 743,764 | |||||||||||||
| 843,057 | 2,532 | 9,614 | 835,975 | ||||||||||||||
| $ | 2,386,293 | $ | 6,533 | $ | 23,210 | $ | 2,369,616 | ||||||||||
The
following table presents the taxable and non-taxable components of interest
income on investment securities for the quarters ended December 31, 2009 and
2008 (unaudited) and for the fiscal years ended September 30, 2009, 2008 and
2007.
|
For
the Quarter ended
|
For
the Year Ended
|
||||||||||||||||||||
|
December
31 (unaudited),
|
September
30,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Taxable
|
$ | 2,024 | $ | 841 | $ | 3,526 | $ | 8,313 | $ | 30,444 | |||||||||||
|
Non-taxable
|
535 | 485 | 2,007 | 1,604 | 405 | ||||||||||||||||
| $ | 2,559 | $ | 1,326 | $ | 5,533 | $ | 9,917 | $ | 30,849 | ||||||||||||
The
following tables summarize the estimated fair value and gross unrealized losses
of those securities on which an unrealized loss at December 31, 2009
(unaudited), September 30, 2009 and 2008 was reported and the continuous
unrealized loss position for the twelve months prior to December 31, 2009
(unaudited), September 30, 2009 and 2008 or for a shorter period of time, as
applicable.
F-24
|
December
31, 2009 (unaudited)
|
|||||||||||||||||||||||||
|
Less
Than
|
Equal
to or Greater
|
||||||||||||||||||||||||
|
12
Months
|
Than
12 Months
|
||||||||||||||||||||||||
|
Estimated
|
Estimated
|
||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||||||
|
Count
|
Value
|
Losses
|
Count
|
Value
|
Losses
|
||||||||||||||||||||
|
AFS:
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
1 | $ | 25,025 | $ | 1 | — | $ | — | $ | — | |||||||||||||||
|
Municipal
bonds
|
1 | 412 | 13 | — | — | — | |||||||||||||||||||
|
Trust
preferred securities
|
— | — | — | 1 | 2,408 | 1,354 | |||||||||||||||||||
|
MBS
|
44 | 87,014 | 181 | 11 | 2,063 | 20 | |||||||||||||||||||
| 46 | $ | 112,451 | $ | 195 | 12 | $ | 4,471 | $ | 1,374 | ||||||||||||||||
|
HTM:
|
|||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
4 | $ | 97,495 | $ | 627 | — | $ | — | $ | — | |||||||||||||||
|
Municipal
bonds
|
8 | 3,336 | 36 | 2 | 1,316 | 65 | |||||||||||||||||||
|
MBS
|
5 | 28,943 | 135 | 1 | 54 | 1 | |||||||||||||||||||
| 17 | $ | 129,774 | $ | 798 | 3 | $ | 1,370 | $ | 66 | ||||||||||||||||
F-25
|
September
30, 2009
|
|||||||||||||||||||||||||
|
Less
Than
|
Equal
to or Greater
|
||||||||||||||||||||||||
|
12
Months
|
Than
12 Months
|
||||||||||||||||||||||||
|
Estimated
|
Estimated
|
||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||||||
|
Count
|
Value
|
Losses
|
Count
|
Value
|
Losses
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
AFS:
|
|||||||||||||||||||||||||
|
Trust
preferred securities
|
— | $ | — | $ | — | 1 | $ | 2,110 | $ | 1,664 | |||||||||||||||
|
MBS
|
16 | 57,157 | 600 | 37 | 15,804 | 98 | |||||||||||||||||||
| 16 | $ | 57,157 | $ | 600 | 38 | $ | 17,914 | $ | 1,762 | ||||||||||||||||
|
HTM:
|
|||||||||||||||||||||||||
|
Municipal
bonds
|
4 | $ | 1,930 | $ | 36 | 1 | $ | 495 | $ | 4 | |||||||||||||||
|
MBS
|
3 | 5,563 | 26 | 4 | 11,043 | 46 | |||||||||||||||||||
| 7 | $ | 7,493 | $ | 62 | 5 | $ | 11,538 | $ | 50 | ||||||||||||||||
|
September
30, 2008
|
|||||||||||||||||||||||||
|
Less
Than
|
Equal
to or Greater
|
||||||||||||||||||||||||
|
12
Months
|
Than
12 Months
|
||||||||||||||||||||||||
|
Estimated
|
Estimated
|
||||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||||||
|
Count
|
Value
|
Losses
|
Count
|
Value
|
Losses
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
AFS:
|
|||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
2 | $ | 44,189 | $ | 967 | — | $ | — | $ | — | |||||||||||||||
|
Municipal
bonds
|
2 | 491 | 4 | — | — | — | |||||||||||||||||||
|
Trust
preferred securities
|
1 | 2,655 | 1,204 | — | — | — | |||||||||||||||||||
|
MBS
|
150 | 956,968 | 10,191 | 62 | 51,515 | 1,230 | |||||||||||||||||||
| 155 | $ | 1,004,303 | $ | 12,366 | 62 | $ | 51,515 | $ | 1,230 | ||||||||||||||||
|
HTM:
|
|||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
1 | $ | 24,353 | $ | 647 | — | $ | — | $ | — | |||||||||||||||
|
Municipal
bonds
|
47 | 24,522 | 342 | — | — | — | |||||||||||||||||||
|
MBS
|
42 | 417,400 | 5,004 | 30 | 166,807 | 3,621 | |||||||||||||||||||
| 90 | $ | 466,275 | $ | 5,993 | 30 | $ | 166,807 | $ | 3,621 | ||||||||||||||||
On a
quarterly basis, management conducts a formal review of securities for the
presence of OTTI. Management assesses whether an OTTI is present when
the fair value of a security is less than its amortized cost basis at the
balance sheet date. For such securities, OTTI is considered to have
occurred if the Company intends to sell the security, if it is more likely than
not the Company will be required to sell the security before recovery of its
amortized cost basis or if the present value of expected cash flows is not
sufficient to recover the entire amortized cost.
F-26
The
unrealized losses at December 31, 2009 (unaudited), September 30, 2009 and 2008
are primarily a result of increases in market yields from the time of
purchase. In general, as market yields rise, the fair value of
securities will decrease; as market yields fall, the fair value of securities
will increase. Management generally views changes in fair value caused by
changes in interest rates as temporary; therefore, these securities have not
been classified as other-than-temporarily impaired. Additionally, the
impairment is also considered temporary because scheduled coupon payments have
been made, it is anticipated that the entire principal balance will be collected
as scheduled, and management does not intend to sell the securities and it is
not more likely than not that the Company will be required to sell the
securities before the recovery of the remaining amortized cost amount, which
could be at maturity.
The
amortized cost and estimated fair value of securities by remaining contractual
maturity without consideration for call features or pre-refunding dates are
shown below. Actual maturities of MBS may differ from contractual
maturities because borrowers have the right to prepay obligations, generally
without penalties. Maturities of MBS depend on the repayment
characteristics and experience of the underlying financial
instruments.
|
December
31, 2009 (unaudited)
|
|||||||||||||||||||||||||
|
AFS
|
HTM
|
Total
|
|||||||||||||||||||||||
|
|
Estimated
|
Estimated
|
Estimated
|
||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
||||||||||||||||||||
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
One
year or less
|
$ | 25,740 | $ | 25,999 | $ | 1,506 | $ | 1,536 | $ | 27,246 | $ | 27,535 | |||||||||||||
|
One
year through five years
|
202,918 | 203,434 | 367,861 | 368,044 | 570,779 | 571,478 | |||||||||||||||||||
|
Five
years through ten years
|
105,593 | 111,744 | 353,048 | 367,809 | 458,641 | 479,553 | |||||||||||||||||||
|
Ten
years and thereafter
|
1,155,207 | 1,197,920 | 268,400 | 276,328 | 1,423,607 | 1,474,248 | |||||||||||||||||||
| $ | 1,489,458 | $ | 1,539,097 | $ | 990,815 | $ | 1,013,717 | $ | 2,480,273 | $ | 2,552,814 | ||||||||||||||
|
September
30, 2009
|
|||||||||||||||||||||||||
|
AFS
|
HTM
|
Total
|
|||||||||||||||||||||||
|
Estimated
|
Estimated
|
Estimated
|
|||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
||||||||||||||||||||
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
One
year or less
|
$ | — | $ | — | $ | 247 | $ | 251 | $ | 247 | $ | 251 | |||||||||||||
|
One
year through five years
|
229,118 | 230,260 | 196,386 | 197,492 | 425,504 | 427,752 | |||||||||||||||||||
|
Five
years through ten years
|
97,211 | 103,487 | 371,221 | 389,827 | 468,432 | 493,314 | |||||||||||||||||||
|
Ten
years and thereafter
|
1,243,213 | 1,290,248 | 281,322 | 289,188 | 1,524,535 | 1,579,436 | |||||||||||||||||||
| $ | 1,569,542 | $ | 1,623,995 | $ | 849,176 | $ | 876,758 | $ | 2,418,718 | $ | 2,500,753 | ||||||||||||||
Issuers
of certain investment securities have the right to call and prepay obligations
with or without prepayment penalties. As of December 31, 2009
(unaudited) and September 30, 2009, the amortized cost of the securities in our
portfolio which are callable or have pre-refunding dates within one year totaled
$534.2 million and $334.1 million, respectively.
As of
December 31, 2009 (unaudited), September 30, 2009 and 2008, the Bank had pledged
AFS and HTM MBS with an amortized cost of $734.3 million, $764.4 million and
$744.7 million, respectively, and an estimated fair value of $765.3 million,
$797.0 million and $742.7 million, respectively, as collateral for the
repurchase agreements. The securities pledged as collateral for the
repurchase agreements can be repledged by the counterparties. As of
December 31, 2009 (unaudited), September 30, 2009 and 2008, the Bank also had
pledged AFS and HTM MBS with an amortized cost of $198.6 million, $193.6 million
and $59.1 million, respectively, and an estimated fair value of $207.3 million,
$202.8 million and $58.2 million, respectively, as collateral for public unit
depositors and the Federal Reserve Bank.
F-27
During
the quarter ended December 31, 2009 (unaudited), the Bank swapped $194.8 million
of originated fixed-rate mortgage loans with the Federal Home Loan Mortgage
Corporation (“FHLMC”) for MBS (“loan swap transaction”). The MBS
received in the loan swap transaction were classified as trading securities
prior to the sale. Proceeds from the sale of these securities were
$199.1 million, resulting in a gross realized gain of $6.5
million. The gain is included in gains on securities and loans
receivable, net in the consolidated statements of income for the
quarter.
During
the year ended September 30, 2007, proceeds from the sale of securities from the
trading portfolio totaled $389.2 million, resulting in gross realized gains of
$2.8 million and gross realized losses of $1.7 million. Also during
the year ended September 30, 2007, proceeds from the sale of AFS securities
totaled $15.2 million, resulting in a gross loss of $47 thousand. The
gross realized gains and losses are included in gains on securities and loans
receivable, net in the consolidated statements of income. All
dispositions of securities during 2009 and 2008 were the result of principal
repayments or maturities.
|
4.
|
LOANS
RECEIVABLE and ALLOWANCE FOR LOAN
LOSSES
|
Loans
receivable, net at December 31, 2009 (unaudited), September 30, 2009 and 2008 is
summarized as follows:
|
December
31,
|
September
30,
|
||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Mortgage
loans:
|
|||||||||||||
|
Residential
- one- to-four family
|
$ | 5,155,773 | $ | 5,321,935 | $ | 5,026,358 | |||||||
|
Multi-family
and commercial
|
71,395 | 80,493 | 56,081 | ||||||||||
|
Construction
|
33,403 | 39,535 | 85,178 | ||||||||||
| 5,260,571 | 5,441,963 | 5,167,617 | |||||||||||
|
Other
loans:
|
|||||||||||||
|
Home
equity
|
193,987 | 195,557 | 202,956 | ||||||||||
|
Other
|
9,186 | 9,430 | 9,272 | ||||||||||
| 203,173 | 204,987 | 212,228 | |||||||||||
|
Less:
|
|||||||||||||
|
Undisbursed
loan funds
|
(17,089 | ) | (20,649 | ) | (43,186 | ) | |||||||
|
Allowance
for loan losses
|
(12,207 | ) | (10,150 | ) | (5,791 | ) | |||||||
|
Unearned
loan fees and deferred costs
|
(10,525 | ) | (12,186 | ) | (10,088 | ) | |||||||
| $ | 5,423,923 | $ | 5,603,965 | $ | 5,320,780 | ||||||||
Originating
and purchasing loans secured by one- to four-family mortgage loans on
residential properties is the Bank’s primary business, resulting in a loan
concentration in residential first mortgage loans. As a result of the
Bank’s lending practices, the Bank also has a concentration of loans secured by
real property located in Kansas and Missouri. At December 31, 2009
(unaudited), September 30, 2009 and 2008, approximately 70% and approximately
15% of the Bank’s loans were located in Kansas and Missouri,
respectively.
There
were no originations of commercial real estate or business loans for the quarter
ended December 31, 2009 (unaudited). The Bank originated $6.0 million
of commercial real estate and business loans during the quarter ended December
31, 2008 (unaudited). The Bank originated $15.3 million, $975
thousand, and $16.7 million of commercial real estate and business loans during
the years ended September 30, 2009, 2008, and 2007, respectively.
The Bank
is subject to numerous lending-related regulations. Under the Financial
Institutions Reform, Recovery, and Enforcement Act, 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 thousand. As of December 31, 2009
(unaudited), the Bank was in compliance with this limitation.
Aggregate
loans to executive officers, directors and their associates did not exceed 5% of
stockholders’ equity as of December 31, 2009 (unaudited), September 30, 2009 and
2008. Such loans were made under terms and conditions substantially
the same as loans made to parties not affiliated with the Bank.
F-28
As of
December 31, 2009 (unaudited), September 30, 2009 and 2008, the Bank serviced
loans for others aggregating approximately $742.7 million, $576.0 million and
$623.0 million, 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 withheld 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 $3.8 million, $7.9 million and
$8.4 million as of December 31, 2009 (unaudited), September 30, 2009 and 2008,
respectively.
As of
December 31, 2009 (unaudited), September 30, 2009, 2008 and 2007, loans totaling
approximately $32.8 million, $30.9 million, $13.7 million and $7.4 million,
respectively, were on nonaccrual status. Gross interest income would have
increased by $298 thousand and $123 thousand for the quarters ended December 31,
2009 and 2008 (unaudited). Gross interest income would have increased
by $603 thousand, $178 thousand, and $101 thousand for the years ended September
30, 2009, 2008, and 2007, respectively, if these nonaccrual status loans were
not classified as such. The balance of non-performing loans continues to remain
at historically high levels due to the continued elevated level of unemployment
coupled with the decline in real estate values, particularly in some of the
states in which we have purchased loans.
Management considers all non-accrual loans and troubled
debt restructurings that have not been performing satisfactorily under the new
terms for 12 consecutive months to be impaired loans. The
following is a summary of information pertaining to impaired loans.
|
December
31,
|
September
30,
|
||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Impaired
loans without a specific valuation allowance
|
$ | 24,165 | $ | 19,052 | $ | 7,646 | |||||||
|
Impaired
loans with a specific valuation allowance
|
23,262 | 22,347 | 6,020 | ||||||||||
| $ | 47,427 | $ | 41,399 | $ | 13,666 | ||||||||
|
Specific
valuation allowance related to impaired loans
|
$ | 4,035 | $ | 4,596 | $ | 758 | |||||||
|
For
the Quarter Ended
December 31 (unaudited),
|
For
the Year Ended September
30, |
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Average
investment in impaired loans
|
$ | 31,908 | $ | 13,570 | $ | 25,156 | $ | 10,878 | $ | 6,606 | |||||||||||
|
Interest
income recognized on impaired loans
|
$ | 239 | $ | 61 | $ | 473 | $ | 150 | $ | 111 | |||||||||||
No
additional principal is committed to be advanced in connection with impaired
loans.
F-29
At
December 31, 2009 (unaudited), September 30, 2009, 2008 and 2007, loans totaling
$15.2 million, $10.8 million, $918 thousand and $230 thousand, respectively,
were troubled debt restructurings that have been under the terms of the
restructured loan for less than 12 months.
Continued
declines in real estate values could adversely impact the property used as
collateral for the Bank’s loans. Adverse changes in the economy and
increasing unemployment rates may have a negative effect on the ability of the
Bank’s borrowers to make timely loan payments, which would likely increase
delinquencies and have an adverse impact on the Bank’s
earnings. Further increases in delinquencies will decrease net
interest income and will likely adversely impact the Bank’s loan loss
experience, resulting in an increase in the Bank’s allowance for loan losses and
provision for loan losses. Although management believes the allowance
for loan losses was at an adequate level to absorb known and inherent losses in
the loan portfolio at December 31, 2009 (unaudited), the level of the allowance
for loan losses remains an estimate that is subject to significant judgment and
short-term changes. Additions to the allowance for loan losses may be
necessary if future economic and other conditions differ substantially from the
current environment.
A summary
of the activity in the allowance for loan losses for the quarters ended December
31, 2009 and 2008 (unaudited) and for the years ended September 30, 2009, 2008
and 2007 is as follows:
|
For
the Quarter Ended
|
For
the Year Ended
|
||||||||||||||||||||
|
December
31 (unaudited),
|
September
30,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Balance
at beginning of period
|
$ | 10,150 | $ | 5,791 | $ | 5,791 | $ | 4,181 | $ | 4,433 | |||||||||||
|
Provision (recovery) charged to expense
|
3,115 | 549 | 6,391 | 2,051 | (225 | ) | |||||||||||||||
|
Charge-offs:
|
|||||||||||||||||||||
|
Residential - one- to four-family
|
(895 | ) | (192 | ) | (2,007 | ) | (407 | ) | (8 | ) | |||||||||||
|
Home equity
|
(23 | ) | — | (1 | ) | (2 | ) | (3 | ) | ||||||||||||
|
Other loans
|
(5 | ) | (11 | ) | (24 | ) | (32 | ) | (16 | ) | |||||||||||
|
Total charge-offs
|
(923 | ) | (203 | ) | (2,032 | ) | (441 | ) | (27 | ) | |||||||||||
|
Recoveries
|
— | — | — | — | — | ||||||||||||||||
|
Allowance on loans in the loan swap transaction
|
(135 | ) | — | — | — | — | |||||||||||||||
|
Balance
at end of period
|
$ | 12,207 | $ | 6,137 | $ | 10,150 | $ | 5,791 | $ | 4,181 | |||||||||||
F-30
|
5.
|
PREMISES
AND EQUIPMENT, Net
|
A summary of the net carrying value of
banking premises and equipment at December 31, 2009 (unaudited) and September
30, 2009 and 2008 is as follows:
|
December 31
(unaudited),
|
September
30,
|
||||||||||||
|
2009
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Land
|
$ | 7,872 | $ | 7,866 | $ | 7,618 | |||||||
|
Building
and improvements
|
42,120 | 40,167 | 31,027 | ||||||||||
|
Furniture,
fixtures and equipment
|
36,873 | 35,874 | 32,419 | ||||||||||
| 86,865 | 83,907 | 71,064 | |||||||||||
|
Less
accumulated depreciation
|
(46,964 | ) | (46,198 | ) | (41,190 | ) | |||||||
| $ | 39,901 | $ | 37,709 | $ | 29,874 | ||||||||
Depreciation
and amortization expense for the quarters ended December 31, 2009 and 2008
(unaudited) was $1.3 million and $1.2 million,
respectively. Depreciation and amortization expense for the years
ended September 30, 2009, 2008, and 2007 was $5.1 million, $5.4 million, and
$4.5 million, respectively.
The Bank
has entered into non-cancelable operating lease agreements with respect to
banking premises and equipment. It is expected that many agreements will be
renewed at expiration in the normal course of business. Rental expense was $307
thousand and $290 thousand for the quarters ended December 31, 2009 and 2008
(unaudited), respectively. Rental expense was $1.2 million, $1.2
million, and $1.1 million for the years ended September 30, 2009, 2008, and
2007, respectively. Future minimum rental commitments by fiscal year,
rounded to the nearest thousand, required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2009 (unaudited) are as follows (dollars in
thousands):
|
2010
|
$ | 903 | |||
|
2011
|
1,029 | ||||
|
2012
|
899 | ||||
|
2013
|
775 | ||||
|
2014
|
763 | ||||
|
2015
|
708 | ||||
|
Thereafter
|
7,732 | ||||
| $ | 12,809 |
Future
minimum rental commitments, rounded to the nearest thousand, required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year, as of September 30, 2009 are as follows (dollars in
thousands):
|
2010
|
$ | 1,129 | |||
|
2011
|
990 | ||||
|
2012
|
861 | ||||
|
2013
|
748 | ||||
|
2014
|
706 | ||||
|
Thereafter
|
8,334 | ||||
| $ | 12,768 |
F-31
|
6.
|
DEPOSITS
|
Deposits
at December 31, 2009 (unaudited), September 30, 2009 and 2008 are summarized as
follows:
|
December
31, 2009
(unaudited) |
September
30,
|
|||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||||||||||||||
|
Amount
|
Weighted Average |
%
of Total |
Amount
|
Weighted Average |
%
of Total |
Amount
|
Weighted Average |
%
of Total |
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Non-certificates:
|
||||||||||||||||||||||||||||||||||||
|
Checking
|
$ | 491,619 | 0.13 | % | 11.7 | % | $ | 439,975 | 0.17 | % | 10.4 | % | $ | 400,461 | 0.21 | % | 10.2 | % | ||||||||||||||||||
|
Savings
|
225,383 | 0.56 | 5.3 | 226,396 | 0.66 | 5.4 | 232,103 | 1.51 | 5.9 | |||||||||||||||||||||||||||
|
Money
market
|
888,131 | 0.73 | 21.0 | 848,157 | 0.82 | 20.1 | 772,323 | 1.48 | 19.7 | |||||||||||||||||||||||||||
|
Total
non-certificates
|
1,605,133 | 0.52 | 38.0 | 1,514,528 | 0.61 | 35.9 | 1,404,887 | 1.12 | 35.8 | |||||||||||||||||||||||||||
|
Certificates
of deposit:
|
||||||||||||||||||||||||||||||||||||
|
0.00
– 0.99%
|
97,315 | 0.44 | 2.3 | 78,036 | 0.55 | 1.8 | 114 | 0.59 | — | |||||||||||||||||||||||||||
|
1.00
– 1.99%
|
493,527 | 1.54 | 11.7 | 254,846 | 1.55 | 6.0 | 7,426 | 1.98 | 0.2 | |||||||||||||||||||||||||||
|
2.00
– 2.99%
|
905,202 | 2.40 | 21.4 | 971,605 | 2.42 | 23.0 | 413,102 | 2.78 | 10.5 | |||||||||||||||||||||||||||
|
3.00
– 3.99%
|
684,727 | 3.47 | 16.2 | 848,991 | 3.45 | 20.1 | 935,470 | 3.39 | 23.8 | |||||||||||||||||||||||||||
|
4.00
– 4.99%
|
282,351 | 4.43 | 6.7 | 326,087 | 4.41 | 7.7 | 747,612 | 4.52 | 19.1 | |||||||||||||||||||||||||||
|
5.00
– 5.99%
|
158,041 | 5.16 | 3.7 | 233,572 | 5.17 | 5.5 | 414,347 | 5.17 | 10.6 | |||||||||||||||||||||||||||
|
6.00
– 6.99%
|
956 | 6.48 | — | 944 | 6.48 | — | 925 | 6.47 | — | |||||||||||||||||||||||||||
|
Total
certificates of deposit
|
2,622,119 | 2.83 | 62.0 | 2,714,081 | 3.09 | 64.1 | 2,518,996 | 3.91 | 64.2 | |||||||||||||||||||||||||||
| $ | 4,227,252 | 1.95 | % | 100.0 | % | $ | 4,228,609 | 2.20 | % | 100.0 | % | $ | 3,923,883 | 2.91 | % | 100.0 | % | |||||||||||||||||||
F-32
As of
December 31, 2009 (unaudited) and September 30, 2009, certificates of deposit
mature as follows:
| December 31, 2009 (unaudited) | September 30, 2009 | |||||||||||||||
| Amount |
Weighted
Average Rate
|
Amount |
Weighted
Average Rate
|
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Within
one year or less
|
$ | 1,446,540 | 2.61 | % | $ | 1,634,399 | 2.97 | % | ||||||||
|
Between
one and two years
|
770,863 | 3.07 | 609,704 | 3.15 | ||||||||||||
|
Between
two and three years
|
242,479 | 3.19 | 333,648 | 3.49 | ||||||||||||
|
Between
three and four years
|
134,029 | 3.11 | 115,465 | 3.22 | ||||||||||||
|
Between
four and five years
|
26,949 | 3.07 | 19,744 | 3.15 | ||||||||||||
|
Thereafter
|
1,259 | 3.52 | 1,121 | 3.61 | ||||||||||||
| $ | 2,622,119 | 2.83 | % | $ | 2,714,081 | 3.09 | % | |||||||||
The
amount of noninterest-bearing deposits was $79.6 million, $71.7 million and
$66.8 million as of December 31, 2009 (unaudited), September 30, 2009 and 2008,
respectively. Certificates of deposit with a minimum denomination of
$100 thousand were $726.2 million, $790.8 million and $686.3 million as of
December 31, 2009 (unaudited), September 30, 2009 and 2008, respectively. The
aggregate amount of deposits that were reclassified as loans receivable due to
customer overdrafts was $151 thousand, $235 thousand and $296 thousand as of
December 31, 2009 (unaudited), September 30, 2009 and 2008,
respectively.
F-33
|
7.
|
BORROWED
FUNDS
|
At
December 31, 2009 (unaudited) and September 30, 2009 and 2008, the Company’s
borrowed funds consisted of FHLB advances and other
borrowings. Included in other borrowings are repurchase agreements
and Junior Subordinated Deferrable Interest Debentures (the
“Debentures”).
FHLB
Advances – FHLB
advances at December 31, 2009 (unaudited), September 30, 2009 and 2008 were
comprised of the following:
| December 31, | September 30, | ||||||||||||
| 2009 (unaudited) | 2009 | 2008 | |||||||||||
| (Dollars in thousands) | |||||||||||||
|
Fixed-rate
FHLB advances
|
$ | 2,426,000 | $ | 2,426,000 | $ | 2,446,000 | |||||||
|
Deferred
prepayment penalty
|
(32,542 | ) | (34,227 | ) | — | ||||||||
|
Deferred
gain on terminated interest rate swaps
|
756 | 797 | 1,129 | ||||||||||
|
|
$ | 2,394,214 | $ | 2,392,570 | $ | 2,447,129 | |||||||
|
Weighted
average contractual interest rate on FHLB advances
|
3.79 | % | 3.79 | % | 4.77 | % | |||||||
|
Weighted
average effective interest rate on FHLB advances(1)
|
4.13 | % | 4.13 | % | 4.75 | % | |||||||
|
|
(1)
|
The
effective rate includes the net impact of the amortization of deferred
prepayment penalties related to the prepayment of certain FHLB advances
and deferred gains related to the termination of interest rate
swaps.
|
During
the first quarter of fiscal year 2008, management terminated interest rate swap
agreements with total notional amounts of $575.0 million. As a result
of the termination, the Bank received cash proceeds of $1.7 million and recorded
a deferred gain for the proceeds. The gain is being amortized to interest
expense on FHLB advances over the remaining life of the FHLB advances that were
originally hedged by the terminated interest rate swap
agreements. The Bank had no interest rate swap agreements outstanding
at December 31, 2009 (unaudited), September 30, 2009 or 2008.
During
fiscal year 2009, the Bank prepaid $875.0 million of fixed-rate FHLB advances
with a weighted average interest rate of 5.65% and a weighted average remaining
term to maturity of 11 months. The prepaid FHLB advances were
replaced with $875.0 million of fixed-rate FHLB advances, with a weighted
average contractual interest rate of 3.41% and an average term of 69
months. The Bank paid a $38.4 million penalty to the FHLB as a result
of prepaying the FHLB advances. The prepayment penalty was deferred
as an adjustment to the carrying value of the new advances as the new FHLB
advances were not “substantially different,” from the prepaid FHLB
advances. The present value of the cash flows under the terms of the
new FHLB advances was not more than 10% different from the present value of the
cash flows under the terms of the prepaid FHLB advances (including the
prepayment penalty) and there were no embedded conversion options in the prepaid
FHLB advances or in the new FHLB advances. The prepayment penalty
effectively increased the interest rate on the new advances 96 basis points at
the time of the transaction. The deferred prepayment penalty will be
recognized in interest expense over the life of the new FHLB
advances. The benefit of prepaying the advances was an immediate
decrease in interest expense, and a decrease in interest rate sensitivity, as
the maturities of the refinanced advances were extended at a lower
rate.
The FHLB
advances are secured by certain qualifying mortgage loans pursuant to a blanket
collateral agreement with the FHLB and all of the capital stock of FHLB owned by
the Bank. Per the FHLB’s lending guidelines, total FHLB borrowings
cannot exceed 40% of total Bank assets without the pre-approval of the FHLB
president. At December 31, 2009 (unaudited) and September 30, 2009,
the Bank’s ratio of FHLB advances to total assets, as reported to the OTS, was
29% and 28%, respectively.
At
December 31, 2009 (unaudited), the Bank had access to a line of credit with the
FHLB set to expire on November 26, 2010, at which time the line of credit is
expected to be renewed automatically by the FHLB for a one year
period. At December 31, 2009 (unaudited), there were no
borrowings on the FHLB line of credit. Any borrowings on the line of
credit would be included in total FHLB borrowings in calculating the ratio of
FHLB borrowings to total Bank assets, which generally could not exceed 40% of
total Bank assets at December 31, 2009 (unaudited).
F-34
Other
Borrowings –The
following summarizes the components of other borrowings as of December 31, 2009
(unaudited), September 30, 2009 and 2008:
|
December
31,
|
September
30,
|
||||||||||||||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||
|
Contractual
|
Contractual
|
Contractual
|
|||||||||||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||
|
Repurchase
agreements
|
$ | 660,000 | 3.97 | % | $ | 660,000 | 3.97 | % | $ | 660,000 | 3.97 | % | |||||||||||||
|
Debentures
|
53,609 | 3.03 | 53,609 | 3.26 | 53,581 | 5.54 | |||||||||||||||||||
| $ | 713,609 | 3.90 | % | $ | 713,609 | 3.91 | % | $ | 713,581 | 4.09 | % | ||||||||||||||
Repurchase Agreements -
During fiscal year 2008, the Bank entered into repurchase agreements
totaling $660.0 million. Repurchase agreements are made at mutually
agreed upon terms between counterparties and the Bank. The use of
repurchase agreements allows for the diversification of funding sources and the
use of securities that were not being leveraged as collateral. The
Bank has pledged AFS and HTM MBS with an estimated fair value of $765.3 million,
at December 31, 2009 (unaudited), as collateral for the repurchase
agreements.
Debentures - The Company has
established a Delaware statutory trust, Capitol Federal Financial Trust I (the
“Trust”), of which the Company owns 100% of the common securities, or slightly
more than 3% of the Trust (“Trust Common Securities”). The Trust was
formed for the purpose of issuing Company obligated mandatorily redeemable
preferred securities (“Trust Preferred Securities”). Outside
investors own 100% of the Trust Preferred Securities, or slightly less than 97%
of the Trust. The Trust issued $53.6 million of Trust Preferred
Securities. The Company purchased $1.6 million of the Trust Common
Securities which are reported in Other Assets in the December 31, 2009
(unaudited), September 30, 2009 and 2008 consolidated balance
sheets. When the Trust Preferred and Trust Common Securities were
issued, the Trust used the proceeds to purchase a like amount of Debentures of
the Company. The Debentures bear the same terms and interest rates as
the Trust Preferred and Trust Common Securities. Interest is due
quarterly in January, April, July and October until the maturity date of April
7, 2034. The interest rate, which resets at each interest payment, is
based upon the three month LIBOR rate plus 275 basis
points. Principal is due at maturity. The Debentures were
callable, in part or whole, beginning on April 7, 2009, at par. Any
such redemption of the Debentures by the Company will cause redemption of a like
amount of the Trust Preferred and Trust Common Securities by the
Trust. The Company has guaranteed the obligations of the
Trust. The Trust is not included in the consolidated financial
statements. The Debentures are the sole assets of the
Trust. There are certain covenants of the Debentures that the Company
is required to comply with. These covenants include a prohibition on
cash dividends in the event of default or if the Company elects to defer the
payment of interest on the Debentures, annual certifications to the Trust and
other covenants related to the payment of interest and principal and maintenance
of the Trust. The Company was in compliance with all covenants at
December 31, 2009 (unaudited) and September 30, 2009.
F-35
Maturity of
Borrowed Funds –
At December 31, 2009 (unaudited) and September 30, 2009, the FHLB advances,
repurchase agreements and Debentures mature as follows:
|
At
December 31, 2009 (unaudited)
|
|||||||||||||||||||||||||
|
Weighted
|
Weighted
|
||||||||||||||||||||||||
|
FHLB
|
Repurchase
|
Total
|
Average
|
Average
|
|||||||||||||||||||||
|
Advances
|
Agreements
|
Debentures
|
Borrowings
|
Contractual
|
Effective
|
||||||||||||||||||||
|
Amount
|
Amount
|
Amount
|
Amount
|
Rate
|
Rate
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
2010
|
$ | 350,000 | $ | 45,000 | $ | — | $ | 395,000 | 4.33 | % | 4.33 | % | |||||||||||||
|
2011
|
276,000 | 200,000 | — | 476,000 | 4.42 | 4.42 | |||||||||||||||||||
|
2012
|
350,000 | 150,000 | — | 500,000 | 3.67 | 3.67 | |||||||||||||||||||
|
2013
|
525,000 | 145,000 | — | 670,000 | 3.74 | 4.00 | |||||||||||||||||||
|
2014
|
450,000 | 100,000 | — | 550,000 | 3.33 | 3.96 | |||||||||||||||||||
|
2015
|
200,000 | 20,000 | — | 220,000 | 3.50 | 4.16 | |||||||||||||||||||
|
Thereafter
|
275,000 | — | 53,609 | 328,609 | 3.72 | 4.17 | |||||||||||||||||||
| $ | 2,426,000 | $ | 660,000 | $ | 53,609 | $ | 3,139,609 | 3.82 | % | 4.07 | % | ||||||||||||||
|
At
September 30, 2009
|
|||||||||||||||||||||||||
|
Weighted
|
Weighted
|
||||||||||||||||||||||||
|
FHLB
|
Repurchase
|
Total
|
Average
|
Average
|
|||||||||||||||||||||
|
Advances
|
Agreements
|
Debentures
|
Borrowings
|
Contractual
|
Effective
|
||||||||||||||||||||
|
Amount
|
Amount
|
Amount
|
Amount
|
Rate
|
Rate
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
2010
|
$ | 350,000 | $ | 45,000 | $ | — | $ | 395,000 | 4.33 | % | 4.33 | % | |||||||||||||
|
2011
|
276,000 | 200,000 | — | 476,000 | 4.42 | 4.42 | |||||||||||||||||||
|
2012
|
350,000 | 150,000 | — | 500,000 | 3.67 | 3.67 | |||||||||||||||||||
|
2013
|
525,000 | 145,000 | — | 670,000 | 3.74 | 4.00 | |||||||||||||||||||
|
2014
|
450,000 | 100,000 | — | 550,000 | 3.33 | 3.96 | |||||||||||||||||||
|
2015
|
200,000 | 20,000 | — | 220,000 | 3.50 | 4.16 | |||||||||||||||||||
|
Thereafter
|
275,000 | — | 53,609 | 328,609 | 3.76 | 4.21 | |||||||||||||||||||
| $ | 2,426,000 | $ | 660,000 | $ | 53,609 | $ | 3,139,609 | 3.82 | % | 4.08 | % | ||||||||||||||
Of the
$350.0 million FHLB advances maturing in fiscal year 2010, $100.0 million is due
in the third quarter of fiscal year 2010 and $250.0 million is due in the fourth
quarter of fiscal year 2010. The $45.0 million of repurchase agreements maturing
in fiscal year 2010 are due in the fourth quarter of fiscal year
2010.
F-36
|
8.
|
INCOME
TAXES
|
Income
tax expense for the quarters ended December 31, 2009 and 2008 (unaudited), and
for the years ended September 30, 2009, 2008, and 2007 consisted of the
following:
|
December
31 (unaudited),
|
September
30,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Current:
|
|||||||||||||||||||||
|
Federal
|
$ | 7,858 | $ | 7,570 | $ | 32,590 | $ | 19,523 | $ | 1,563 | |||||||||||
|
State
|
694 | 653 | 2,788 | 1,518 | 333 | ||||||||||||||||
| 8,552 | 8,223 | 35,378 | 21,041 | 1,896 | |||||||||||||||||
|
Deferred:
|
|||||||||||||||||||||
|
Federal
|
2,397 | 971 | 3,285 | 7,556 | 17,328 | ||||||||||||||||
|
State
|
192 | 78 | 263 | 604 | 1,386 | ||||||||||||||||
| 2,589 | 1,049 | 3,548 | 8,160 | 18,714 | |||||||||||||||||
| $ | 11,141 | $ | 9,272 | $ | 38,926 | $ | 29,201 | $ | 20,610 | ||||||||||||
Income
tax expense has been provided at effective rates of 34.7% and 36.9% for the
quarters ended December 31, 2009 and 2008 (unaudited), respectively, and 37.0%,
36.4%, and 39.0% for the years ended September 30, 2009, 2008, and 2007,
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:
| December 31 (unaudited), | September 30, | ||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||
|
|
Amount |
%
|
Amount |
%
|
Amount |
%
|
Amount |
%
|
Amount |
%
|
|||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
|
Federal
income tax expense computed at statutory Federal
rate
|
$ | 11,242 | 35.0 | % | $ | 8,793 | 35.0 | % | $ | 36,828 | 35.0 | % | $ | 28,054 | 35.0 | % | $ | 18,517 | 35.0 | % | |||||||||||||||
|
Increases
in taxes resulting from:
|
|||||||||||||||||||||||||||||||||||
|
State
taxes, net of Federal tax effect
|
899 | 2.8 | 708 | 2.8 | 3,051 | 2.9 | 2,122 | 2.6 | 1,719 | 3.3 | |||||||||||||||||||||||||
|
Other
|
(1,000 | ) | (3.1 | ) | (229 | ) | (0.9 | ) | (953 | ) | (0.9 | ) | (975 | ) | (1.2 | ) | 374 | 0.7 | |||||||||||||||||
| $ | 11,141 | 34.7 | % | $ | 9,272 | 36.9 | % | $ | 38,926 | 37.0 | % | $ | 29,201 | 36.4 | % | $ | 20,610 | 39.0 | % | ||||||||||||||||
F-37
Deferred
income tax expense results from temporary differences in the recognition of
revenue and expenses for tax and financial statement purposes. The sources of
these differences and the tax effect of each for the quarters ended December 31,
2009 and 2008 (unaudited) and the years ended September 30, 2009, 2008 and 2007
were as follows:
|
December
31, (unaudited)
|
September
30,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
|||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
|
FHLB
prepayment penalty
|
$ | 321 | $ | 1,153 | $ | 4,601 | $ | 10,586 | $ | 21,225 | |||||||||||
|
FHLB
stock dividends
|
1,810 | (123 | ) | 694 | (1,901 | ) | (440 | ) | |||||||||||||
|
Allowance
for loan losses
|
— | — | (1,628 | ) | (611 | ) | 117 | ||||||||||||||
|
Other,
net
|
458 | 19 | (119 | ) | 86 | (2,188 | ) | ||||||||||||||
| $ | 2,589 | $ | 1,049 | $ | 3,548 | $ | 8,160 | $ | 18,714 | ||||||||||||
The
components of the net deferred income tax (liabilities) assets as of December
31, 2009 (unaudited), September 30, 2009 and 2008 are as follows:
|
December
31,
|
September
30,
|
||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Deferred
income tax assets:
|
|||||||||||||
|
FHLB
prepayment penalty
|
$ | 962 | $ | 1,283 | $ | 5,884 | |||||||
|
Unrealized
loss on AFS securities
|
— | — | 3,627 | ||||||||||
|
Salaries
and employee benefits
|
1,268 | 1,259 | 1,567 | ||||||||||
|
Allowance
for loan losses
|
1,895 | 1,895 | 267 | ||||||||||
|
ESOP
compensation
|
887 | 887 | 977 | ||||||||||
|
Other
|
1,934 | 2,401 | 2,018 | ||||||||||
|
Gross
deferred income tax assets
|
6,946 | 7,725 | 14,340 | ||||||||||
|
Valuation
allowance
|
(261 | ) | (261 | ) | (241 | ) | |||||||
| Gross deferred income tax asset, net of valuation allowance | 6,685 | 7,464 | 14,099 | ||||||||||
|
Deferred
income tax liabilities:
|
|||||||||||||
|
Unrealized
gain on AFS securities
|
18,764 | 20,583 | — | ||||||||||
|
FHLB
stock dividends
|
17,000 | 15,190 | 14,496 | ||||||||||
|
Other
|
2,661 | 2,661 | 2,826 | ||||||||||
|
Gross
deferred income tax liabilities
|
38,425 | 38,434 | 17,322 | ||||||||||
|
Net
deferred tax liabilities
|
$ | (31,740 | ) | $ | (30,970 | ) | $ | (3,223 | ) | ||||
The
Company assesses the available positive and negative evidence surrounding the
recoverability of the deferred tax assets and applies its judgment in estimating
the amount of valuation allowance necessary under the
circumstances. As of December 31, 2009 (unaudited), September 30,
2009 and 2008, the Company recorded a valuation allowance of $261 thousand, $261
thousand and $241 thousand, respectively, related to net operating losses
generated by the Company’s consolidated Kansas corporate income tax return. The
Company’s consolidated Kansas corporate income tax return includes MHC, the
Company, and Capitol Funds, Inc., as the Bank files a Kansas privilege tax
return. Based on the
nature of operations of the noted entities, management believes there will not
be sufficient taxable income for the foreseeable future on the Company’s
consolidated Kansas corporate income tax return to utilize the net operating
losses.
The
Company adopted the section of ASC 740 Income Taxes related to the
accounting for uncertainty in income taxes on October 1, 2007. This
section of ASC 740 prescribes a process by which the likelihood of a tax
position is gauged based upon the technical merits of the position, and then a
subsequent measurement relates the maximum benefit and the degree of likelihood
to determine the amount of benefit to recognize in the financial
statements.
F-38
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
for the periods ended December 31, 2009 (unaudited), September 30, 2009 and 2008
is as follows. The amounts have not been reduced by the federal
deferred tax effects of unrecognized tax benefits.
| December 31, | September 30, | |||||||||||
| 2009 (unaudited) | 2009 | 2008 | ||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 2,848 | $ | 2,409 | $ | 3,773 | ||||||
|
Additions
for tax positions related to the current period
|
— | 109 | — | |||||||||
|
Additions
for tax positions of prior years
|
4 | 888 | 130 | |||||||||
|
Reductions
for tax positions of prior years
|
(194 | ) | — | (915 | ) | |||||||
|
Reductions
relating to settlement with taxing authorities
|
— | (97 | ) | — | ||||||||
|
Lapse
of statute of limitations
|
(2,557 | ) | (461 | ) | (579 | ) | ||||||
|
Balance
at end of period
|
$ | 101 | $ | 2,848 | $ | 2,409 | ||||||
Included in the unrecognized tax benefits above is
accrued penalties and interest of $4 thousand for the quarter ended December 31,
2009 (unaudited), and accrued penalties and interest of $763 thousand and $609
thousand for the years ended September 30, 2009 and 2008,
respectively. The reversal of penalties and interest expense due to
the lapse of statute of limitations and settlements with taxing authorities for
the quarters ended December 31, 2009 and 2008 (unaudited) were $471 thousand and
$4 thousand, respectively. Estimated penalties and interest expense
for the years ended September 30, 2009 and 2008 were $87 thousand and $81
thousand, respectively. Estimated penalties and interest expense are
included in income tax expense in the consolidated statements of
income. Interest income related to state and federal tax return
refunds for the year ended September 30, 2008 was $235 thousand, which is
included in other income in the consolidated statements of
income. We do not expect a material change in unrecognized tax
benefits in the next 12 months.
The
Company files income tax returns in the U.S. federal jurisdiction and the state
of Kansas, as well as other states where it has nexus. In many cases,
uncertain tax positions are related to tax years that remain subject to
examination by the relevant taxing authorities. With few exceptions,
the Company is no longer subject to U.S. federal and state examinations by tax
authorities for fiscal years before 2007.
|
9.
|
EMPLOYEE
BENEFIT PLANS
|
The
Company has a profit sharing plan (“PIT”) and an employee stock ownership plan
(“ESOP”). The plans cover all employees with a minimum of one year of
service, at least age 21, and at least 1,000 hours of employment in each plan
year.
Profit Sharing
Plan – The PIT
provides for two types of discretionary contributions. The first type is an
optional Bank contribution and may be 0% or any percentage above that, as
determined by the board of directors, of an eligible employee’s eligible
compensation during the fiscal year. The second contribution may be 0% or any
percentage above that, as determined by the board of directors, of an eligible
employee’s eligible compensation during the fiscal year if the employee matches
50.0% (on an after-tax basis) of the Bank’s second contribution. The
PIT qualifies as a thrift and profit sharing plan for purposes of Internal
Revenue Codes 401(a), 402, 412, and 417. The Bank accrued $51
thousand and $47 thousand at December 31, 2009 and 2008 (unaudited),
respectively, related to PIT contributions. Total Bank contributions
to the PIT amounted to $102 thousand, $93 thousand, and $89 thousand for the
years ended September 30, 2009, 2008, and 2007, respectively.
ESOP – The ESOP Trust acquired
3,024,574 shares of common stock in the Company’s initial public offering with
proceeds from a loan from the Company. The Bank makes cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make the required annual loan payments to the Company at September
30.
The loan
referenced above bears interest at a fixed-rate of 5.80% with interest payable
annually and future principal and interest payable in four remaining fixed
installments, as of December 31, 2009 (unaudited), of $3.0 million. Payments of
$3.0 million consisting of principal of $2.3 million, $2.1 million, and $2.0
million and interest of $700 thousand, $900 thousand, and $1.0 million were made
on September 30, 2009, 2008, and 2007, respectively. The loan is secured by the
shares of Company stock purchased.
F-39
As the
debt is repaid, 201,638 shares are released from collateral annually at
September 30 and allocated to qualified employees based on the proportion of
their qualifying compensation to total qualifying compensation. As
ESOP shares are committed to be released from collateral, the Company records
compensation expense. Compensation expense related to the ESOP
was $1.5 million for the quarter ended December 31, 2009 (unaudited), $2.2
million for the quarter ended December 31, 2008 (unaudited), $7.9 million for
the year ended September 30, 2009 and $7.5 million for each of the years ended
September 30, 2008 and 2007. Dividends on unallocated ESOP shares are
recorded as a reduction of debt, up to a total of $3.0 million.
During
the years ended September 30, 2009, 2008, and 2007, the Bank paid $863 thousand,
$571 thousand, and $41 thousand, respectively, of the ESOP debt payment because
dividends on unallocated shares were insufficient to pay the scheduled debt
payment as they had been in previous years. Dividends paid to
participants on allocated ESOP shares were $1.4 million for the quarter ended
December 31, 2009 (unaudited), $967 thousand for the quarter ended December 31,
2008 (unaudited), $3.3 million for the year ended September 30, 2009 and $2.9
million for each of the years ended September 30, 2008 and 2007.
Participants
have the option to receive the dividends in cash or leave the dividend in the
ESOP. Dividends are reinvested in Company stock for those
participants who choose to leave their dividends in the ESOP or who do not make
an election. The purchase of Company stock for reinvestment of
dividends is made in the open market on or about the date of the cash
disbursement to the participants who opt to take dividends in cash.
Shares
may be withdrawn from the ESOP Trust due to retirement, termination or death of
the participant. Following is a summary of shares held in the ESOP
Trust as of December 31, 2009 (unaudited), September 30, 2009, and
2008:
|
December
31,
|
September
30,
|
||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Allocated
ESOP shares
|
1,732,923 | 1,751,474 | 1,604,939 | ||||||||||
|
Unreleased
ESOP shares
|
806,556 | 806,556 | 1,008,194 | ||||||||||
|
Total
ESOP shares
|
2,539,479 | 2,558,030 | 2,613,133 | ||||||||||
|
Fair
value of unreleased ESOP shares
|
$ | 25,374 | $ | 26,552 | $ | 44,693 | |||||||
|
10.
|
STOCK
BASED COMPENSATION
|
At
December 31, 2009 (unaudited) and September 30, 2009, the Company had a Stock
Option and Incentive Plan and an RRP which are considered share-based
plans. Compensation expense is
recognized over the service period of the share-based payment
award. The Company utilizes a fair-value-based measurement method in
accounting for the share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans.
Stock Option Plan
– The
purpose of the Option Plan is to provide additional incentive to certain
officers, directors and key employees by facilitating their purchase of a stock
interest in the Company. Pursuant to the Option Plan, subject to
adjustment as described below, 3,780,718 shares of common stock were reserved
for issuance by the Company upon exercise of stock options granted to officers,
directors and employees of the Company and the Bank from time to time under the
Option Plan. The Company may issue both incentive and nonqualified stock options
under the Option Plan. The Company may also award stock appreciation
rights under the Option Plan, although to date no stock appreciation rights have
been awarded under the Option Plan. The incentive stock options
expire no later than ten years and the nonqualified stock options expire no
later than fifteen years from the date of grant. The date on which
the options are first exercisable is determined by the Stock Benefits Committee
(“sub-committee”), a sub-committee of the Compensation Committee (“committee”)
of the board of directors. The vesting period of the options
generally ranges from three to five years. The option price is equal
to the market value at the date of the grant as defined by the Option
Plan.
Under the Option Plan, incentive stock options may not
be granted after April 2010 and nonqualified stock options may not be granted
after April 2015. At December 31, 2009 (unaudited) and
September 30, 2009, the Company had 1,293,915
shares and 1,303,915 shares, respectively, available for future grants under the
Option Plan. This includes 1,044,380 shares added back to the Option
Plan through the reload feature of the plan, which provides that the maximum
number of shares with respect to which awards may be made under the plan shall
be increased by (i) the number of shares of common stock repurchased by the
Company with an aggregate price no greater than the cash proceeds received by
the Company from the exercise of options under the Option Plan; and (ii) the
number of shares surrendered to the Company in payment of the exercise price of
options granted under the Option Plan.
F-40
The
Option Plan is administered by the sub-committee, which selects the employees
and non-employee directors to whom options are to be granted and the number of
shares to be granted. The exercise price may be paid in cash, shares
of the common stock, or a combination of both. The option price may
not be less than 100% of the fair market value of the shares on the date of the
grant. In the case of any employee who is granted an incentive stock option who
owns more than 10% of the outstanding common stock at the time the option is
granted, the option price may not be less than 110% of the fair market value of
the shares on the date of the grant, and the option shall not be exercisable
after the expiration of five years from the grant date. Historically,
the Company has issued shares held in treasury upon the exercise of stock
options.
The fair
value of stock option grants are estimated on the date of the grant using the
Black-Scholes option pricing model. The weighted average grant-date
fair value of stock options granted during the quarters ended December 31, 2009
and 2008 (unaudited) was $3.09 and $5.27, respectively. The weighted
average grant-date fair value of stock options granted during the fiscal years
ended September 30, 2009, 2008, and 2007 was $5.03, $3.20 and $5.61 per share,
respectively. Compensation expense attributable to stock options
awards during the quarters ended December 31, 2009 and 2008 (unaudited) totaled
$61 thousand ($51 thousand, net of tax) and $92 thousand ($79
thousand, net of tax), respectively. Compensation expense
attributable to stock options awards during the years ended September 30, 2009,
2008 and 2007 totaled $281 thousand ($240 thousand, net of tax), $323 thousand
($205 thousand, net of tax), and $294 thousand ($179 thousand, net of tax),
respectively. The following weighted average assumptions were used
for valuing stock option grants for the periods noted:
|
Quarter
Ended
December
31 (unaudited),
|
Year
Ended September 30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Risk-free
interest rate
|
2.0 | % | 2.4 | % | 2.1 | % | 3.2 | % | 4.8 | % | ||||||||||
|
Expected
life (years)
|
4 | 4 | 4 | 5 | 6 | |||||||||||||||
|
Expected
volatility
|
25 | % | 23 | % | 24 | % | 22 | % | 21 | % | ||||||||||
|
Dividend
yield
|
6.5 | % | 4.6 | % | 4.8 | % | 6.2 | % | 5.2 | % | ||||||||||
|
Estimated
forfeitures
|
13.5 | % | 14.5 | % | 10.5 | % | 3.0 | % | 6.2 | % | ||||||||||
The
risk-free interest rate was determined using the yield available on the option
grant date for a zero-coupon U.S. Treasury security with a term equivalent to
the expected life of the option. The expected life for options
granted during the quarters ended December 31, 2009 and 2008 (unaudited) and the
years ended September 30, 2009 and 2008 was based upon historical
experience. The expected life for options granted during the year
ended September 30, 2007 represents the period the option is expected to be
outstanding and was determined by applying the simplified method. The
expected volatility was determined using historical volatilities based on
historical stock prices. The dividend yield was determined based upon
historical quarterly dividends and the Company’s stock price on the option grant
date. Estimated forfeitures were determined based upon voluntary
termination behavior and actual option forfeitures.
A summary
of option activity for the quarters ended December 31, 2009 and 2008 (unaudited)
and the years ended September 30, 2009, 2008 and 2007 follows:
|
December
31 (unaudited),
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
Weighted
|
Weighted
|
||||||||||||||||
|
Average
|
Average
|
||||||||||||||||
|
Number
|
Exercise
|
Number
|
Exercise
|
||||||||||||||
|
of
Options
|
Price
|
of
Options
|
Price
|
||||||||||||||
|
Options
outstanding
|
|||||||||||||||||
|
at
beginning of period:
|
372,022 | $ | 33.28 | 403,322 | $ | 29.66 | |||||||||||
|
Granted
|
10,000 | 30.75 | 25,500 | 43.46 | |||||||||||||
|
Forfeited
|
— | — | — | — | |||||||||||||
|
Exercised
|
— | — | (49,075 | ) | 20.76 | ||||||||||||
|
Options
outstanding at end of period
|
382,022 | $ | 33.21 | 379,747 | $ | 31.74 | |||||||||||
F-41
|
September
30,
|
|||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||
|
Number
|
Exercise
|
Number
|
Exercise
|
Number
|
Exercise
|
||||||||||||||||||||
|
of
Options
|
Price
|
of
Options
|
Price
|
of
Options
|
Price
|
||||||||||||||||||||
|
Options
outstanding
|
|||||||||||||||||||||||||
|
at
beginning of year:
|
403,322 | $ | 29.66 | 382,855 | $ | 28.13 | 668,457 | $ | 20.43 | ||||||||||||||||
|
Granted
|
41,750 | 42.05 | 56,500 | 32.19 | 34,000 | 38.77 | |||||||||||||||||||
|
Forfeited
|
— | — | (100 | ) | 25.66 | (8,967 | ) | 29.37 | |||||||||||||||||
|
Exercised
|
(73,050 | ) | 18.31 | (35,933 | ) | 17.34 | (310,635 | ) | 12.69 | ||||||||||||||||
|
Options
outstanding at end of year
|
372,022 | $ | 33.28 | 403,322 | $ | 29.66 | 382,855 | $ | 28.13 | ||||||||||||||||
Shares
issued upon the exercise of stock options are issued from treasury
stock. The Company has an adequate number of treasury shares
available for sale for future stock option exercises.
There
were no stock options exercised during the quarter ended December 31, 2009
(unaudited). During the quarter ended December 31, 2008 (unaudited),
the total pretax intrinsic value of stock options exercised was $1.1 million,
and the tax benefits realized from the exercise of stock options were $345
thousand. During the years ended September 30, 2009, 2008, and 2007,
the total pretax intrinsic value of stock options exercised was $1.7 million,
$755 thousand, and $8.1 million, respectively, and the tax benefits realized
from the exercise of stock options were $515 thousand, $114 thousand, and $2.6
million, respectively. The fair value of stock options vested during
the quarters ended December 31, 2009 and 2008 (unaudited) was $61 thousand and
$64 thousand, respectively. The fair value of stock options vested
during the years ended September 30, 2009, 2008, and 2007 was $297 thousand,
$281 thousand, and $338 thousand, respectively.
F-42
The
following summarizes information about the stock options outstanding and
exercisable as of December 31, 2009 (unaudited):
|
Options
Outstanding
|
||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||
|
Number
|
Remaining
|
Exercise
|
Aggregate
|
|||||||||||||||
|
Exercise
|
of
Options
|
Contractual
|
Price
per
|
Intrinsic
|
||||||||||||||
|
Price
|
Outstanding
|
Life
(in years)
|
Share
|
Value
|
||||||||||||||
|
(Dollars
in thousands, except per share amounts)
(unaudited)
|
||||||||||||||||||
| $9.22 | 19,381 | 1.30 | $ | 9.22 | $ | 431 | ||||||||||||
| 14.03 - 19.68 | 4,291 | 1.43 | 18.13 | 57 | ||||||||||||||
| 25.66 - 28.78 | 2,500 | 2.67 | 26.91 | 11 | ||||||||||||||
| 30.19 – 39.83 | 330,350 | 8.70 | 34.07 | 26 | ||||||||||||||
| 43.46 | 25,500 | 8.83 | 43.46 | — | ||||||||||||||
| 382,022 | 8.21 | $ | 33.21 | $ | 525 | |||||||||||||
|
Options
Exercisable
|
||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||
|
Number
|
Remaining
|
Exercise
|
Aggregate
|
|||||||||||||||
|
Exercise
|
of
Options
|
Contractual
|
Price
per
|
Intrinsic
|
||||||||||||||
|
Price
|
Exercisable
|
Life
(in years)
|
Share
|
Value
|
||||||||||||||
|
(Dollars
in thousands, except per share amounts)
(unaudited)
|
||||||||||||||||||
| $9.22 | 19,381 | 1.30 | $ | 9.22 | $ | 431 | ||||||||||||
| 14.03 - 19.68 | 4,291 | 1.43 | 18.13 | 57 | ||||||||||||||
| 25.66 - 28.78 | 2,500 | 2.67 | 26.91 | 11 | ||||||||||||||
| 30.19 – 39.83 | 241,650 | 8.62 | 33.99 | 20 | ||||||||||||||
| 43.46 | 10,200 | 8.83 | 43.46 | — | ||||||||||||||
| 278,022 | 7.95 | $ | 32.30 | $ | 519 | |||||||||||||
The
following summarizes information about the stock options outstanding and
exercisable as of September 30, 2009:
|
Options
Outstanding
|
||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||
|
Number
|
Remaining
|
Exercise
|
Aggregate
|
|||||||||||||||
|
Exercise
|
of
Options
|
Contractual
|
Price
per
|
Intrinsic
|
||||||||||||||
|
Price
|
Outstanding
|
Life
(in years)
|
Share
|
Value
|
||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||||
| $9.22 | 19,381 | 1.55 | $ | 9.22 | $ | 459 | ||||||||||||
| 14.03 - 19.68 | 4,291 | 1.68 | 18.13 | 63 | ||||||||||||||
| 25.66 - 28.78 | 2,500 | 2.92 | 26.91 | 15 | ||||||||||||||
| 30.19 – 38.77 | 320,350 | 8.92 | 34.18 | 123 | ||||||||||||||
| 43.46 | 25,500 | 9.08 | 43.46 | — | ||||||||||||||
| 372,022 | 8.42 | $ | 33.28 | $ | 660 | |||||||||||||
F-43
|
Options
Exercisable
|
||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||
|
Number
|
Remaining
|
Exercise
|
Aggregate
|
|||||||||||||||
|
Exercise
|
of
Options
|
Contractual
|
Price
per
|
Intrinsic
|
||||||||||||||
|
Price
|
Exercisable
|
Life
(in years)
|
Share
|
Value
|
||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||||
| $9.22 | 19,381 | 1.55 | $ | 9.22 | $ | 459 | ||||||||||||
| 14.03 - 19.68 | 4,291 | 1.68 | 18.13 | 63 | ||||||||||||||
| 25.66 - 28.78 | 2,500 | 2.92 | 26.91 | 15 | ||||||||||||||
| 30.19 – 38.77 | 232,450 | 8.91 | 34.05 | 90 | ||||||||||||||
| 43.46 | 5,100 | 9.08 | 43.46 | — | ||||||||||||||
| 263,722 | 8.19 | $ | 32.08 | $ | 627 | |||||||||||||
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $31.46 and $32.92
as of December 31, 2009 (unaudited) and September 30, 2009, respectively, which
would have been received by the option holders had all option holders exercised
their options as of that date. The total number of in-the-money
options exercisable as of December 31, 2009 (unaudited) and September 30, 2009
was 42,672 and 141,272, respectively.
As of
December 31, 2009 (unaudited) and September 30, 2009, the total estimated future
compensation cost related to non-vested stock options not yet recognized in the
consolidated statements of income was $250 thousand and $283 thousand,
respectively, and the weighted average period over which these awards are
expected to be recognized was 2.3 years and 2.2 years,
respectively.
Recognition
and Retention Plan
– The objective of the RRP is to enable the Company and the Bank to
retain personnel of experience and ability in key positions of
responsibility. Employees and directors of the Bank are eligible to
receive benefits under the RRP at the sole discretion of the sub-committee. The
total number of shares originally eligible to be granted under the RRP was
1,512,287. At December 31, 2009 (unaudited) and September 30, 2009,
the Company had 163,487 shares available for future grants under the
RRP. The RRP expires in April 2015. No additional grants
may be made after expiration, but outstanding grants continue until they are
individually exercised, forfeited, or expire.
Compensation
expense in the amount of the fair market value of the common stock at the date
of the grant, as defined by the RRP, to the employee is recognized over the
period during which the shares vest. Compensation expense
attributable to RRP awards during the quarters ended December 31, 2009 and 2008
(unaudited) totaled $70 thousand ($44 thousand, net of tax) and $85 thousand
($54 thousand, net of tax), respectively. Compensation expense
attributable to RRP awards during the years ended September 30, 2009, 2008 and
2007 totaled $323 thousand ($204 thousand, net of tax), $399 thousand ($253
thousand, net of tax), and $375 thousand ($229 thousand, net of tax),
respectively. A recipient of such restricted stock will be entitled
to all voting and other stockholder rights (including the right to receive
dividends on vested and non-vested shares), except that the shares, while
restricted, may not be sold, pledged or otherwise disposed of and are required
to be held in escrow by the Company. If a holder of such restricted
stock terminates employment for reasons other than death or disability, the
employee forfeits all rights to the non-vested shares under
restriction. If the participant’s service terminates as a result of
death, disability, or if a change in control of the Bank occurs, all
restrictions expire and all non-vested shares become unrestricted. A
summary of RRP share activity for the quarters ended December 31, 2009 and 2008
(unaudited) and for the years ended September 30, 2009, 2008 and 2007
follows:
F-44
|
December
31 (unaudited),
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
Weighted
|
Weighted
|
||||||||||||||||
|
Average
|
Average
|
||||||||||||||||
|
Number
|
Grant
Date
|
Number
|
Grant
Date
|
||||||||||||||
|
of
Shares
|
Fair
Value
|
of
Shares
|
Fair
Value
|
||||||||||||||
|
Unvested
RRP shares at beginning of period:
|
15,100 | $ | 34.35 | 23,200 | $ | 33.68 | |||||||||||
|
Granted
|
— | — | — | — | |||||||||||||
|
Vested
|
(1,000 | ) | 33.25 | (1,000 | ) | 33.25 | |||||||||||
|
Forfeited
|
— | — | — | — | |||||||||||||
|
Unvested
RRP shares at end of period
|
14,100 | $ | 34.42 | 22,200 | $ | 33.69 | |||||||||||
|
Year
Ended September 30,
|
||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||
|
Number
|
Grant
Date
|
Number
|
Grant
Date
|
Number
|
Grant
Date
|
|||||||||||||||||||||
|
of
Shares
|
Fair
Value
|
of
Shares
|
Fair
Value
|
of
Shares
|
Fair
Value
|
|||||||||||||||||||||
|
Unvested
RRP shares at beginning of year:
|
23,200 | $ | 33.68 | 24,300 | $ | 34.46 | 30,800 | $ | 33.37 | |||||||||||||||||
|
Granted
|
2,500 | 39.95 | 10,000 | 32.26 | 5,000 | 38.77 | ||||||||||||||||||||
|
Vested
|
(10,600 | ) | 34.20 | (11,100 | ) | 34.12 | (11,100 | ) | 33.35 | |||||||||||||||||
|
Forfeited
|
— | — | — | — | (400 | ) | 35.42 | |||||||||||||||||||
|
Unvested
RRP shares at end of year
|
15,100 | $ | 34.35 | 23,200 | $ | 33.68 | 24,300 | $ | 34.46 | |||||||||||||||||
The
estimated forfeiture rate for the RRP shares granted during the quarters ended
December 31, 2009 and 2008 (unaudited) and the years ended September 30, 2009,
2008, and 2007 was 0% based upon voluntary termination behavior and actual
forfeitures. The fair value of RRP shares that vested during the
quarters ended December 31, 2009 and 2008 (unaudited) totaled $33 thousand for
both periods. The fair value of RRP shares that vested during the
years ended September 30, 2009, 2008, and 2007 totaled $363 thousand, $379
thousand, and $370 thousand, respectively. As of December 31, 2009
(unaudited) and September 30, 2009, there was $260 thousand and $330 thousand,
respectively, of unrecognized compensation cost related to non-vested RRP shares
to be recognized over a weighted average period of 2.1 years.
F-45
|
11.
|
PERFORMANCE
BASED COMPENSATION
|
The
Company and the Bank have a short-term performance plan for all officers and a
deferred incentive bonus plan for senior officers. The short-term
performance plan has a component tied to Company performance and a component
tied to individual participant performance. Individual performance
criteria are established by executive management for eligible non-executive
employees of the Bank; individual performances of executive officers are
reviewed by the committee. Company performance criteria are approved
by the committee. Short-term performance plan awards are granted
based upon a performance review by the committee. The committee may
exercise its discretion and reduce or not grant awards. The deferred
incentive bonus plan is intended to operate in conjunction with the short-term
performance plan. A participant in the deferred incentive bonus plan
can elect to defer into an account between $2 thousand and up to 50% of the
short-term performance plan award up to but not exceeding $100
thousand. The amount deferred receives an employer match of up to
50%. The deferral period is three years. Earnings on the
amount deferred by the employee and the employer match are tied to the
performance of the Company’s common stock and cash dividends paid thereon during
the deferral period. The total amount of short-term performance plan awards
provided for the years ended September 30, 2009, 2008, and 2007 amounted to $1.1
million, $2.1 million, and $1.1 million, respectively, of which $137 thousand,
$165 thousand, and $66 thousand, respectively, was deferred under the deferred
incentive bonus plan. The deferrals and any earnings on those
deferrals will be paid in 2011, 2012, and 2013, respectively. During
the quarters ended December 31, 2009 and 2008 (unaudited), the amount expensed
in conjunction with the earnings on the deferred amounts was $21 thousand and
$61 thousand, respectively. During fiscal years 2009, 2008, and 2007,
the amount expensed in conjunction with the earnings on the deferred amounts was
$51 thousand, $332 thousand, and $82 thousand, respectively.
|
12.
|
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 $332 thousand, $337 thousand and $363 thousand as of December 31, 2009
(unaudited) and September 30, 2009 and 2008, respectively, and are accrued over
the period of active employment and are funded by life insurance
contracts.
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
The Bank
had commitments outstanding to originate and purchase first and second mortgage
loans as of December 31, 2009 (unaudited), September 30, 2009 and 2008 as
follows:
|
December
31,
|
September
30,
|
||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Originate
fixed-rate
|
$ | 67,670 | $ | 105,316 | $ | 105,419 | |||||||
|
Originate
adjustable-rate
|
13,005 | 8,945 | 16,302 | ||||||||||
|
Purchase
fixed-rate
|
15,947 | 12,948 | 14,366 | ||||||||||
|
Purchase
adjustable-rate
|
8,794 | 9,000 | 133,153 | ||||||||||
| $ | 105,416 | $ | 136,209 | $ | 269,240 | ||||||||
F-46
As of
December 31, 2009 (unaudited), the Bank had commitments to originate
non-mortgage loans approximating $7 thousand, all of which were
fixed-rate. As of September 30, 2009 and 2008, the Bank had
commitments to originate non-mortgage loans approximating $134 thousand and $72
thousand, respectively, all of which were fixed-rate.
As of
December 31, 2009 (unaudited), September 30, 2009 and 2008, the Bank had
approved but unadvanced home equity lines of credit of $270.1 million, $270.3
million and $269.0 million, respectively. Approval of lines of credit
is based upon underwriting standards that do not allow total borrowings,
including existing mortgages and lines of credit, to exceed 95% of the estimated
market value of the customer’s home. In order to minimize risk of
loss, home equity loans that are greater than 80% of the value of the property,
when combined with the first mortgage, require private mortgage
insurance.
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 rate lock fee. Some of the commitments
are expected to expire without being fully drawn upon; therefore the amount of
total commitments 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 customer. As of December 31, 2009 (unaudited), September 30,
2009 and 2008, there were no significant loan-related commitments that met the
definition of derivatives or commitments to sell mortgage loans.
|
14.
|
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 material adverse effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank’s capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
The
Bank’s primary regulatory agency, the OTS, requires that the Bank maintain
minimum ratios of tangible equity of 1.5%, Tier 1 (core) capital of 4%, and
total risk-based capital of 8%. As of December 31, 2009 (unaudited) and
September 30, 2009 and 2008, the most recent guidelines 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 Tier 1 (core) capital, Tier 1 risked based capital and total
risk-based capital ratios as set forth in the table below. Management believes,
as of December 31, 2009 (unaudited), that the Bank meets all capital adequacy
requirements to which it is subject and there were no conditions or events
subsequent to December 31, 2009 (unaudited), that would change the Bank’s
category.
F-47
|
To
Be Well
|
|||||||||||||||||||||||||
|
Capitalized
|
|||||||||||||||||||||||||
|
Under
Prompt
|
|||||||||||||||||||||||||
|
For
Capital
|
Corrective
Action
|
||||||||||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Provisions
|
|||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
As
of December 31, 2009 (unaudited):
|
|
||||||||||||||||||||||||
|
Tangible equity
|
$ | 844,959 | 10.1 | % | $ | 125,133 | 1.5 | % | N/A | N/A | |||||||||||||||
|
Tier 1 (core) capital
|
844,959 | 10.1 | 333,687 | 4.0 | $ | 417,109 | 5.0 | % | |||||||||||||||||
|
Tier I risk-based capital
|
844,959 | 23.8 | N/A | N/A | 213,118 | 6.0 | |||||||||||||||||||
|
Total risk-based capital
|
853,139 | 24.0 | 284,157 | 8.0 | 355,196 | 10.0 | |||||||||||||||||||
|
As
of September 30, 2009:
|
|||||||||||||||||||||||||
|
Tangible equity
|
$ | 834,879 | 10.0 | % | $ | 125,505 | 1.5 | % | N/A | N/A | |||||||||||||||
|
Tier 1 (core) capital
|
834,879 | 10.0 | 334,681 | 4.0 | $ | 418,351 | 5.0 | % | |||||||||||||||||
|
Tier I risk-based capital
|
834,879 | 23.2 | N/A | N/A | 216,029 | 6.0 | |||||||||||||||||||
|
Total risk-based capital
|
840,439 | 23.3 | 288,039 | 8.0 | 360,048 | 10.0 | |||||||||||||||||||
|
As
of September 30, 2008:
|
|||||||||||||||||||||||||
|
Tangible equity
|
$ | 806,708 | 10.0 | % | $ | 121,197 | 1.5 | % | N/A | N/A | |||||||||||||||
|
Tier 1 (core) capital
|
806,708 | 10.0 | 323,192 | 4.0 | $ | 403,990 | 5.0 | % | |||||||||||||||||
|
Tier I risk-based capital
|
806,708 | 23.1 | N/A | N/A | 209,357 | 6.0 | |||||||||||||||||||
|
Total risk-based capital
|
801,886 | 23.0 | 279,143 | 8.0 | 348,929 | 10.0 | |||||||||||||||||||
|
|
A
reconciliation of the Bank’s equity under GAAP to regulatory capital
amounts as of December 31, 2009 (unaudited) and September 30, 2009 and
2008 is as follows:
|
|
December
31,
2009
(unaudited)
|
September 30, | ||||||||||||
| 2009 | 2008 | ||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Total
Bank equity as reported under GAAP
|
$ | 876,290 | $ | 869,029 | $ | 803,643 | |||||||
|
Unrealized
(gains) losses on AFS securities
|
(30,875 | ) | (33,870 | ) | 5,968 | ||||||||
|
Other
|
(456 | ) | (280 | ) | (2,903 | ) | |||||||
|
Total
tangible equity and Tier 1 (core) capital
|
844,959 | 834,879 | 806,708 | ||||||||||
|
Allowance
for loan losses
|
8,180 | 5,560 | 5,008 | ||||||||||
|
Other
|
— | — | (9,830 | ) | |||||||||
|
Total
risk based capital
|
$ | 853,139 | $ | 840,439 | $ | 801,886 | |||||||
Under OTS
regulations, there are limitations on the amount of capital the Bank may
distribute to the Company. Generally, this is limited to the earnings
of the previous two calendar years and current year-to-date
earnings. Under OTS safe harbor regulations, the Bank may distribute
to the Company capital not exceeding net income for the current calendar year
and the prior two calendar years. At December 31, 2009 (unaudited)
and September 30, 2009, the Bank was in compliance with the OTS safe harbor
regulations. The Bank has received a waiver from the OTS to
distribute capital from the Bank to the Company, not to exceed 100% of the
Bank’s net quarterly earnings, through June 30, 2010. So long as the
Bank continues to remain “well capitalized” after each capital distribution,
operate in a safe and sound manner, provide the OTS with updated capital levels,
and non-performing asset balances and ALLL information as requested, and comply
with the interest rate risk management guidelines of the OTS, it is management’s
belief that the Bank will continue to receive waivers allowing it to distribute
the net income of the Bank to the Company, although no assurance can be given in
this regard.
F-48
|
15.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Fair
Value Measurements - ASC 820, Fair
Value Measurements and Disclosures, defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. ASC 820 applies only to fair value measurements already
required or permitted by other accounting standards and does not impose
requirements for additional fair value measures. ASC 820 was issued
to increase consistency and comparability in reporting fair
values.
The
Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. The Company did not have any
liabilities that were measured at fair value at December 31, 2009 (unaudited)
and September 30, 2009. The Company’s AFS securities are
recorded at fair value on a recurring basis. Additionally, from time
to time, the Company may be required to record at fair value other assets or
liabilities on a non-recurring basis, such as REO, LHFS, and impaired loans.
These non-recurring fair value adjustments involve the application of
lower-of-cost-or-fair value accounting or write-downs of individual
assets.
In
accordance with ASC 820, the Company groups its assets at fair value in three
levels, based on the markets in which the assets are traded and the reliability
of the assumptions used to determine fair value. These levels are:
|
●
|
Level
1 — Valuation is based upon quoted prices for identical instruments traded
in active markets.
|
|
|
●
|
Level
2 — Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the
market.
|
|
|
●
|
Level
3 — Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable
assumptions reflect the Company’s own estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation
techniques include the use of option pricing models, discounted cash flow
models, and similar techniques. The results cannot be determined with
precision and may not be realized in an actual sale or immediate
settlement of the asset or
liability.
|
The
Company bases its fair values on the price that would be received to sell an
asset in an orderly transaction between market participants at the measurement
date. As required by ASC 820, the Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when measuring
fair value.
The
following is a description of valuation methodologies used for assets measured
at fair value on a recurring basis.
AFS
Securities
The
Company’s AFS securities portfolio is carried at estimated fair value, with any
unrealized gains and losses, net of taxes, reported as accumulated other
comprehensive income/loss in stockholders’ equity. The Company’s
major security types based on the nature and risks of the securities are
included in the table below. The majority of the securities within
the AFS portfolio are issued by U.S. government sponsored
enterprises. The fair values for all AFS securities are based on
quoted prices for similar securities. Various modeling techniques are
used to determine pricing for the Company’s securities, including option pricing
and discounted cash flow models. The inputs to these models may include
benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
benchmark securities, bids, offers and reference data. There are some
AFS securities in the AFS portfolio that have significant unobservable inputs
requiring the independent pricing services to use some judgment in pricing the
related securities. These AFS securities are classified as Level
3. All other AFS securities are classified as Level 2.
The
following tables provide the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a recurring
basis, which consists of AFS securities, at December 31, 2009 (unaudited) and
September 30, 2009.
F-49
|
December
31, 2009 (unaudited)
|
||||||||||||||||
|
Quoted
Prices
|
Significant
|
Significant
|
||||||||||||||
|
in
Active Markets
|
Other
|
Unobservable
|
||||||||||||||
|
Carrying
|
for
Identical Assets
|
Observable
Inputs
|
Inputs
|
|||||||||||||
|
Value
|
(Level
1)
|
(Level
2)
|
(Level 3)(1)
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
AFS
Securities:
|
||||||||||||||||
|
U.S.
government-sponsored enterprises
|
$ | 228,840 | $ | — | $ | 228,840 | $ | — | ||||||||
|
Municipal
bonds
|
2,753 | — | 2,753 | — | ||||||||||||
|
Trust
preferred securities
|
2,408 | — | — | 2,408 | ||||||||||||
|
MBS
|
1,305,096 | — | 1,305,096 | — | ||||||||||||
|
|
$ | 1,539,097 | $ | — | $ | 1,536,689 | $ | 2,408 | ||||||||
|
September
30, 2009
|
||||||||||||||||
|
Quoted
Prices
|
Significant
|
Significant
|
||||||||||||||
|
in
Active Markets
|
Other
|
Unobservable
|
||||||||||||||
|
Carrying
|
for
Identical Assets
|
Observable
Inputs
|
Inputs
|
|||||||||||||
|
Value
|
(Level
1)
|
(Level
2)
|
(Level 3)(1)
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
AFS
Securities:
|
||||||||||||||||
|
U.S.
government-sponsored enterprises
|
$ | 229,875 | $ | — | $ | 229,875 | $ | — | ||||||||
|
Municipal
bonds
|
2,799 | — | 2,799 | — | ||||||||||||
|
Trust
preferred securities
|
2,110 | — | — | 2,110 | ||||||||||||
|
MBS
|
1,389,211 | — | 1,389,211 | — | ||||||||||||
|
|
$ | 1,623,995 | $ | — | $ | 1,621,885 | $ | 2,110 | ||||||||
|
(1)
|
The
Company’s Level 3 AFS securities were not significant at December 31, 2009
(unaudited) or September 30, 2009 and had no material activity during the
quarter ended December 31, 2009 (unaudited) and the year ended September
30, 2009.
|
F-50
The
following is a description of valuation methodologies used for significant
assets measured at fair value on a non-recurring basis.
Loans
Receivable
Loans
which meet certain criteria are evaluated individually for impairment. A loan is
considered impaired when, based upon current information and events, it is
probable the Bank will be unable to collect all amounts due, including principal
and interest, according to the contractual terms of the loan
agreement. Impaired loans at December 31, 2009 (unaudited) and
September 30, 2009 were $47.4 million and $41.4 million, respectively.
Substantially all of the Bank’s impaired loans at December 31, 2009 (unaudited)
and September 30, 2009 are secured by residential real estate. These
impaired loans are individually assessed to ensure that the carrying value of
the loan is not in excess of the fair value of the collateral, less estimated
selling costs. Fair value is estimated through current appraisals, real estate
brokers or listing prices. Fair values may be adjusted by management
to reflect current economic and market conditions and, as such, are classified
as Level 3. Based on this evaluation, the Company maintained an allowance for
loan losses of $4.0 million at December 31, 2009 (unaudited) and $4.6 million at
September 30, 2009, respectively, for such impaired loans.
REO
REO
represents real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure and is carried at the lower of cost or fair value less estimated
selling costs. Fair value is estimated through current appraisals,
real estate brokers or listing prices. As these properties are
actively marketed, estimated fair values may be adjusted by management to
reflect current economic and market conditions and, as such, are classified as
Level 3. REO at December 31, 2009 (unaudited) and September 30, 2009
was $6.6 million and $7.4 million, respectively. During the quarter ended
December 31, 2009 (unaudited), and the year ended September 30, 2009,
charge-offs to the allowance for loan losses related to loans that were
transferred to REO were $437 thousand and $1.5 million, respectively. Write
downs related to REO that were charged to other expense were $173 thousand for
the quarter ended December 31, 2009 (unaudited) and $959 thousand for the year
ended September 30, 2009.
The
following tables provide the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a non-recurring
basis at December 31, 2009 (unaudited) and September 30, 2009.
|
December
31, 2009 (unaudited)
|
|||||||||||||||||
|
Quoted
Prices
|
Significant
|
Significant
|
|||||||||||||||
|
in
Active Markets
|
Other
|
Unobservable
|
|||||||||||||||
|
Carrying
|
for
Identical Assets
|
Observable
Inputs
|
Inputs
|
||||||||||||||
|
Value
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Impaired
loans
|
$ | 47,427 | $ | — | $ | — | $ | 47,427 | |||||||||
|
REO
|
6,637 | — | — | 6,637 | |||||||||||||
|
|
$ | 54,064 | $ | — | $ | — | $ | 54,064 | |||||||||
|
September
30, 2009
|
|||||||||||||||||
|
Quoted
Prices
|
Significant
|
Significant
|
|||||||||||||||
|
in
Active Markets
|
Other
|
Unobservable
|
|||||||||||||||
|
Carrying
|
for
Identical Assets
|
Observable
Inputs
|
Inputs
|
||||||||||||||
|
Value
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Impaired
loans
|
$ | 41,399 | $ | — | $ | — | $ | 41,399 | |||||||||
|
REO
|
7,404 | — | — | 7,404 | |||||||||||||
|
|
$ | 48,803 | $ | — | $ | — | $ | 48,803 | |||||||||
F-51
Fair
Value Disclosures
The
Company determined estimated fair value amounts using available market
information and a selection from a variety of valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and estimation
methodologies may have a material effect on the estimated fair value
amounts. The fair value estimates presented herein are based on
pertinent information available to management as of December 31, 2009
(unaudited), September 30, 2009 and 2008. 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 those dates.
The
carrying amounts and estimated fair values of the Company’s financial
instruments as of December 31, 2009 (unaudited), September 30, 2009 and 2008
were as follows:
|
December
31,
|
September
30,
|
||||||||||||||||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
|||||||||||||||||||||||
|
Estimated
|
Estimated
|
Estimated
|
|||||||||||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||
|
Financial
Assets:
|
|||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 105,128 | $ | 105,128 | $ | 41,154 | $ | 41,154 | $ | 87,138 | $ | 87,138 | |||||||||||||
|
Investment
securities:
|
|||||||||||||||||||||||||
|
AFS
|
234,001 | 234,001 | 234,784 | 234,784 | 49,586 | 49,586 | |||||||||||||||||||
|
HTM
|
417,942 | 419,352 | 245,920 | 248,929 | 92,773 | 92,211 | |||||||||||||||||||
|
MBS:
|
|||||||||||||||||||||||||
|
AFS
|
1,305,096 | 1,305,096 | 1,389,211 | 1,389,211 | 1,484,055 | 1,484,055 | |||||||||||||||||||
|
HTM
|
572,873 | 594,365 | 603,256 | 627,829 | 750,284 | 743,764 | |||||||||||||||||||
|
Loans
receivable
|
5,423,923 | 5,589,283 | 5,603,965 | 5,801,724 | 5,320,780 | 5,301,179 | |||||||||||||||||||
|
BOLI
|
53,777 | 53,777 | 53,509 | 53,509 | 52,350 | 52,350 | |||||||||||||||||||
|
Capital
stock of FHLB
|
134,064 | 134,064 | 133,064 | 133,064 | 124,406 | 124,406 | |||||||||||||||||||
|
Financial
Liabilities:
|
|||||||||||||||||||||||||
|
Deposits
|
4,227,252 | 4,282,549 | 4,228,609 | 4,294,454 | 3,923,883 | 3,934,188 | |||||||||||||||||||
|
Advances
from FHLB
|
2,394,214 | 2,528,034 | 2,392,570 | 2,554,206 | 2,447,129 | 2,485,545 | |||||||||||||||||||
|
Other
borrowings
|
713,609 | 738,653 | 713,609 | 742,301 | 713,581 | 716,951 | |||||||||||||||||||
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 considered to approximate their fair value due to the nature of the
financial asset.
Investment
Securities and MBS - Estimated fair values of securities are based on one
of three methods: 1) quoted market prices where available, 2) quoted
market prices for similar instruments if quoted market prices are not available,
3) unobservable data that represents the Bank’s assumptions about items that
market participants would consider in determining fair value where no market
data is available. AFS securities are carried at estimated fair
value. HTM securities are carried at amortized
cost.
Loans
Receivable - Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as one-
to four-family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans. Each loan category is further
segmented into fixed and adjustable interest rate categories. Market
pricing sources are used to approximate the estimated fair value of fixed and
adjustable-rate one- to four-family residential mortgages. For all
other loan categories, future cash flows are discounted using the LIBOR curve
plus a margin at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturity.
BOLI -
The carrying value of BOLI is considered to approximate its fair value due to
the nature of the financial asset.
F-52
Capital Stock of FHLB - The
carrying value of FHLB stock equals cost. The fair value is based on
redemption at par value.
Deposits - The estimated fair
value of demand deposits, savings and money market 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 a margin to the LIBOR curve.
Advances from FHLB - The
estimated fair value of advances from FHLB is determined by discounting the
future cash flows of each advance using a margin to the LIBOR
curve.
Other Borrowings - Other
borrowings consists of repurchase agreements and the debentures. The estimated fair value
of the repurchase agreements is determined by discounting the future cash flows
of each agreement using a margin to the LIBOR curve. The debentures
have a variable rate structure, with the ability to redeem at par; therefore,
the carrying value of the debentures approximates their estimated fair
value.
F-53
|
16.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
The following table presents summarized quarterly data for each of the fiscal
years indicated for the Company.
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
|||||||||||||||||
|
(Dollars
and counts in thousands, except per share amounts)
|
|||||||||||||||||||||
|
2010
|
|||||||||||||||||||||
|
Total
interest and dividend income
|
$ | 98,887 | n/a | n/a | n/a | $ | 98,887 | ||||||||||||||
|
Net
interest and dividend income
|
44,854 | n/a | n/a | n/a | 44,854 | ||||||||||||||||
|
Provision
for loan losses
|
3,115 | n/a | n/a | n/a | 3,115 | ||||||||||||||||
|
Net
income
|
20,980 | n/a | n/a | n/a | 20,980 | ||||||||||||||||
|
Basic
earnings per share
|
0.29 | n/a | n/a | n/a | 0.29 | ||||||||||||||||
|
Diluted
earnings per share
|
0.29 | n/a | n/a | n/a | 0.29 | ||||||||||||||||
|
Dividends
paid per public share
|
0.79 | n/a | n/a | n/a | 0.79 | ||||||||||||||||
|
Average
number of shares outstanding
|
73,267 | n/a | n/a | n/a | 73,267 | ||||||||||||||||
|
2009
|
|||||||||||||||||||||
|
Total
interest and dividend income
|
$ | 105,273 | $ | 104,335 | $ | 103,078 | $ | 100,100 | $ | 412,786 | |||||||||||
|
Net
interest and dividend income
|
41,218 | 45,862 | 45,922 | 43,640 | 176,642 | ||||||||||||||||
|
Provision
for loan losses
|
549 | 2,107 | 3,112 | 623 | 6,391 | ||||||||||||||||
|
Net
income
|
15,852 | 18,132 | 15,476 | 16,838 | 66,298 | ||||||||||||||||
|
Basic
earnings per share
|
0.22 | 0.25 | 0.21 | 0.23 | 0.91 | ||||||||||||||||
|
Diluted
earnings per share
|
0.22 | 0.25 | 0.21 | 0.23 | 0.91 | ||||||||||||||||
|
Dividends
paid per public share
|
0.61 | 0.50 | 0.50 | 0.50 | 2.11 | ||||||||||||||||
|
Average
number of shares outstanding
|
73,063 | 73,113 | 73,173 | 73,227 | 73,144 | ||||||||||||||||
|
2008
|
|||||||||||||||||||||
|
Total
interest and dividend income
|
$ | 101,028 | $ | 101,816 | $ | 102,785 | $ | 105,177 | $ | 410,806 | |||||||||||
|
Net
interest and dividend income
|
26,627 | 31,002 | 36,681 | 39,858 | 134,168 | ||||||||||||||||
|
Provision
for loan losses
|
— | 119 | 1,602 | 330 | 2,051 | ||||||||||||||||
|
Net
income
|
9,113 | 11,727 | 14,355 | 15,759 | 50,954 | ||||||||||||||||
|
Basic
earnings per share
|
0.12 | 0.16 | 0.20 | 0.22 | 0.70 | ||||||||||||||||
|
Diluted
earnings per share
|
0.12 | 0.16 | 0.20 | 0.22 | 0.70 | ||||||||||||||||
|
Dividends
paid per public share
|
0.50 | 0.50 | 0.50 | 0.50 | 2.00 | ||||||||||||||||
|
Average
number of shares outstanding
|
72,956 | 72,875 | 72,933 | 72,990 | 72,939 | ||||||||||||||||
F-54
|
17.
|
PARENT
COMPANY FINANCIAL INFORMATION (PARENT COMPANY
ONLY)
|
The
Company serves as the holding company for the Bank (see Note 1). The
Company’s (parent company only) balance sheets as of December 31, 2009
(unaudited), September 30, 2009 and 2008, and the related statements of income
and cash flows for the quarters ended December 31, 2009 and 2008 (unaudited),
and for each of the three years in the period ended September 30, 2009 are as
follows:
|
BALANCE
SHEETS
|
||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||
|
December
31,
|
September
30,
|
|||||||||||
|
2009
(unaudited)
|
2009
|
2008
|
||||||||||
|
ASSETS
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 47,943 | $ | 54,101 | $ | 44,508 | ||||||
|
Investment
in the Bank
|
876,290 | 869,028 | 803,643 | |||||||||
|
Investment
in certificates of deposit at the Bank
|
60,000 | 60,000 | 60,000 | |||||||||
|
Note
receivable - ESOP
|
10,411 | 10,411 | 12,667 | |||||||||
|
Other
assets
|
1,772 | 1,622 | 4,621 | |||||||||
|
Income
tax receivable
|
53 | 162 | 67 | |||||||||
|
TOTAL
ASSETS
|
$ | 996,469 | $ | 995,324 | $ | 925,506 | ||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||
|
LIABILITIES:
|
||||||||||||
|
Accounts
payable and accrued expenses
|
$ | 861 | $ | 417 | $ | 709 | ||||||
|
Other
borrowings
|
53,609 | 53,609 | 53,581 | |||||||||
|
Total
liabilities
|
54,470 | 54,026 | 54,290 | |||||||||
|
STOCKHOLDERS’
EQUITY:
|
||||||||||||
|
Preferred
stock, $.01 par value; 50,000,000 shares authorized, no shares
issued or outstanding
|
— | — | — | |||||||||
|
Common
stock, $.01 par value; 450,000,000 shares authorized, 91,512,287
shares issued; 74,023,577, 74,099,355 and 74,079,868
|
915 | 915 | 915 | |||||||||
|
shares
outstanding as of December 31, 2009 (unaudited), September 30, 2009
and September 30, 2008, respectively
|
||||||||||||
|
Additional
paid-in capital
|
453,975 | 452,872 | 445,391 | |||||||||
|
Unearned
compensation - ESOP
|
(7,561 | ) | (8,066 | ) | (10,082 | ) | ||||||
|
Unearned
compensation - RRP
|
(260 | ) | (330 | ) | (553 | ) | ||||||
|
Retained
earnings
|
785,914 | 781,604 | 759,375 | |||||||||
|
Accumulated
other comprehensive income (loss)
|
30,875 | 33,870 | (5,968 | ) | ||||||||
| 1,263,858 | 1,260,865 | 1,189,078 | ||||||||||
|
Treasury
stock, at cost, 17,488,710, 17,412,932 and 17,432,419 shares as of
December 31, 2009 (unaudited), September 30, 2009 and September 30, 2008,
respectively
|
(321,859 | ) | (319,567 | ) | (317,862 | ) | ||||||
|
Total
stockholders’ equity
|
941,999 | 941,298 | 871,216 | |||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 996,469 | $ | 995,324 | $ | 925,506 | ||||||
F-55
|
STATEMENTS
OF INCOME
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
For
the Quarter ended
|
For
the Years Ended
|
|||||||||||||||||||
|
December
31(unaudited),
|
September
30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
INTEREST
AND DIVIDEND INCOME:
|
||||||||||||||||||||
|
Dividend
income from the Bank
|
$ | 12,500 | $ | 15,754 | $ | 50,056 | $ | 41,511 | $ | 35,956 | ||||||||||
|
Interest
income from other investments
|
760 | 987 | 3,612 | 4,683 | 5,751 | |||||||||||||||
|
Total
interest and dividend income
|
13,260 | 16,741 | 53,668 | 46,194 | 41,707 | |||||||||||||||
|
INTEREST
EXPENSE
|
418 | 1,033 | 2,573 | 3,624 | 4,468 | |||||||||||||||
|
NET
INTEREST AND DIVIDEND INCOME
|
12,842 | 15,708 | 51,095 | 42,570 | 37,239 | |||||||||||||||
|
OTHER
INCOME
|
13 | 31 | 76 | 107 | 132 | |||||||||||||||
|
OTHER
EXPENSES:
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
245 | 271 | 1,108 | 975 | 945 | |||||||||||||||
|
Other,
net
|
262 | 75 | 471 | 380 | 438 | |||||||||||||||
|
Total
other expenses
|
507 | 346 | 1,579 | 1,355 | 1,383 | |||||||||||||||
|
INCOME
BEFORE INCOME TAX (BENEFIT) EXPENSE AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (EXCESS OF DISTRIBUTION
OVER)
|
12,348 | 15,393 | 49,592 | 41,322 | 35,988 | |||||||||||||||
|
INCOME
TAX (BENEFIT) EXPENSE
|
(53 | ) | (126 | ) | (162 | ) | (66 | ) | 11 | |||||||||||
|
INCOME
BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY
(EXCESS OF DISTRIBUTION OVER)
|
12,401 | 15,519 | 49,754 | 41,388 | 35,977 | |||||||||||||||
|
EQUITY
IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY (EXCESS
OF DISTRIBUTION OVER)
|
8,579 | 333 | 16,544 | 9,566 | (3,681 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
NET
INCOME
|
$ | 20,980 | $ | 15,852 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
F-56
|
STATEMENTS
OF CASH FLOWS (in
thousands) |
||||||||||||||||||||
|
For
the Quarter ended
December
31 (unaudited),
|
For
the Years Ended September 30,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
|
Net
income
|
$ | 20,980 | $ | 15,852 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
|
Equity
in excess of distribution over/(undistributed) earnings of
subsidiary
|
(8,579 | ) | (333 | ) | (16,544 | ) | (9,566 | ) | 3,681 | |||||||||||
|
Amortization
of deferred debt issuance costs
|
— | 14 | 28 | 57 | 57 | |||||||||||||||
|
Other,
net
|
— | (14 | ) | 14 | 3 | (5 | ) | |||||||||||||
|
Changes
in:
|
||||||||||||||||||||
|
Other
assets
|
(150 | ) | 2,799 | 2,999 | (2,982 | ) | 33 | |||||||||||||
|
Income
taxes receivable/payable
|
109 | (59 | ) | (95 | ) | (295 | ) | 351 | ||||||||||||
|
Accounts
payable and accrued expenses
|
444 | 260 | (292 | ) | (1,669 | ) | 1,321 | |||||||||||||
|
Net
cash flows provided by operating activities
|
12,804 | 18,519 | 52,408 | 36,502 | 37,734 | |||||||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Principal
collected on notes receivable from ESOP
|
— | — | 2,256 | 2,132 | 2,016 | |||||||||||||||
|
Net
cash flows provided by investing activities
|
— | — | 2,256 | 2,132 | 2,016 | |||||||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Payment
from subsidiary for sale of treasury stock related to RRP
shares
|
— | — | 87 | 322 | 180 | |||||||||||||||
|
Dividends
paid
|
(16,670 | ) | (12,737 | ) | (44,069 | ) | (41,426 | ) | (43,000 | ) | ||||||||||
|
Acquisition
of treasury stock
|
(2,292 | ) | (859 | ) | (2,426 | ) | (7,307 | ) | (3,198 | ) | ||||||||||
|
Stock
options exercised
|
— | 1,032 | 1,337 | 623 | 3,942 | |||||||||||||||
|
Net
cash flows used in financing activities
|
(18,962 | ) | (12,564 | ) | (45,071 | ) | (47,788 | ) | (42,076 | ) | ||||||||||
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(6,158 | ) | 5,955 | 9,593 | (9,154 | ) | (2,326 | ) | ||||||||||||
|
CASH
AND CASH EQUIVALENTS:
|
||||||||||||||||||||
|
Beginning
of year
|
54,101 | 44,508 | 44,508 | 53,662 | 55,988 | |||||||||||||||
|
|
||||||||||||||||||||
|
End
of year
|
$ | 47,943 | $ | 50,463 | $ | 54,101 | $ | 44,508 | $ | 53,662 | ||||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||||||||||
|
Interest
payments
|
$ | 447 | $ | 1,743 | $ | 2,866 | $ | 3,929 | $ | 4,511 | ||||||||||
F-57
|
18.
|
SUBSEQUENT EVENTS – PLAN OF CONVERSION AND
REORGANIZATION –
(Unaudited)
|
The Board of Directors of MHC, the Company and
the Bank adopted a Plan of conversion and reorganization (the “Plan”) on May 5, 2010. Pursuant to the Plan, MHC
will convert from the mutual holding company form of organization to a stock
form of organization. MHC will be merged into the Company, and MHC
will no longer exist. Pursuant to the Plan, the Company, which owns 100% of the
Bank, also will be succeeded by a new Maryland corporation, named Capitol
Federal Financial, Inc. As part of the conversion, MHC’s ownership interest of
the Company will be offered for sale in a public offering. The existing publicly
held shares of the Company, which represents the remaining ownership interest in
the Company, will be exchanged for new shares of common stock of Capitol Federal
Financial, Inc. the new Maryland corporation. The exchange ratio will ensure
that immediately after the conversion and public offering, the public
shareholders of the Company will own the same aggregate percentage of Capitol
Federal Financial, Inc. common stock that they owned immediately prior to that
time. When the conversion and public offering are completed, all of the capital
stock of the Bank will be owned by Capitol Federal Financial, Inc. and Capitol
Federal Financial, Inc. will be owned by the public.
The Plan
provides for the establishment, upon the completion of the reorganization, of
special “liquidation accounts” at Capitol Federal Financial, Inc. and at the
Bank for the benefit of certain depositors of the Bank in an amount equal to
MHC’s ownership interest in the retained earnings of the Company as of the date
of the latest balance sheet contained in the prospectus. Following the
completion of the reorganization, under the rules of the Office of Thrift
Supervision, neither Capitol Federal Financial, Inc. nor the Bank, will be
permitted to pay dividends on its capital stock to its stockholders, if
stockholders’ equity would be reduced below the amount of its liquidation
account.
In
addition, Capitol Federal Financial, Inc. intends to fund an additional
contribution to the Bank’s charitable foundation in connection with the
conversion totaling $40.0 million in cash (unaudited).
Direct
costs of the conversion and public offering will be deferred and reduce the
proceeds from the shares sold in the public offering. If the
conversion and public offering are not completed, all costs will be charged to
expense in the period in which the public offering is terminated. No
costs have been incurred related to the conversion as of December 31, 2009
(unaudited).
F-58
No
person has been authorized to give any information or to make any representation
other than as contained in this prospectus and, if given or made, such other
information or representation must not be relied upon as having been authorized
by Capitol Federal Financial, Inc. or Capitol Federal Savings Bank. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby to any person in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. Neither
the delivery of this prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of Capitol Federal Financial, Inc. or Capitol Federal Savings Bank since
any of the dates as of which information is furnished herein or since the date
hereof.
Up
to 212,750,000 Shares
Capitol
Federal Financial, Inc.
(Proposed
Holding Company for
Capitol
Federal Savings Bank)
COMMON
STOCK
par
value $0.01 per share
PROSPECTUS
Sandler
O’Neill + Partners, L.P.
The date
of this prospectus is _______________, 2010.
These
securities are not deposits or savings accounts and are not federally insured or
guaranteed.
Until
______________, 2010, all dealers effecting transactions in the registered
securities, whether or not participating in this offering, 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.
PROXY
STATEMENT/
PROSPECTUS
TO
BE
FILED
BY AMENDMENT
PART
II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13. Other
Expenses of Issuance and Distribution
Set forth
below is an estimate of the amount of fees and expenses (other than underwriting
discounts and commissions) to be incurred in connection with the issuance of the
shares.
|
Registrant’s
Counsel Fees and Expenses
|
$2,400,000
|
|
Registrant’s
Accounting Fees and Expenses
|
425,000
|
|
Appraisal
Fees and Expenses
|
385,000
|
|
Business
Plan Preparation Fees and Expenses
|
85,000
|
|
Marketing
Agent Commission and Records Management Fees(1)
|
71,146
|
|
Marketing
Agent Fees (Including Legal Fees and Expenses)
(2)
|
350,000
|
|
Printing,
EDGAR, Postage and Mailing
|
1,575,000
|
|
Filing
Fees (FINRA, Nasdaq, SEC and OTS)
|
270,000
|
|
Blue
Sky Fees
|
5,000
|
|
Transfer
Agent and Registrar Fees and Expenses
|
100,000
|
|
Other
|
10,000
|
|
TOTAL
|
$76,40,000(3)
|
(1) Capitol
Federal Financial, Inc. has retained Sandler O'Neill +
Partners, L.P. to assist in the sale of common stock on a best efforts basis in
the offerings, and to serve as records management agent in connection with the
conversion and offering. Fees are estimated at the maximum, as
adjusted, of the offering range, assuming 30% of the shares are sold in the
Subscription and Community Offering (including approximately 4.0% to directors,
executive officers and tax-qualified employee benefit plans) and the remaining
70% of the shares are sold in the Syndicated Offering.
(2) Credited
against Marketing Agent commission if the offering is completed.
(3) Amount
assumes completing of the offering.
Item
14. Indemnification of Directors and Officers
Articles 12 and 13 of the Articles of
Incorporation of Capitol Federal Financial, Inc. (the “Corporation”) set forth
circumstances under which directors, officers, employees and agents of the
Corporation may be insured or indemnified against liability which they incur in
their capacities as such:
ARTICLE 12. Indemnification, etc. of Directors
and Officers.
A. Indemnification. The
Corporation shall indemnify (1) its current and former directors and officers,
whether serving the Corporation or at its request any other entity, to the
fullest extent required or permitted by the Maryland General Corporation Law
(the “MGCL”) now or hereafter in force, including the advancement of expenses
under the procedures and to the fullest extent permitted by law, and (2) other
employees and agents to such extent as shall be authorized by the Board of
Directors and permitted by law; provided, however, that, except as provided in
Section B hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. Procedure. If
a claim under Section A of this Article 12 is not paid in full by the
Corporation within 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim. If successful in whole or in part in any such suit, or in
a suit brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall also be entitled to be
reimbursed the expense of prosecuting or defending such suit. It
shall be a defense to any action for advancement of expenses that the
Corporation has not received both (i) an undertaking as required by law to repay
such advances in the event it shall ultimately be determined that the standard
of conduct has not been met and (ii) a written affirmation by the indemnitee of
his good faith belief that the standard of conduct necessary for indemnification
by the Corporation has been met. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard for indemnification set forth in
the MGCL. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the MGCL, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article 12 or otherwise shall be on the
Corporation.
1
C. Non-Exclusivity. The
rights to indemnification and to the advancement of expenses conferred in this
Article 12 shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, the Charter, the Corporation’s Bylaws,
any agreement, any vote of stockholders or the Board of Directors, or otherwise.
D. Insurance. The Corporation may maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the MGCL.
E. Miscellaneous. The Corporation shall not be
liable for any payment under this Article 12 in connection with a claim made by
any indemnitee to the extent such indemnitee has otherwise actually received
payment under any insurance policy, agreement, or otherwise, of the amounts
otherwise indemnifiable hereunder. The rights to indemnification and
to the advancement of expenses conferred in Sections A and B of this Article 12
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
Any
repeal or modification of this Article 12 shall not in any way diminish any
rights to indemnification or advancement of expenses of such director or officer
or the obligations of the Corporation arising hereunder with respect to events
occurring, or claims made, while this Article 12 is in force.
ARTICLE
13. Limitation of Liability. An officer or director
of the Corporation, as such, shall not be liable to the Corporation or its
stockholders for money damages, except (A) to the extent that it is proved that
the person actually received an improper benefit or profit in money, property or
services for the amount of the benefit or profit in money, property or services
actually received; (B) to the extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person’s action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding; or (C) to the extent otherwise provided by the
MGCL. If the MGCL is amended to further eliminate or limit the
personal liability of officers and directors, then the liability of officers and
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by the MGCL, as so amended.
Item 15. Recent
Sales of Unregistered Securities
Not
Applicable.
Item 16. Exhibits
and Financial Statement Schedules
(a) List of
Exhibits: See the Exhibit Index filed as part of this
Registration Statement.
(b) Financial Statement
Schedules: No financial statement schedules are filed because
the required information is not applicable or is included in the consolidated
financial statements or related notes.
2
Item
17. Undertakings
The
undersigned Registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement;
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment 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.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
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 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(5)
That, 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:
(6)
That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§230.424 of this
chapter);
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned registrant;
3
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(7) 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 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.
4
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Topeka, State of Kansas, on May 6,
2010.
|
CAPITOL
FEDERAL FINANCIAL, INC.
|
||
|
By:
|
/s/ John B.
Dicus
|
|
|
John
B. Dicus, President and Chief Executive Officer
(Duly Authorized
Representative)
|
||
KNOW ALL MEN BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints John B. Dicus his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
| By: /s/ John B. Dicus | By: /s/ B. B. Andersen |
| John B. Dicus, Chairman, President | B. B. Andersen, Director |
| and Chief Executive Officer | |
| Principal Executive Officer) | Date: May 6, 2010 |
| Date: May 6, 2010 |
By: /s/ Kent G.
Townsend
Kent G.
Townsend, Executive Vice President
and Chief Financial
Officer
(Principal
Financial Officer)
|
| By: /s/ Michael T. McCoy, M.D. | |
| Michael T. McCoy, M.D., Director | |
| Date: May 6, 2010 | Date: May 6, 2010 |
| By: /s/ Marilyn S. Ward | By: /s/ Jeffrey R. Thompson |
| Marilyn S. Ward, Director | Jeffrey R. Thompson, Director |
| Date: May 6, 2010 | Date: May 6, 2010 |
| By: /s/ Tara D. Van Houweling | By: /s/ Jeffrey M. Johnson |
| Tara D. Van Houweling, First Vice President | Jeffrey M. Johnson, Director |
| and Reporting Director | |
| (Principal Accounting Officer) | |
| Date: May 6, 2010 | Date: May 6, 2010 |
| By: /s/ Morris J. Huey II | |
| Morris J. Huey, Director | |
| Date: May 6, 2010 | |
EXHIBIT
INDEX
|
Exhibit Number
|
Document
|
|
1.1
|
Engagement
Letter with Sandler O'Neill + Partners, L.P.
|
|
1.2
|
Form
of Agency Agreement
|
|
2.0
|
Plan
of Conversion and Reorganization
|
|
3.1
|
Articles
of Incorporation of Capitol Federal Financial, Inc.
|
|
3.2
|
Bylaws
of Capitol Federal Financial, Inc.
|
|
5.0
|
Opinion
of Silver, Freedman & Taff, L.L.P. regarding the legality of the
shares being registered
|
|
8.1
|
Opinion
of Silver, Freedman & Taff, L.L.P. regarding federal tax
matters
|
|
8.2
|
Opinion
regarding state tax matters*
|
|
10.1(i)
|
Capitol
Federal Financial Thrift Plan filed on November 29, 2007 as Exhibit
10.1(i) to the Annual Report on Form 10-K (File No. 000-25391) and
incorporated herein by reference
|
|
10.1(ii)
|
Capitol
Federal Financial Stock Ownership Plan filed on November 29, 2007 as
Exhibit 10.1(ii) to the Annual Report on Form 10-K (File No. 000-25391)
and incorporated herein by reference
|
|
10.2
|
Capitol
Federal Financial 2000 Stock Option and Incentive Plan (the “Stock Option
Plan”) filed on April 13, 2000 as Appendix A to Registrant’s Revised Proxy
Statement (File No. 000-25391) and incorporated herein by
reference
|
|
10.3
|
Capitol
Federal Financial 2000 Recognition and Retention Plan (the “RRP”) filed on
April 13, 2000 as Appendix B to Registrant’s Revised Proxy Statement (File
No. 000-25391) and incorporated herein by reference
|
|
10.4
|
Capitol
Federal Financial Deferred Incentive Bonus Plan, as amended, filed on May
5, 2009 as Exhibit 10.4 to the March 31, 2009 Form 10-Q (File No.
000-25391) and incorporated herein by reference
|
|
10.5
|
Form
of Incentive Stock Option Agreement under the Stock Option Plan filed on
February 4, 2005 as Exhibit 10.5 to the December 31, 2004 Form 10-Q (File
No. 000-25391) and incorporated herein by reference
|
|
10.6
|
Form
of Non-Qualified Stock Option Agreement under the Stock Option Plan filed
on February 4, 2005 as Exhibit 10.6 to the December 31, 2004 Form 10-Q
(File No. 000-25391) and incorporated herein by
reference
|
|
10.7
|
Form
of Restricted Stock Agreement under the RRP filed on February 4, 2005 as
Exhibit 10.7 to the December 31, 2004 Form 10-Q (File No. 000-25391) and
incorporated herein by reference
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|
10.8
|
Description
of Named Executive Officer Salary and Bonus Arrangements filed on November
30, 2009 as Exhibit 10.8 to the Capitol Federal Financial Annual Report on
Form 10-K (File No. 000-25391) for the fiscal year ended September 30,
2009 and incorporated herein by reference
|
|
10.9
|
Description
of Director Fee Arrangements filed on February 4, 2009 as Exhibit 10.9 to
the Capitol Federal Financial December 31, 2008 Form 10-Q (File No.
000-25391) and incorporated herein by reference
|
|
10.10
|
Short-Term
Performance Plan filed on December 1, 2008 as Exhibit 10.10 to the Capitol
Federal Financial Annual Report on Form 10-K (File No. 000-25391) for the
fiscal year ended September 30, 2008 and incorporated herein by
reference
|
|
21.0
|
Subsidiaries
of the Registrant filed on November 30, 2009 as Exhibit 21 to the Capitol
Federal Financial Annual Report on Form 10-K (File No. 000-25391) for the
fiscal year ended September 30, 2009 and incorporated herein by
reference
|
|
23.1
|
Consent
of Silver, Freedman & Taff, L.L.P. (contained in opinions included as
Exhibits 5.0 and 8.1)
|
|
23.2
|
Consent
of Deloitte & Touche, LLP
|
|
23.3
|
Consent
of RP Financial, LP
|
|
24.0
|
Power
of Attorney (set forth on signature page)
|
|
99.1
|
Appraisal
Agreement with RP Financial, LP
|
|
99.2
|
Appraisal
Report of RP Financial, LP
|
|
99.3
|
Letter
of RP Financial, LP regarding subscription rights
|
|
99.4
|
Letter
of RP Financial, LP regarding liquidation account
|
|
99.5
|
Subscription
Order Form and Instructions*
|
|
99.6
|
Additional
Solicitation Materials*
|
|
99.7
|
Form
of Proxy for Capitol Federal Financial stockholders*
|
|
|
*
To be filed supplementally or by
amendment.
|