Registration No. 333- 166578
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 1
to
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
|
27-2631712
|
||
|
(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 (2)
|
(1) Estimated
solely for the purpose of calculating the registration fee.
(2) Previously
paid.
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
New Holding Company for Capitol Federal Savings
Bank)
Up
to 195,500 ,000 Shares of Common Stock
$10.00
per Share
Capitol
Federal Financial, Inc., a newly formed Maryland corporation , is offering up to 195,500 ,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 71 % 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. Shares of common stock not subscribed for in the
subscription and community offerings will be offered to the
general public in a syndicated offering through a syndicate of selected
dealers.
We must
sell a minimum of 144,500 ,000 shares 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 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 29 % interest in CFF common stock currently held by stockholders other than Capitol Federal Savings Bank MHC
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 81,620,351 shares of common stock in the
exchange. Capitol Federal Financial, Inc. also intends to make a $40.0 million cash contribution to the Capitol
Federal Foundation in connection with the
conversion .
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 195,500 ,000 shares or decreased to less than
144,500 ,000 shares. Funds received prior
to the completion of the offering will be held in a segregated account at
Capitol Federal Savings Bank and will earn interest at Capitol Federal Savings
Bank’s statement savings rate, which is currently 0.25 % but
is subject to change at any time . 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 timely 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
|
144,500 ,000 | 170 ,000,000 | 195,500 ,000 | |||||||||
|
Gross
offering
proceeds
|
$ | 1 ,445,000, 000 | $ | 1 ,700, 000,000 | $ | 1,955,000,000 | ||||||
|
Estimated
offering expenses
excluding
selling agent
commission
and expenses
|
$ | 5 ,980, 000 | $ | 5 ,980, 000 | $ | 5 ,980, 000 | ||||||
|
Estimated
selling agent
commissions
and expenses(1) (2)
|
$ | 48,319,875 | $ | 56,849,625 | $ | 65,379,375 | ||||||
|
Net
proceeds
|
$ | 1,390,700,125 | $ | 1,637,170,375 | $ | 1,883,640,625 | ||||||
|
Net
proceeds per
share
|
$ | 9 .62 | $ | 9 .63 | $ | 9 .63 | ||||||
(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 ) or approximately $3,793,500 at the maximum of the offering
range, assuming that 30% of the offering is sold in the subscription and
community offerings , and (ii) a management fee payable by us of 1.00% of
the aggregate dollar amount of the common stock sold in the syndicated 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 share of common stock sold in the syndicated 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, or
approximately $61,582,500 at the maximum of the offering range, assuming
that 70% of the offering will be sold in the syndicated
offering. See “Pro Forma Data” on page [ ]
and “The Conversion and Offering – Marketing Arrangements” on page [ ].
(2) If all shares of common stock are sold in the syndicated
offering, the maximum selling agent commissions and expenses would be
$65,025,000 at the minimum, $76,500,000 at the midpoint, and $87,975,000 at the
maximum of the offering range.
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
TABLE OF
CONTENTS
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 71 % of the issued and outstanding shares
as of May 28, 2010 . 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 March 31, 2010 , CFF had
consolidated assets of $8. 49 billion, deposits of
$4. 32 billion and stockholders’ equity of $ 946.1 million. After the completion of the
conversion, CFF will cease to exist, and will be succeeded by Capitol Federal
Financial, Inc. As of May 28, 2010 , CFF
had 73, 990,478 shares of common stock issued and
outstanding, of which 52,192,817 shares were owned by Capitol Federal Savings
Bank MHC. The remaining 21, 797,661 shares
of CFF common stock outstanding as of that date were
held by the public.
Capitol
Federal Savings Bank
Capitol
Federal Savings Bank is a federally chartered stock savings bank headquartered
in Topeka, Kansas. Capitol Federal Savings Bank was 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 greater Kansas City
metropolitan area .
Our
Business Strategy
We are 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 to our
customers . We strive to enhance stockholder value while
maintaining a strong capital position. To meet
these goals , we focus on the following
strategies :
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 , our reputation , 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 from
correspondent lenders secured by property primarily located within our market
areas and select market areas in Missouri as well as one-
to four-family loans from nationwide lenders. Following completion of
this offering, we intend to increase our emphasis on purchased one- to four-family 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 include 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 are very effective at controlling our costs of
operations. Through our technology platform , 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 $ 114.8 million at March 31,
2010 . 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. For the six months ended
March 31, 2010 , our efficiency ratio was
42.77 %.
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 March 31, 2010 , our ratio of
non-performing assets to total assets was 0. 48 %.
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 comprised of generally
long-term interest-earning assets and generally
short-term 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 Capitol Federal Savings Bank’s stock,
and conducted an initial public offering by selling a minority of CFF’s 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 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 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) they 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 are expected to
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.
|
Terms
of the Offering
We are
offering between 144,500 ,000 and 195,500 ,000 shares of common stock to eligible depositors
and borrowers of Capitol Federal Savings Bank, to 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 195,500 ,000 shares or decreased to fewer than 144,500 ,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 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 and any deposit account withdrawal
authorizations will be canceled. 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.
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 ,
but is not obligated to purchase any shares of common stock in the
offering.
Shares of our common stock not purchased in the
subscription offering or the community offering will be
offered for sale to the general public in a syndicated offering through a
syndicate of selected dealers . We may begin the syndicated
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 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
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 . is an appraisal firm experienced in appraisals of
financial institutions . RP Financial, LC.
has estimated that, as of May 28 , 2010, this
estimated pro forma market value was $2. 41
billion. Based on regulation, the market value is the midpoint of a
range with a minimum of $2. 05 billion and a maximum
of $ 2.77 billion. Based on this
valuation, the regulatory established range, the 71 %
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 144,500 ,000 shares to 195,500 ,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 2.7686 shares at the minimum
of the offering range to 3.7457 shares at the maximum of
the offering range in order to preserve the existing percentage ownership of
public stockholders of CFF in 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 appraised value is not the same as the current
book value or the current fair value of CFF. See “The Conversion and
Offering—Stock Pricing and Number of Shares to be Issued” for a complete
discussion of the valuation methodology used by RP Financial, LC. in determining
the pro forma market value of Capitol Federal Financial,
Inc.
The
appraisal peer group consists of the following companies. Total
assets are as of March 31, 2010 .
5
|
Company
Name and Ticker Symbol
|
Exchange
|
Headquarters
|
Total
Assets
(in
millions)
|
|||||
|
Washington
Federal, Inc. (WFSL)
|
NASDAQ
|
Seattle,
WA
|
$ | 13,803 | ||||
|
NewAlliance
Bancshares (NAL)
|
NYSE
|
New
Haven, CT
|
$ | 8, 501 | ||||
|
Flushing
Financial Corp. (FFIC)
|
NASDAQ
|
Lake
Success, NY
|
$ | 4, 183 | ||||
|
Dime
Community Bancshares (DCOM)
|
NASDAQ
|
Brooklyn,
NY
|
$ | 4,114 | ||||
|
TrustCo
Bank Corp NY (TRST)
|
NASDAQ
|
Glenville,
NY
|
$ | 3, 719 | ||||
|
Bank
Mutual Corp. (BKMU)
|
NASDAQ
|
Milwaukee,
WI
|
$ | 3, 445 | ||||
|
First
Financial Holding Inc. (FFCH)
|
NASDAQ
|
Charleston,
SC
|
$ | 3, 381 | ||||
|
Provident
NY Bancorp, Inc. (PBNY)
|
NASDAQ
|
Montebello,
NY
|
$ | 2, 936 | ||||
|
Brookline
Bancorp, Inc. (BRKL)
|
NASDAQ
|
Brookline,
MA
|
$ | 2, 639 | ||||
|
Danvers
Bancorp, Inc. (DNBK)
|
NASDAQ
|
Danvers,
MA
|
$ | 2, 455 | ||||
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 March 31, 2010 , stock price
information as of May 28 , 2010, as reflected in RP
Financial, LC.’s appraisal report, dated May 28 ,
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 premium of
83.6 % on a price-to-core earnings basis and a discount of 23.0% on a price-to-tangible book value
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
|
27.38 | x | 92.00 | % | ||||
|
Midpoint
|
31.27 | x | 98.04 | % | ||||
|
Maximum
|
34.95 | x | 103.09 | % | ||||
|
Valuation
of peer group companies,
as
of May 28 , 2010
|
||||||||
|
Average
|
19.04 | x | 133.93 | % | ||||
|
Median
|
16.84 | x | 133.17 | % | ||||
|
(1)
|
Information
is derived from the RP Financial, LC. appraisal report and is based upon
estimated core earnings for the twelve months ended March 31, 2010 . 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 junior subordinated debentures
(debentures) .
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 Contribution to 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. 05 billion or above $ 2.77 billion, then, after
consulting with the Office of Thrift Supervision, we may: terminate the offering
and promptly return all funds; set a new offering range,
promptly return all funds and give all subscribers updated information and the
opportunity to place a new order; 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 and the percentage of CFF common stock then held by the
public . 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 CFF common stock issued and outstanding as of March 31, 2010 . 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
|
144,500 ,000 | 70. 6 | % | 60,328,085 | 29. 4 | % | 204,828,085 | 2.7686 | 276 | |||||||||||||||||||
|
Midpoint
|
170 ,000,000 | 70. 6 | % | 70,974,218 | 29. 4 | % | 240,974,218 | 3. 2572 | 325 | |||||||||||||||||||
|
Maximum
|
195,500 ,000 | 70. 6 | % | 81,620,351 | 29. 4 | % | 277,120,351 | 3.7457 | 374 | |||||||||||||||||||
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 to a stockholder who holds a
stock certificate , 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 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 March 31, 2010 , there were
412,931 outstanding options to purchase shares of
CFF common stock, 309,731 of which have
vested. Such options will be converted into options to purchase
1, 143,240 shares of common stock at the minimum of
the offering range and 1, 546,715 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 195,500 ,000 shares of common stock
in the stock offering, equal to the maximum of the offering range, and we have
net proceeds of $ 1.88 billion, we intend to
distribute the net proceeds as follows:
|
|
● |
$ 941.8 million ( 50.0% of the net proceeds) will be
invested in Capitol Federal Savings
Bank;
|
|
|
● |
$ 78.2 million (4. 2 % 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. 1 % of the net proceeds) will be contributed by
Capitol Federal Financial, Inc. to the Capitol Federal
Foundation;
|
|
●
|
$53.6
million (2. 8 % of the net proceeds) will be
used by Capitol Federal Financial, Inc. to repay outstanding debentures ;
and
|
|
●
|
$ 770.0 million ( 40.9 % 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 , including one- to
four-family loan purchases, 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
During the three months ended March 31, 2010 , 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 per share. It is currently anticipated that the dividend
yield will be 3.0%, based on the $10.00 per share
offering price. We intend to continue our prior practice of paying a
special year-end dividend when earnings are sufficient to support the special
dividend payment. We expect that the timing of quarterly and special
dividend payments will be consistent with our current practice. 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
8
currently
own, our directors and executive officers, together with their associates, are
expected to beneficially own approximately 5, 460,090
and 7, 314,728 shares of common stock, or 2. 67 % and 2. 64 % of our total
outstanding shares of common stock, at the minimum and the maximum of the
offering range, respectively.
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 7,820 ,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 6.2% of
the shares outstanding following the conversion. 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 7,820 ,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. 6 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
3,910 ,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 9,775,000 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. We intend to fund the
stock-based incentive plan through open market purchases rather than through the
issuance of authorized but unissued shares of common stock, subject to future
market conditions and regulatory limitations described
below. 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
|
5,780 ,000 | 7,820 ,000 | 4.00 | % |
NA
|
% | $ | 57,800 | $ | 78,200 | ||||||||||||||
|
Restricted
stock awards
|
2,890 ,000 | 3,910 ,000 | 2.00 | 1.39 | % | 28,900 | 39,100 | |||||||||||||||||
|
Stock
options
|
7, 225,000 | 9,775,000 | 5.00 | 3.41 | % | 17,557 | 23,753 | |||||||||||||||||
|
Total
|
15,895,000 | 21,505,000 | 11.00 | % | 4.80 | % | $ | 104,257 | $ | 141,053 | ||||||||||||||
|
(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 $ 2 .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. 84 %; and a volatility rate of 23.90 %. 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 March 31,
2010 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 277,120,351 shares are
outstanding after the offering, which includes the sale of 195,500 ,000 shares in the offering at the maximum of the
offering range, and the issuance of shares in exchange for shares of CFF common stock using an exchange ratio of 3.7457 . 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
|
Employees
|
9,317,425 | (1) | $ | 93,174,250 | 3.36 | % | |||||||
|
New employee stock ownership plan
|
Employees
|
7,820,000 | 78,200,000 | 2.82 | ||||||||||
|
Total employee stock
ownership plan
|
Employees
|
17,137,425 | 171,374,250 | 6.18 | ||||||||||
|
Existing shares of restricted
stock
|
Directors,
Officers and Employees
|
593,645 | (2) | 5,936,448 | 0. 21 | |||||||||
|
New
shares of restricted stock
|
Directors,
Officers and Employees
|
3,910 ,000 | 39,100 ,000 | (3) | 1.41 | |||||||||
|
Total
shares of restricted stock
|
Directors,
Officers and Employees
|
4,503,645 | 45,036,448 | 1. 62 | ||||||||||
|
Existing stock options
|
Directors,
Officers and Employees
|
4,706,082 | (4) | 11,435,780 | 1. 70 | |||||||||
|
New
stock options
|
Directors,
Officers and Employees
|
9,775,000 | 23,753,250 | (5) | 3.53 | |||||||||
|
Total
stock options
|
Directors,
Officers and Employees
|
14,481,082 | 35,189,030 | 5. 23 | ||||||||||
|
Total
of stock-based incentive plans
|
36,122,152 | $ | 251,599,728 | 13 .03 | % | |||||||||
|
(1)
|
As of March 31, 2010 , CFF’s existing
employee stock ownership plan held 2, 487,499 shares,
of which 1,680,943 shares 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 underlying options 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 $ 2 .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, 23.90 %; and interest rate, 3. 84 %.
|
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
|
||||||||||||
|
2,890 ,000 Shares
Awarded
at Minimum of
|
3, 400 ,000 Shares
Awarded
at Midpoint of
|
3,910 ,000 Shares
Awarded
at Maximum of
|
||||||||||
|
Share
Price
|
Range | Range | Range | |||||||||
| $ 8.00 | $ |
23,120 ,000
|
$ |
27,200 ,000
|
$ |
31,280 ,000
|
||||||
| 10.00 |
28,900 ,000
|
34 ,000,000
|
39,100 ,000
|
|||||||||
| 12.00 |
34,680 ,000
|
40,800 ,000
|
46,920 ,000
|
|||||||||
| 14.00 |
40,460 ,000
|
47,600 ,000
|
54,740 ,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, 225,000
Options
at
Minimum
of Range
|
8,500 ,000
Options
at
Midpoint
of Range
|
9,775,000
Options
at
Maximum
of Range
|
||||||||||||
|
$
8.00
|
$ | 1.94 | $ | 14,016,500 | $ | 16,490 ,000 | $ | 18,963,500 | ||||||||
|
10.00
|
2 .43 | 17,556,750 | 20,655,000 | 23,753,250 | ||||||||||||
|
12.00
|
2.92 | 21,097,000 | 24,820 ,000 | 28,543,000 | ||||||||||||
|
14.00
|
3.40 | 24,565 ,000 | 28,900 ,000 | 33,235 ,000 | ||||||||||||
The
tables presented above are provided for informational purposes
only. Our shares of common stock may trade below $10.00 per
share. Before you make an investment decision, we urge you to read
this entire prospectus carefully, including, but not limited to, the section
entitled “Risk Factors” beginning on page
[ ].
Limits
on How Much Common Stock You May Purchase
The
minimum number of shares of common stock that may be purchased in the offering
is 25.
The
maximum number of shares of common stock that may be purchased by a person or
persons exercising subscription rights through a single qualifying deposit
account held jointly is 7, 000 ,000 shares. If
any of the following persons purchase shares of common stock, their purchases,
in all categories of the offering combined, when aggregated with your purchases,
cannot exceed 7, 000 ,000 shares ($ 70 .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 144,500 ,000 shares
of common stock in the subscription, community and/or syndicated offering, we
may take the following steps in order to issue the
minimum number of shares of common stock in the offering range:
|
|
● |
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
whose loan remains outstanding on 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 71 % 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;
|
|
|
● |
We
sell at least the minimum number of shares of common stock offered;
and
|
|
|
● |
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.
|
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 May 28, 2010 , Capitol
Federal Savings Bank MHC owned 71 % of the
outstanding shares of common stock of CFF. The directors , chairman emeritus and executive officers of CFF and
their affiliates owned 2,073,629 shares of CFF, or
2. 8 % of the outstanding shares of common stock as of
May 28, 2010 . 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
$40.0 million in cash to the charitable
foundation. 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. The Capitol
Federal Foundation currently owns 1,462,287 shares of CFF common stock. Following completion of
the offering and assuming closing at the midpoint of the valuation range, the
foundation will own 4,762,961 shares, or 2.0% of the outstanding shares of
Capitol Federal Financial, Inc. Pursuant to Office of Thrift
Supervision regulations, all shares of CFF and Capitol Federal Financial Inc.
common stock owned by the foundation must be voted in the same ratio as all
other shares of CFF or Capitol Federal Financial, Inc. are
voted.
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, 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
receive compensation for their service as a trustee of the charitable
foundation. In addition, some of our employees serve as executive
officers of the charitable foundation. None of these individuals
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 six months ended
March 31, 2010 and the
years ended September 30, 2009 and 2008, the Capitol Federal Foundation made
charitable contributions of $ 2.0 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 could 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 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:
|
|
(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. We expect our employee stock ownership plan to
purchase up to 4.0% 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 as of January 6, 1993
whose loan remains outstanding on [ ],
2010.
|
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 offering through a syndicate of selected
dealers. We may begin the syndicated 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. will act as co-manager for the
syndicated offering, which is also being conducted on a best efforts
basis. The syndicated 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
offering. See “The Conversion and Offering — Syndicated
Offering.”
15
How
You May Purchase Shares of Common Stock
In the
subscription and community offerings, you may pay for your shares only
by:
|
(i)
|
personal
check, bank check or money order made payable directly to Capitol Federal
Financial, Inc.; or
|
|
(ii)
|
authorizing
us to withdraw funds from the Capitol Federal Savings Bank deposit
accounts designated on the stock order
form.
|
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 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 195,500 ,000 shares or decreased to fewer than
144,500 ,000 shares.
16
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.
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 195,500 ,000 or decreases to less than 144,500 ,000. We may extend the [ ],
2010 expiration date, without notice to you, until [ ],
2010. If the offering is extended beyond [ ],
2010, we will be required to resolicit purchasers before proceeding with the
offering. In this case , 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.
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.
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. 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. See “The Conversion and Offering – Using
Retirement Account Funds to Purchase Shares.”
Delivery
of Stock Certificates
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. 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, within five business days
following completion of the conversion and offering.
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. 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.
17
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-[ ]
-[ ].
18
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.
Capitol Federal Savings Bank’s net loan charge-offs during the
fiscal years 2007, 2008 and 2009, and the six months ended March 31, 2010 were
$27 thousand, $441 thousand, $2.0 million and $1.6 million,
respectively. Historically, Capitol Federal Savings Bank’s net loan
charge-offs have been low due to the low level of non-performing loans and the
amount of equity in the properties collateralizing the related loans.
During fiscal year
2009 and the six months ended March 31, 2010, Capitol Federal Savings Bank
recorded a provision for loan losses of $6.4 million and $6.3 million,
respectively, compared to $2.1 million in fiscal year 2008 and a recovery of
$225 thousand in fiscal year 2007. The increases in the provision for loan
losses and net loan charge-offs were directly related to the increases in
delinquent loans, non-performing loans, and losses on foreclosed property
transactions; which were primarily a result of the decline in home prices, the
economic recession and lingering negative economic conditions. The
overall amount of the provision for loan losses and net loan charge-offs has not
been significant to date because of Capitol Federal Savings Bank’s traditional
underwriting standards and the relative economic stability of the geographic
areas in our primary lending areas.
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 , especially in our geographic market area, would likely
exacerbate the adverse effects of these difficult market conditions on us 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. Approximately 70 % of our loan
portfolio is comprised of loans secured by property located in Kansas, and approximately 15 % 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 a significant number of our
customers are dependent.
19
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 , as a result
of the declines in home prices, 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. When determining the amount of
the allowance for loan losses, 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 which is maintained through
provisions for loan losses . Material additions to our allowance would
materially decrease our net income.
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. 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. 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.
Our allowance for loan losses at September 30, 2007, 2008, 2009
and March 31, 2010 was $4.2 million, $5.8 million, $10.2 million and $14.7
million, respectively. The increase in our allowance for loan losses
has primarily been a result of a decline in the performance of some of our
mortgage loans due to the economic recession, lingering negative economic
conditions and the related collateral values not being sufficient to pay the
outstanding loan balance due to the decline in home prices. However,
the overall credit quality of Capitol Federal Savings Bank’s loan portfolio
continues to compare favorably to the industry and peers as a result of our
traditional underwriting standards. Capitol Federal Savings Bank’s
non-performing loans at September 30, 2007, 2008 and 2009 and March 31, 2010
were $7.4 million, $13.7 million, $30.9 million and $34.0 million,
respectively. Non-performing loans as a percentage of total loans at
September 30, 2007, 2008 and 2009 and March 31, 2010 was 0.14%, 0.26%, 0.55% and
0.63%, respectively.
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 , specifically
accumulated other comprehensive income (loss), by the amount of change in
the estimated fair value of the available for sale securities, net of deferred
taxes. Decreases in the fair value of available
for sale securities would, therefore, adversely impact our stockholders’ equity.
The balance of accumulated other comprehensive income (loss) at September 30,
2007, 2008, 2009 and March 31, 2010 was $1.3 million, $(6.0) million, $33.9
million and $30.8 million, respectively.
20
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 as the rates on their loans adjust upward and
their payments increase. Rising interest rate environments
also entice customers with adjustable rate loans to refinance into fixed-rate
loans, exposing Capitol Federal Savings Bank to additional
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.
Capitol Federal Savings Bank’s one-year cumulative excess of
interest-earning assets over interest-bearing liabilities as a percentage of
asset at March 31, 2010 was 3.46% which signifies a positive gap position,
meaning we have more interest-earning assets expected to reprice over the next
12 months than interest-bearing liabilities. In a rising rate
environment, a positive gap position would tend to result in an increase in our
net interest income. In a decreasing rate environment, a positive gap
position would tend to result in a decrease in our net interest income.
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 adjustable-rate assets tend to refinance into
fixed-rate loans when rates are low . 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 Federal Home Loan Bank ( 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 March 31, 2010 , $2. 73 billion, or 32.1 % of our
assets, consisted of investment and mortgage-backed securities, most of which
were issued by, or have principal and interest payments guaranteed by the Federal National Mortgage Association ( FNMA ) or the Federal Home Loan Mortgage
Corporation ( FHLMC ) .
21
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, 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.
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
increased the base assessment rate by 7 basis points
effective January 1, 2009, and effective April 1, 2009 , included additional factors to be used in calculating a
financial institution’s total assessment rate. This has resulted in
our annual assessment rate increasing from 5 basis points prior to January 1,
2009 to a current rate of approximately 16 basis points and, therefore,
our Federal Deposit Insurance Corporation insurance premium expense increasing 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 $ 695.4 million and $ 941.8
million 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 debentures . 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. Capitol Federal Savings Bank intends to increase the amount of
one- to four-family loans purchased compared to its historical
levels. If additional volumes of one- to four-family loans meeting
our underwriting criteria are not available for purchase at acceptable prices,
these funds will be used to purchase mortgage backed securities (MBS) and other
investment securities, which may generate a lower yield.
With the
exception of the loan to the employee stock ownership plan, the cash
contribution to the charitable foundation and the repayment of outstanding debentures, 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.
23
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 195,500 ,000 shares or decreased to less than
144,500 ,000 shares.
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 six months
ended March 31, 2010 was
7.49 % compared to an average return on equity of
( 0.42 )% based on trailing twelve-month earnings for
all publicly traded fully converted savings institutions as of March 31, 2010 . 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 six months ended March 31,
2010 was 3. 26% 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
may never 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. 64 % of our
outstanding shares of common stock at the midpoint of the offering
range. In addition, our employee stock ownership plan is expected to
own 6.2 % of the shares of common stock outstanding upon completion of the conversion and offering. 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.
24
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.
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. The actual amount of
these new stock-related compensation and benefit expenses is subject to applicable accounting practices which 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 $ 12.6 million ($ 9.1 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 and the actual number of
restricted shares awarded or options granted . 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 contribute
$40 million in cash to the Capitol Federal Foundation in connection with
the conversion. 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 $ 35.6 million for the six months ended March
31, 2010 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.
|
25
|
●
|
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 .
|
|
●
|
Charter of Capitol
Federal Savings Bank. The charter 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
will 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
information at March 31, 2010
and 2009 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 operations data for the six
months ended March 31, 2010 and 2009 and the balance sheet data at March 31,
2010 were not audited. However, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the unaudited periods have been
made. The results of operations for the six months ended March 31,
2010 are not necessarily indicative of the results of operations that may be
expected for the entire fiscal year. 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.
| At | ||||||||||||||||||||||||
| March 31, | At Year Ended September 30, | |||||||||||||||||||||||
| 2010 | 2009 |
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| (Dollars and share counts in thousands, except per share amounts) | ||||||||||||||||||||||||
|
Selected
Balance Sheet Data:
|
||||||||||||||||||||||||
|
Total
assets
|
$ | 8,485,465 | $ | 8,403,680 | $ | 8,055,249 | $ | 7,675,886 | $ | 8,199,073 | $ | 8,409,687 | ||||||||||||
|
Loans
receivable, net
|
5,380,852 | 5,603,965 | 5,320,780 | 5,290,071 | 5,221,117 | 5,464,130 | ||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||
|
Available-for-sale
(AFS)
|
141,893 | 234,784 | 49,586 | 102,424 | 189,480 | -- | ||||||||||||||||||
|
Held-to-maturity
(HTM)
|
828,538 | 245,920 | 92,773 | 421,744 | 240,000 | 430,499 | ||||||||||||||||||
|
Mortgage-backed
securities (MBS):
|
||||||||||||||||||||||||
|
Trading
|
-- | -- | -- | -- | 396,904 | -- | ||||||||||||||||||
|
AFS
|
1,212,991 | 1,389,211 | 1,484,055 | 402,686 | 556,248 | 737,638 | ||||||||||||||||||
|
HTM
|
544,319 | 603,256 | 750,284 | 1,011,585 | 1,131,634 | 1,407,616 | ||||||||||||||||||
|
Capital
stock of Federal Home Loan Bank (FHLB)
|
135,050 | 133,064 | 124,406 | 139,661 | 165,130 | 182,259 | ||||||||||||||||||
|
Deposits
|
4,319,066 | 4,228,609 | 3,923,883 | 3,922,782 | 3,900,431 | 3,960,297 | ||||||||||||||||||
|
Advances
from FHLB
|
2,395,842 | 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
|
946,073 | 941,298 | 871,216 | 867,631 | 863,219 | 865,063 | ||||||||||||||||||
|
Book
value per share
|
12. 91 | 12.85 | 11.93 | 11.88 | 11.89 | 11.91 | ||||||||||||||||||
27
| Six Months Ended March 31, |
Year
Ended September 30,
|
|||||||||||||||||||||||||||
| 2010 | 2009 |
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
| (Dollars and share counts in thousands, except per share amounts) | ||||||||||||||||||||||||||||
|
Selected
Operations Data:
|
||||||||||||||||||||||||||||
|
Total
interest and dividend income
|
$ | 192,594 | $ | 209,608 | $ | 412,786 | $ | 410,806 | $ | 411,550 | $ | 410,928 | $ | 400,107 | ||||||||||||||
|
Total
interest expense
|
105,057 | 122,528 | 236,144 | 276,638 | 305,110 | 283,905 | 244,201 | |||||||||||||||||||||
|
Net
interest and dividend income
|
87,537 | 87,080 | 176,642 | 134,168 | 106,440 | 127,023 | 155,906 | |||||||||||||||||||||
|
Provision
(recovery) for loan losses
|
6,315 | 2,656 | 6,391 | 2,051 | (225 | ) | 247 | 215 | ||||||||||||||||||||
|
Net
interest and dividend income after provision
(recovery) for loan losses
|
81,222 | 84,424 | 170,251 | 132,117 | 106,665 | 126,776 | 155,691 | |||||||||||||||||||||
|
Retail fees and charges
|
8,936 | 8,561 | 18,023 | 17,805 | 16,120 | 17,007 | 16,029 | |||||||||||||||||||||
|
Other income
|
10,731 | 5,017 | 10,571 | 12,222 | 7,846 | 7,788 | 7,286 | |||||||||||||||||||||
|
Total other income
|
19,667 | 13,578 | 28,594 | 30,027 | 23,966 | 24,795 | 23,315 | |||||||||||||||||||||
|
Total
other expenses
|
45,849 | 44,182 | 93,621 | 81,989 | 77,725 | 72,868 | 73,631 | |||||||||||||||||||||
|
Income before income tax expense
|
55,040 | 53,820 | 105,224 | 80,155 | 52,906 | 78,703 | 105,375 | |||||||||||||||||||||
|
Income
tax expense
|
19,405 | 19,836 | 38,926 | 29,201 | 20,610 | 30,586 | 40,316 | |||||||||||||||||||||
|
Net
income
|
$ | 35,635 | $ | 33,984 | $ | 66,298 | $ | 50,954 | $ | 32,296 | $ | 48,117 | $ | 65,059 | ||||||||||||||
|
Basic
earnings per share
|
$ | 0. 49 | $ | 0. 46 | $ | 0.91 | $ | 0.70 | $ | 0.44 | $ | 0.66 | $ | 0.90 | ||||||||||||||
|
Average
shares outstanding
|
73, 241 | 73, 088 | 73,144 | 72,939 | 72,849 | 72,595 | 72,506 | |||||||||||||||||||||
|
Diluted
earnings per share
|
$ | 0. 49 | $ | 0. 46 | $ | 0.91 | $ | 0.70 | $ | 0.44 | $ | 0.66 | $ | 0.89 | ||||||||||||||
|
Average
diluted shares outstanding
|
73, 264 | 73, 168 | 73,208 | 73,013 | 72,970 | 72,854 | 73,082 | |||||||||||||||||||||
|
Dividends paid per public share (1)
|
$
|
1.29
|
$
|
1.11
|
$
|
2.11
|
$
|
2.00
|
$
|
2.09
|
$
|
2.30
|
$
|
2.00
|
||||||||||||||
(footnotes
begin on next page)
28
| At or For the Six Months | ||||||||||||||||||||||||
| Ended | ||||||||||||||||||||||||
| March 31, |
At and for Year Ended September
30,
|
|||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Selected
Performance and Financial Ratios and Other Data:
|
||||||||||||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||||||||||
|
Return
on average assets
|
0.85 | % | 0.81 | % | 0.65 | % | 0.41 | % | 0.58 | % | 0.77 | % | ||||||||||||
|
Return
on average equity
|
7.49 | 7.27 | 5.86 | 3.72 | 5.58 | 7.62 | ||||||||||||||||||
|
Dividend payout
ratio
|
76.91 | 66.47 | 81.30 | 133.14 | 97.41 | 62.59 | ||||||||||||||||||
|
Ratio
of operating expense to average total
assets
|
1. 09 | 1.14 | 1.04 | 0.98 | 0.88 | 0.87 | ||||||||||||||||||
|
Efficiency
ratio(2)
|
42.77 | 45.62 | 49.93 | 59.60 | 48.03 | 41.19 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ratio
of average interest-earning assets
to
average interest-bearing liabilities
|
1. 11 | x | 1.12 | x | 1.12 | x | 1.12 | x | 1.11 | x | 1.10 | x | ||||||||||||
|
Interest
rate spread information:
|
||||||||||||||||||||||||
|
Average
during
period
|
1. 84 | % | 1.86 | % | 1.35 | % | 0.93 | % | 1.19 | % | 1.59 | % | ||||||||||||
|
End
of
period
|
1. 83 | 1.89 | 1.70 | 0.89 | 1.07 | 1.46 | ||||||||||||||||||
|
Net
interest
margin
|
2. 14 | 2.20 | 1.75 | 1.36 | 1.57 | 1.87 | ||||||||||||||||||
|
Asset
Quality Ratios:
|
||||||||||||||||||||||||
|
Non-performing
assets to total assets
|
0. 48 | 0.46 | 0.23 | 0.12 | 0.10 | 0.08 | ||||||||||||||||||
|
Non-performing
loans to total loans
|
0. 63 | 0.55 | 0.26 | 0.14 | 0.11 | 0.09 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance
for loan losses to non-performing
loans
|
43.30 | 32.83 | 42.37 | 56.87 | 79.03 | 89.14 | ||||||||||||||||||
|
Allowance
for loan losses to loans receivable,
net
|
0. 27 | 0.18 | 0.11 | 0.08 | 0.08 | 0.08 | ||||||||||||||||||
|
Net charge-offs during the period to average loans
outstanding
|
0. 03 | 0.04 | * | * | * | * | ||||||||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||||||||
|
Equity
to total assets at end of period (3)
|
11. 15 | 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. 0 | 10.0 | 10.0 | 10.3 | 9.5 | 9.1 | ||||||||||||||||||
|
Tier
1 (core)
capital
|
10. 0 | 10.0 | 10.0 | 10.3 | 9.5 | 9.1 | ||||||||||||||||||
|
Tier
1 (core) risk-based capital
|
23. 6 | 23.2 | 23.1 | 22.9 | 22.6 | 21.3 | ||||||||||||||||||
|
Total
risk-based
capital
|
23.9 | 23.3 | 23.0 | 22.8 | 22.5 | 21.3 | ||||||||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||
|
Number
of traditional offices
|
35 | 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 CFF common stock,
waived its right to receive dividends paid on CFF common stock with the exception of the $0.50 per
share dividend paid on 500,000 shares in February 2010 and 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%
|
29
This
prospectus contains forward looking statements which are made in good faith by
us 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;
|
|
●
|
our
success in gaining regulatory approval of our products and services and
branching locations, when
required;
|
30
|
●
|
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. 39 billion and $ 1.88
billion.
We intend
to distribute the net proceeds from the stock offering as follows:
|
Based
Upon the Sale at $10.00 Per Share of
|
||||||||||||||||||||||||
|
144,500 ,000 Shares
|
170 ,000,000 Shares
|
195,500 ,000 Shares
|
||||||||||||||||||||||
|
Amount
|
Percent
of
Net
Proceeds
|
Amount
|
Percent
of
Net
Proceeds
|
Amount
|
Percent
of
Net
Proceeds
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Offering
proceeds
|
$ | 1,445,000 | $ | 1, 700 ,000 | $ | 1,955,000 | ||||||||||||||||||
|
Less
offering expenses
|
54,300 | 62,830 | 71,359 | |||||||||||||||||||||
|
Net
offering proceeds
|
$ | 1,390,700 | 100.0 | % | $ | 1,637,170 | 100.0 | % | $ | 1,883,641 | 100.0 | % | ||||||||||||
|
Distribution
of net proceeds:
|
||||||||||||||||||||||||
|
To
Capitol Federal Savings Bank
|
$ | 695,350 | 50.0 | % | $ | 818,585 | 50.0 | % | $ | 941,820 | 50.0 | % | ||||||||||||
|
To
fund the loan to employee stock
ownership plan
|
57,800 | 4.2 | 68 ,000 | 4.2 | 78,200 | 4. 2 | ||||||||||||||||||
|
To
repay outstanding debentures
|
53,609 | 3. 9 | 53,609 | 3. 3 | 53,609 | 2. 8 | ||||||||||||||||||
|
Cash
contributed to foundation
|
40,000 | 2. 9 | 40,000 | 2. 4 | 40,000 | 2. 1 | ||||||||||||||||||
|
Retained
by Capitol Federal Financial, Inc.
|
$ | 543,941 | 39. 0 | % | $ | 656,976 | 40. 1 | % | $ | 770,011 | 40.9 | % | ||||||||||||
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 offering rather than in the subscription and community
offerings.
Capitol
Federal Financial, Inc. Intends to
Use the Proceeds
it Retains From the Offering:
|
●
|
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;
|
31
|
●
|
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.
|
As reflected in the table above, Capitol Federal
Financial, Inc. also intends to fund a loan to the employee stock ownership plan to purchase
shares of common stock in the offering, make a $40.0 million cash
contribution to the Capitol Federal Foundation and repay outstanding debentures 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 Intends to 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. We also intend to purchase
loans in the future that meet our underwriting standards. These standards
include the full documentation of loans, combined loan to value ratios less than
80% and credit scores above 700. We will avoid market areas that have
traditionally underperformed and will look to those areas where there have been
low incidents of non-performing loans. Purchased loans will be required to
be current for the last twelve months. We will purchase new adjustable
rate loans and adjustable rate loans that have been amortizing for more than
twelve months, fifteen year loans and will consider the purchase of thirty-year
fixed rate loans to the extent we remain in compliance with board established
interest rate risk limits. We will buy loans originated in or prior to
2004 or after June 2008. The maximum individual loan amount we will
purchase is $1.0 million.
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.”
Our
return on equity may be relatively low unless and until we are able to
effectively reinvest the additional capital raised in the offering, 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.”
32
During the six months ended March 31, 2010 , CFF paid two quarterly
cash dividends of $0.50 per share each , which equals $2.00 per share on an annualized
basis. In addition, we paid a year end cash
dividend of $0.29 per share. After the conversion,
we intend to continue to pay cash dividends on a quarterly basis, although at a
reduced level per share. It is currently
anticipated that the dividend yield will be 3.0%,
based on the $10.00 per share offering price. We intend to continue
our prior practice of paying a special year-end dividend when earnings are
sufficient to support the special dividend payment. We expect that
the timing of quarterly and special dividend payments will be consistent with
our current practice . 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 March 31, 2010 , there were 20,983,705
shares of CFF common stock issued and outstanding (excluding shares held by
Capitol Federal Savings Bank MHC).
33
|
Year Ending September 30,
2010
|
High
|
Low
|
Dividend
Paid
Per Share
|
|||||||||
|
Third
quarter (through _____,
2010)
|
$ | [ ] | $ | [ ] | $ | 0.50 | ||||||
|
Second
quarter
|
38.20 | 30.76 | 0 .50 | |||||||||
|
First
quarter
|
33.36 | 28.19 | 0 .79 | |||||||||
|
Year Ending September 30,
2009
|
High
|
Low
|
Dividend
Paid
Per Share
|
|||||||||
|
Fourth
quarter
|
$ | 39.29 | $ | 30.24 | $ | 0 .50 | ||||||
|
Third
quarter
|
44.93 | 34.91 | 0 .50 | |||||||||
|
Second
quarter
|
45.77 | 33.02 | 0 .50 | |||||||||
|
First
quarter
|
47.64 | 33.06 | 0 .61 | |||||||||
|
Year Ending September 30,
2008
|
High
|
Low
|
Dividend
Paid
Per Share
|
|||||||||
|
Fourth
quarter
|
$ | 51.56 | $ | 36.06 | $ | 0 .50 | ||||||
|
Third
quarter
|
41.45 | 36.82 | 0 .50 | |||||||||
|
Second
quarter
|
38.60 | 27.63 | 0 .50 | |||||||||
|
First
quarter
|
36.09 | 30.47 | 0 .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 $ 37.08 per share. At [ ] 2010,
the closing price of CFF’s common stock was $[ ],
and there were approximately 9,395 stockholders of
record.
34
At March 31, 2010 , 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 March 31, 2010 , 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 March 31, 2010 Based Upon the Sale at $10.00 Per
Share
|
|||||||||||||||||||||||||||||||
|
March 31, 2010
|
144,500 ,000 Shares
|
170 ,000,000 Shares
|
195,500 ,000 Shares
|
|||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||
| of | of | of | of | |||||||||||||||||||||||||||||
| Amount | Assets(1) |
Amount
|
Assets(1) |
Amount
|
Assets(1)
|
Amount
|
Assets(1)
|
|||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Equity
capital
|
$ | 873,053 | 10. 27 | % | $ | 1,481,703 | 16.11 | % | $ | 1,589,638 | 17. 05 | % | $ | 1,697,573 | 17.97 | % | ||||||||||||||||
|
Core
(leverage) capital(2)
|
$ | 841,861 | 9.96 | % | $ | 1,450,511 | 15.85 | % | $ | 1,558,446 | 16.81 | % | $ | 1,666,381 | 17.74 | % | ||||||||||||||||
|
Core
(leverage) requirement
|
422,694 | 5.00 | 457,462 | 5.00 | 463,624 | 5.00 | 469,785 | 5.00 | ||||||||||||||||||||||||
|
Excess
|
$ | 419,167 | 4.96 | % | $ | 993,049 | 10.85 | % | $ | 1,094,822 | 11.81 | % | $ | 1,196,596 | 12.74 | % | ||||||||||||||||
|
Tier
I risk-based capital(2)(3)
|
$ | 841,861 | 23.62 | % | $ | 1,450,511 | 39.16 | % | $ | 1,558,446 | 41.80 | % | $ | 1,666,381 | 44.40 | % | ||||||||||||||||
|
Tier
I requirement
|
213, 896 | 6.00 | 222, 240 | 6.00 | 223, 719 | 6.00 | 225, 198 | 6.00 | ||||||||||||||||||||||||
|
Excess
|
$ | 627,965 | 17.62 | % | $ | 1,228,271 | 33.16 | % | $ | 1,334,727 | 35.80 | % | $ | 1,441,183 | 38. 40 | % | ||||||||||||||||
|
Total
risk-based capital(2)(3)
|
$ | 852,065 | 23.90 | % | $ | 1,460,715 | 39.44 | % | $ | 1,568,650 | 42.07 | % | $ | 1,676,585 | 44.67 | % | ||||||||||||||||
|
Risk-based
requirement
|
356,494 | 10.00 | 370, 401 | 10.00 | 372,865 | 10.00 | 375, 330 | 10.00 | ||||||||||||||||||||||||
|
Excess
|
$ | 495,571 | 13.90 | % | $ | 1,090,314 | 29.44 | % | $ | 1,195,785 | 32.07 | % | $ | 1,301,255 | 34.67 | % | ||||||||||||||||
|
Reconciliation
of capital infused into Capitol Federal Savings
Bank:
|
||||||||||||||||||||||||||||||||
|
Net
proceeds
|
$
|
695,350
|
$ |
818,585
|
$ | 941,820 | ||||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||
|
Common
stock acquired by employee stock ownership plan
|
(57,800 |
)
|
(68,000 | ) | (78,200 |
)
|
||||||||||||||||||||||||||
|
Common
stock acquired by stock-based incentive plan
|
(28,900 |
)
|
(34,000 |
)
|
(39,100 |
)
|
||||||||||||||||||||||||||
|
Pro
forma increase in GAAP and regulatory capital(3)
|
$
|
608,650
|
$
|
716,585
|
$ |
824,520
|
||||||||||||||||||||||||||
|
(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.
|
35
The
following table presents the historical consolidated capitalization of CFF at
March 31, 2010 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
March
31, 2010
|
144,500,000
Shares
|
170,000,000
Shares
|
195,500,000
Shares
|
||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Deposits(1)
|
$ | 4,319,066 | $ | 4,318,806 | $ | 4,318,806 | $ | 4,318,806 | |||||||||||
|
Borrowed
funds
|
3,055,842 | 3,055,842 | 3,055,842 | 3,055,842 | |||||||||||||||
|
Debentures
|
53,609 | -- | -- | -- | |||||||||||||||
|
Total
deposits and borrowed funds
|
$ | 7,428,517 | $ | 7,374,648 | $ | 7,374,648 | $ | 7,374,648 | |||||||||||
|
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 | 2,048 | 2,410 | 2,771 | |||||||||||||||
|
Paid-in
capital(2)
|
455,413 | 1,844,980 | 2,091,088 | 2,337,198 | |||||||||||||||
|
Retained
earnings(4)
|
789,831 | 789,831 | 789,831 | 789,831 | |||||||||||||||
|
Accumulated
other
comprehensive
income
|
30,765 | 30,765 | 30,765 | 30,765 | |||||||||||||||
|
Plus:
|
|||||||||||||||||||
|
Capitol
Federal Savings Bank MHC capital
contribution
|
-- | 466 | 466 | 466 | |||||||||||||||
|
Less:
|
|||||||||||||||||||
|
Treasury
stock, at
cost
|
(323,453 | ) | (323,453 | ) | (323,453 | ) | (323,453 | ) | |||||||||||
|
After-tax
expense of contribution to
charitable
foundation(5)
|
-- | (24,672 | ) | (24,672 | ) | (24,672 | ) | ||||||||||||
|
Common
stock acquired by
employee
stock ownership plan (6)
|
(7,057 | ) | (64,857 | ) | (75,057 | ) | (85,257 | ) | |||||||||||
|
Common
stock acquired
by
the stock-based incentive plan(7)
|
(341 | ) | (29,241 | ) | (34,341 | ) | (39,441 | ) | |||||||||||
|
Total
stockholders’ equity
|
$ | 946,073 | $ | 2,225,867 | $ | 2,457,037 | $ | 2,688,208 | |||||||||||
|
Shares
outstanding:
|
|||||||||||||||||||
|
Total
shares
outstanding
|
73,983,078 | 204,828,085 | 240,974,218 | 277,120,351 | |||||||||||||||
|
Exchange
shares
issued
|
-- | 60,328,085 | 70,974,218 | 81,620,351 | |||||||||||||||
|
Shares
offered for
sale
|
-- | 144,500,000 | 170,000,000 | 195,500,000 | |||||||||||||||
|
Total
stockholders’ equity as a
percentage
of total assets
|
11.15 |
%
|
|
22.92 |
%
|
|
24.71 |
%
|
|
26.42 | % | ||||||||
|
(1)
|
Does
not reflect withdrawals from deposit accounts for the purchase of shares
of common stock in the offering. 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 $ 260 thousand from Capitol
Federal Savings Bank MHC consisting of 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 204,828,085 shares,
240,974,218 shares and 277,120,351 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)
(5)
|
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.”
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 contributions 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.
|
|
(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.
|
36
|
(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. 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 214,943,085,
252,874,218 and 290,805,351
respectively, total stockholders’ equity would be $2. 26 billion, $2. 49
billion and $2. 73 billion, respectively, and
total stockholders’ ownership in Capitol Federal Financial, Inc. would be
diluted by approximately 4. 71 % at the maximum
of the offering range.
|
37
The
following tables summarize historical data of CFF and pro forma data at and for
the six months ended March 31, 2010 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 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 offering;
|
|
(ii)
|
205 ,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 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 share of common stock
sold in the syndicated 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, excluding the
marketing fees to be paid to Sandler O’Neill & Partners, L.P. and
other broker-dealers, are estimated to be
$6.0 million.
|
We
calculated pro forma consolidated net income for the six months ended March 31,
2010 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. 55 % (1. 57 % 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 March 31, 2010 . 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 pro
forma tables give effect to the implementation of a
new stock-based incentive plan. Subject to the receipt of
stockholder approval, we have assumed that the stock-based incentive plan 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 all of the shares of common stock are granted under the
plan in awards that vest over a five-year period.
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 debentures , and retain the rest of the proceeds for future
use.
38
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 accounting principles generally accepted in the United
States of America ( 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 common stock issued and
outstanding.
39
|
At
or for the Six Months Ended March 31, 2010
Based
Upon the Sale at $10.00 Per Share of
|
||||||||||||
|
144,500 ,000
Shares
|
170 ,000,000
Shares
|
195,500 ,000
Shares
|
||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||
|
Gross
proceeds of offering
|
$ | 1,445,000 | $ | 1,700,000 | $ | 1,955,000 | ||||||
|
Market
value of shares issued in the exchange
|
603,281 | 709,742 | 816,204 | |||||||||
|
Pro
forma market capitalization
|
$ | 2,048,281 | $ | 2,409,742 | $ | 2,771,204 | ||||||
|
Gross
proceeds of offering
|
$ | 1,445,000 | $ | 1,700,000 | $ | 1,955,000 | ||||||
|
Less:
Expenses
|
54,300 | 62,830 | 71,359 | |||||||||
|
Estimated
net proceeds
|
1,390,700 | 1,637,170 | 1,883,641 | |||||||||
|
Less:
Common stock purchased by employee stock ownership
plan
|
(57,800 | ) | (68,000 | ) | (78,200 | ) | ||||||
|
Less:
Cash contribution to charitable foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Less:
Common stock purchased by the stock-based incentive
plan
|
(28,900 | ) | (34,000 | ) | (39,100 | ) | ||||||
|
Estimated
net proceeds, as adjusted
|
$ | 1,264,000 | $ | 1,495,170 | $ | 1,726,341 | ||||||
|
For
the Six Months Ended March 31, 2010
|
||||||||||||
|
Consolidated
net income:
|
||||||||||||
|
Historical
|
$ | 35,635 | $ | 35,635 | $ | 35,635 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
9,940 | 11,758 | 13,576 | |||||||||
|
Employee
stock ownership plan(1)
|
(594 | ) | (699 | ) | (804 | ) | ||||||
|
Shares
granted under the stock based incentive plan(2)
|
(1,783 | ) | (2,097 | ) | (2,412 | ) | ||||||
|
Options
granted under the stock-based incentive plan(3)
|
(1,588 | ) | (1,868 | ) | (2,148 | ) | ||||||
|
Pro
forma net income
|
$ | 41,611 | $ | 42,729 | $ | 43,847 | ||||||
|
Net
income per share(4):
|
||||||||||||
|
Historical
|
$ | 0.18 | $ | 0.15 | $ | 0.13 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
0.05 | 0.05 | 0.05 | |||||||||
|
Employee
stock ownership plan(1)
|
-- | -- | -- | |||||||||
|
Shares
granted under the stock-based incentive plan(2)
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
|
Options
granted under the stock-based incentive plan(3)
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
|
Pro
forma net income per share(4)(5)
|
$ | 0.21 | $ | 0.18 | $ | 0.16 | ||||||
|
Offering
price to pro forma net income per share
(annualized)
|
23.81 | x | 27.78 | x | 31.25 | x | ||||||
|
Number
of shares used in net income per share calculations(4)
|
197,089,916 | 231,870,490 | 266,651,063 | |||||||||
|
At
March 31, 2010
|
||||||||||||
|
Stockholders’
equity:
|
||||||||||||
|
Historical
|
$ | 946,073 | $ | 946,073 | $ | 946,073 | ||||||
|
Estimated
net proceeds
|
1,390,700 | 1,637,170 | 1,883,641 | |||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
466 | 466 | 466 | |||||||||
|
Tax
benefit of contribution to
charitable foundation
|
15,328 | 15,328 | 15,328 | |||||||||
|
Less:
Common stock acquired by employee stock ownership plan(1)
|
(57,800 | ) | (68,000 | ) | (78,200 | ) | ||||||
|
Less:
Common stock acquired by the stock-based incentive plan(2)
|
(28,900 | ) | (34,000 | ) | (39,100 | ) | ||||||
|
Less:
Expense of contribution to charitable foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Pro
forma stockholders’ equity
|
$ | 2,225,867 | $ | 2,457,037 | $ | 2,688,208 | ||||||
|
Stockholders’
equity per share(6):
|
||||||||||||
|
Historical
|
$ | 4.63 | $ | 3.94 | $ | 3.40 | ||||||
|
Estimated
net proceeds
|
6.79 | 6.79 | 6.80 | |||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
-- | -- | -- | |||||||||
|
Tax
benefit of contribution to charitable foundation
|
0.07 | 0.06 | 0.06 | |||||||||
|
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
|
(0.20 | ) | (0.17 | ) | (0.14 | ) | ||||||
|
Pro
forma stockholders’ equity per share(6)
|
$ | 10.87 | $ | 10.20 | $ | 9.70 | ||||||
|
Offering
price as percentage of pro forma stockholders’ equity per
share
|
92.00 | % | 98.04 | % | 103.09 | % | ||||||
|
Number
of shares outstanding for pro forma book value per share calculations(7)
|
204,828,085 | 240,974,218 | 277,120,351 | |||||||||
|
(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 96,333, 113,333
and 130,333 shares were committed to be
released during the period at the minimum, midpoint and maximum of the
offering range, respectively, and that, in
accordance with Accounting Standards Codification
( ASC ) 718, Compensation – Stock
Compensation , 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.
|
40
|
(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
10 % of the amount contributed was an amortized
expense (based upon a five-year vesting period) during the six months ended March
31, 2010 . 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 following table shows pro forma net income
per share for the six months ended March 31, 2010 and pro
forma stockholders’ equity per share at March
31, 2010 , 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 Six
Months Ended March
31, 2010
|
144,500 ,000 | 170 ,000,000 | 195,500 ,000 | |||||||||
|
Pro
forma net income per share
|
$ | 0. 21 | $ | 0. 18 | $ | 0. 16 | ||||||
|
Pro
forma stockholders’ equity per share
|
$ | 10. 86 | $ | 10.20 | $ | 9. 75 |
|
(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 $ 2 .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 23.90 %; and (vi)
risk-free interest rate of 3. 84 %. 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 March 31, 2010 ,
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 shares assumed to be sold in
the offering; and (ii) shares to be issued in exchange for publicly held
shares of CFF common
stock .
|
|
(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.
|
41
|
At
or for the Year Ended September 30, 2009
Based
Upon the Sale at $10.00 Per Share of
|
||||||||||||
|
144,500 ,000
Shares
|
170 ,000,000
Shares
|
195,500 ,000
Shares
|
||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||
|
Gross
proceeds of offering
|
$ | 1,445,000 | $ | 1, 700 ,000 | $ | 1,955,000 | ||||||
|
Market
value of shares issued in the exchange
|
603,281 | 709,742 | 816,204 | |||||||||
|
Pro
forma market capitalization
|
$ | 2,048,281 | $ | 2,409,742 | $ | 2,771,204 | ||||||
|
Gross
proceeds of offering
|
$ | 1,445,000 | $ | 1, 700 ,000 | $ | 1,955,000 | ||||||
|
Less:
Expenses
|
54,300 | 62,830 | 71,359 | |||||||||
|
Estimated
net proceeds
|
1,390,700 | 1,637,170 | 1,883,641 | |||||||||
|
Less:
Common stock purchased by employee stock ownership plan
|
(57,800 | ) | ( 68 ,000 | ) | (78,200 | ) | ||||||
|
Less:
Cash contribution to the charitable
foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Less:
Common stock purchased by the stock-based incentive
plan
|
(28,900 | ) | ( 34 ,000 | ) | (39,100 | ) | ||||||
|
Estimated
net proceeds, as adjusted
|
$ | 1,264,000 | $ | 1,495,170 | $ | 1,726,341 | ||||||
|
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
|
19,881 | 23,517 | 27,153 | |||||||||
|
Employee
stock ownership plan(1)
|
(1, 188 | ) | (1, 398 | ) | (1, 608 | ) | ||||||
|
Shares
granted under the stock based incentive plan(2)
|
(3, 565 | ) | (4, 194 | ) | (4,823 | ) | ||||||
|
Options
granted under the stock-based incentive plan(3)
|
(3,175 | ) | (3,735 | ) | (4,296 | ) | ||||||
|
Pro
forma net income
|
$ | 78,251 | $ | 80,488 | $ | 82,724 | ||||||
|
Net
income per share(4):
|
||||||||||||
|
Historical
|
$ | 0. 35 | $ | 0. 30 | $ | 0. 26 | ||||||
|
Pro
forma adjustments:
|
||||||||||||
|
Income
on adjusted net proceeds
|
0. 10 | 0. 10 | 0. 10 | |||||||||
|
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. 40 | $ | 0. 35 | $ | 0. 31 | ||||||
|
Offering
price to pro forma net income per share
|
25.00 | x | 28.57 | x | 32.26 | x | ||||||
|
Number
of shares used in net income per share calculations(4)
|
196,965,862 | 231,724,544 | 266,483,225 | |||||||||
|
At
September 30, 2009
|
||||||||||||
|
Stockholders’
equity:
|
||||||||||||
|
Historical
|
$ | 941,298 | $ | 941,298 | $ | 941,298 | ||||||
|
Estimated
net proceeds
|
1,390,700 | 1,637,170 | 1,883,641 | |||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
466 | 466 | 466 | |||||||||
|
Tax
benefit of contribution to charitable
foundation
|
15,328 | 15,328 | 15,328 | |||||||||
|
Less:
Common stock acquired by employee stock ownership plan(1)
|
(57,800 | ) | ( 68 ,000 | ) | (78,200 | ) | ||||||
|
Less:
Common stock acquired by the stock-based incentive plan(2)
|
(28,900 | ) | ( 34 ,000 | ) | (39,100 | ) | ||||||
|
Less: Expense
of contribution to charitable foundation
|
(40,000 | ) | (40,000 | ) | (40,000 | ) | ||||||
|
Pro
forma stockholders’ equity
|
$ | 2,221,092 | $ | 2,452,262 | $ | 2,683,433 | ||||||
|
Stockholders’
equity per share(6):
|
||||||||||||
|
Historical
|
$ | 4. 60 | $ | 3. 92 | $ | 3. 38 | ||||||
|
Estimated
net proceeds
|
6.79 | 6.79 | 6.80 | |||||||||
|
Capitol
Federal Savings Bank MHC capital contribution
|
-- | -- | -- | |||||||||
|
Tax
benefit of contribution to charitable
foundation
|
0.07 | 0.06 | 0. 06 | |||||||||
|
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. 20 | ) | (0. 17 | ) | (0. 14 | ) | ||||||
|
Pro
forma stockholders’ equity per share(6)
|
$ | 10. 84 | $ | 10.18 | $ | 9. 68 | ||||||
|
Offering
price as percentage of pro forma stockholders’ equity per
share
|
92.25 | % | 98.23 | % | 103.31 | % | ||||||
|
Number
of shares outstanding for pro forma book value per share calculations(7)
|
204,828,085 | 240,974,218 | 277,120,351 | |||||||||
|
(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 192 ,667, 226 ,667 and 260 ,667
shares were committed to be released during the period at the minimum,
midpoint and maximum of the offering range, respectively, and that, 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.
|
42
|
(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
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
|
144,500 ,000 | 170 ,000,000 | 195,500 ,000 | |||||||||
|
Pro
forma net income per share
|
$ | 0. 39 | $ | 0. 35 | $ | 0. 31 | ||||||
|
Pro
forma stockholders’ equity per share
|
$ | 10. 84 | $ | 10.18 | $ | 9. 69 |
|
(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 $ 2 .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
23.90 %; and (vi) risk-free interest rate of
3. 84 %. 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 shares assumed to be sold in
the offering; (ii) shares to be issued in exchange for publicly held
shares of CFF common
stock .
|
|
(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.
|
43
AND
WITHOUT THE CONTRIBUTION TO 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 $ 2.05 billion,
$ 2.41 billion and $2. 77 billion with the charitable foundation, as
compared to $ 2.10 billion, $ 2.47 billion and $2. 84 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. 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.
For
comparative purposes only, set forth below are certain pricing ratios and
financial data and ratios at and for the six months
ended March 31, 2010 at the minimum, midpoint and
maximum of the offering range, assuming the stock offering was completed at the
beginning of the six -month period, with and without
the charitable foundation.
| Minimum of Offering Range | Midpoint of Offering Range | Maximum of Offering Range | ||||||||||||||||||||||
|
With
Foundation
|
Without Foundation |
With
Foundation
|
Without Foundation |
With
Foundation
|
Without Foundation | |||||||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Estimated stock
offering amount
|
$
|
1,445,000
|
$
|
1,483,250
|
$
|
1, 700 ,000
|
$
|
1, 745 ,000
|
$
|
1,955,000
|
$
|
2,006,750
|
||||||||||||
|
Estimated full
value
|
2,048,281
|
2,102,500
|
2,409,742
|
2,473,529
|
2,771,204
|
2,844,559
|
||||||||||||||||||
|
Total assets
|
9,711,184
|
9,770,532
|
9,942,354
|
10,007,821
|
10,173,525
|
10,245,111
|
||||||||||||||||||
|
Total
liabilities
|
7,485,783
|
7,485,783
|
7,485,783
|
7,485,783
|
7,485,783
|
7,485,783
|
||||||||||||||||||
|
Pro forma
stockholders’ equity
|
2,225,867
|
2,285,215
|
2,457,037
|
2,522,504
|
2,688,208
|
2,759,794
|
||||||||||||||||||
|
Pro forma net
income
|
41,611
|
42,094
|
42,730
|
43,242
|
43,848
|
44,390
|
||||||||||||||||||
|
Pro
forma stockholders’ equity per share
|
10. 87
|
10. 87
|
10.20
|
10.20
|
9. 70
|
9. 70
|
||||||||||||||||||
|
Pro forma net income
per share
|
0. 21
|
0. 21
|
0. 18
|
0. 18
|
0. 16
|
0. 16
|
||||||||||||||||||
|
Pro
forma pricing ratios:
|
||||||||||||||||||||||||
|
Offering
price as a percentage of pro forma
stockholders’
equity per share
|
92.00
|
%
|
92.00
|
%
|
98.04
|
%
|
98.04
|
%
|
103.09
|
%
|
103.09
|
%
|
||||||||||||
|
Offering
price to pro forma net income per share
|
23.81
|
x
|
23.81
|
x
|
27.78
|
x
|
27.78
|
x
|
31.25
|
x
|
31.25
|
x
|
||||||||||||
|
Pro
forma financial ratios:
|
||||||||||||||||||||||||
|
Return on assets
(annualized)
|
0.86
|
%
|
0.86
|
%
|
0. 86
|
%
|
0.86
|
%
|
0. 86
|
%
|
0.87
|
%
|
||||||||||||
|
Return on equity
(annualized)
|
3.74
|
3.68
|
3. 48
|
3. 43
|
3. 26
|
3. 22
|
||||||||||||||||||
|
Equity to
assets
|
22.92
|
23.39
|
24.71
|
25.21
|
26.42
|
26.94
|
||||||||||||||||||
44
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 home equity and other
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 repricing dates of
less than two years.
During
the first half 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
has maintained the overnight lending rate between
zero and 25 basis points since
December 2008.
Non -performing loans increased $3.1 million from $30.9 million at September 30, 2009
to $34 .0
million at March 31, 2010. 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 . Despite the current economic operating environment and
some deterioration in our purchased loan portfolio, the
overall credit quality of our loan portfolio
continues to compare favorably to the industry and our peers. Capitol Federal Savings Bank recorded a provision for loan losses
of $6.3 million in the six months ended March 31, 2010, due to increases
in certain factors in our general valuation allowance model and specific valuation allowances (SVAs), both primarily related
to purchased loans .
Net
income for the six months ended March 31, 2010 was $35.6 million compared to
$34.0 million for the same period in the prior fiscal year. The $1.6
million increase in net income between periods was primarily a result of an
increase in other income of $6.1 million, partially offset by an increase in the
provision for loan losses of $3.7 million and an increase in other expenses of
$1.7 million. The $6.1 million increase in other income was due primarily to the
gain on the sale of trading MBS in conjunction with a loan swap transaction
during the six months ended March 31, 2010. The $1.7 million increase in other
expenses was due primarily to an increase in federal deposit insurance premiums
of $3.3 million as a result of an increase in the rate on deposit insurance
premiums, partially offset by $1.1 million of impairments and valuation
allowances related to our mortgage-servicing right assets during the prior year
six month period with no similar expense during the current six month period.
45
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 refinancing of $875.0 million of
advances . 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 related to purchased loans. See “-
Critical Accounting Policies – Allowance for Loan Losses” and “Business of CFF
-
Asset Quality.”
During the six months ended March 31, 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.
Total assets increased $81.8 million from $8.40 billion at September
30, 2009 to $8. 49 billion at March 31, 2010, due primarily to growth in the deposit portfolio,
which was used to fund investment security purchases. Additionally, the
proceeds from the sale of the trading MBS in conjunction with the loan swap
transaction were primarily reinvested into investment securities. The weighted
average life (WAL) of the investment securities purchased during fiscal year
2010 was approximately one year at the time of purchase. 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
rate.
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 has opened two new branches in our Kansas City , Missouri market area and a
new branch in the Wichita market area since the
beginning of fiscal year
2010 . Capitol Federal Savings Bank
continues to consider expansion opportunities in all of
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.
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.
46
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 March 31, 2010 , approximately 70% and 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 in 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.
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 quarter ended December 31, 2009 , management increased the level
of certain qualitative factors in our formula analysis to account for continued
negative economic conditions. During the quarter
ended March 31, 2010, management adjusted certain factors in the formula
analysis to account for lingering negative economic conditions and the
relatively recent loss experience on our purchased loan
portfolio.
47
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
can take 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. Commencing with the quarter ended March 31, 2010, management
replaced the market value adjustments generally applied to purchased loans
greater than 90 days delinquent with property-specific adjustments obtained from
either automated valuation models or broker price opinions. Due to
the relatively stable home values in Kansas and Missouri, we do not obtain new
collateral values on originated loans until they enter
foreclosure. 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 March 31, 2010 , 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 ASC 820, Fair
Value Measurements and Disclosures . 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. CFF did not have any liabilities that were measured at fair
value at March 31, 2010.
48
CFF’s AFS securities are our most significant assets measured 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. The fair values for all AFS
securities are obtained from independent nationally recognized pricing services.
Various modeling techniques are used to determine pricing for CFF’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.
Loans receivable and real estate owned (REO) are CFF’s
significant assets measured at fair value on a non-recurring basis. These
non-recurring fair value adjustments involve the application of
lower-of-cost-or-fair value accounting or write-downs of individual
assets. Fair value for these assets is estimated using current appraisals,
automated valuation models, broker price opinions, 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.
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
We
are 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 to our customers . We strive to
enhance stockholder value while maintaining a strong capital
position. To achieve these goals , we
focus on the following
strategies :
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 from correspondent lenders secured
by property primarily located within our market areas and select market areas in
Missouri as well as one- to four-family loans from
nationwide lenders. Following completion of this offering, we intend to increase
our emphasis on purchased one- to four-family 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 include 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 March 31,
2010 , September 30, 2009 and 2008 was approximately
$ 114.8 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. For the six months ended
March 31, 2010 , our efficiency ratio was
42.77 %.
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 March 31, 2010 , our ratio of
non-performing assets to total assets was 0. 48 %. 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.
49
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 the six months ended
March 31, 2010 were $ 1.29 per public share, which consisted of the regular
quarterly dividends 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 per share. We also intend to continue our practice of
paying a special year-end dividend when earnings are sufficient to support the
special dividend payment . 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.
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. The 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 March 31, 2010
indicates a general increase in its risk exposure
compared to September 30, 2009 primarily due to higher
interest rates at March 31, 2010. Capitol Federal Savings Bank’s analysis
of the sensitivity of its net interest income to parallel changes in interest
rates at March 31, 2010
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.
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 March 31, 2010 , the ratio of
our one-year gap to total assets was a positive 3.46 %.
50
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.
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 0 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 ). 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 . It is
important to consider that the estimated changes in
net interest income are for a cumulative four-quarter period . These changes do
not reflect the earnings expectations of management.
|
Change
|
||||
|
(in
Basis Points)
|
Percentage
Change in Net Interest Income
|
|||
|
in
Interest Rates (1)
|
At
March 31, 2010
|
At
September 30, 2009
|
||
|
-200
bp
|
N/A
|
N/A
|
||
|
-100
bp
|
N/A
|
N/A
|
||
|
000
bp
|
--
|
--
|
||
|
+100
bp
|
-0.78%
|
0.84%
|
||
|
+200
bp
|
-4.24%
|
-0.54%
|
||
|
+300
bp
|
-8.43%
|
-2.41%
|
||
_______________________
|
(1)
|
Assumes
an instantaneous, permanent and parallel change in interest rates at all
maturities.
|
At March
31, 2010 estimated net interest income was more adversely impacted by rising
rates than at September 30, 2009. This was primarily caused by a decrease
in the amount of cash flows between the two periods due to a decrease in
mortgage-related assets that are expected to reprice in the upcoming year.
The decrease in mortgage-related asset cash flows was due to an increase in
interest rates from September 30, 2009 to March 31, 2010 and Capitol Federal
Savings Bank significantly reduced the amount of MBS purchased during this
period. The increase in interest rates between the two periods resulted in
a decrease in the prepayment expectation for all mortgage-related assets as
borrowers have a reduced financial incentive to refinance their mortgage.
Cash flows during this time period were primarily invested in callable agency
debentures, rather than MBS, to assist in reducing the level of interest rate
risk. Unlike MBS, callable agency debentures do not provide principal
payments until they are called or mature, thereby reducing Capitol Federal
Savings Bank’s cash
flows available to be reinvested throughout the year, particularly in a rising
interest rate scenario.
51
The
following table sets forth the estimated percentage change in MVPE at each
period end 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.
|
Change
|
||||
|
(in
Basis Points)
|
Percentage
Change in MVPE
|
|||
|
in
Interest Rates (1)
|
At
March 31, 2010
|
At
September 30, 2009
|
||
|
-200
bp
|
N/A
|
N/A
|
||
|
-100
bp
|
N/A
|
N/A
|
||
|
000
bp
|
--
|
--
|
||
|
+100
bp
|
-7.78%
|
-4.92%
|
||
|
+200
bp
|
-20.92%
|
-18.11%
|
||
|
+300
bp
|
-36.31%
|
-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 estimates
of MVPE . The market value of shorter
term-to-maturity financial instruments are 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 .
The
MVPE sensitivity increased in all interest rate scenarios presented at
March 31, 2010 compared
to September 30, 2009 . The changes from September 30, 2009 were
primarily due to an increase in interest rates from
September 30, 2009 to March 31, 2010. This resulted in an increase in the WAL of all mortgage-related assets as
borrowers have less economic incentive to refinance their mortgage, which
increased the price sensitivity of all mortgage-related assets and, as a result,
assets as a whole . The increase in MVPE sensitivity
was also a result of the inclusion of off-balance sheet mortgage commitments in
the valuation of the MVPE, which was not included at September 30,
2009. The market value of the off-balance sheet mortgage commitments
behave similarly to that of related underlying
loans .
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
CFF is required under GAAP to disclose the fair value of all of
its financial assets and liabilities on a quarterly basis. These values
are derived from market based assumptions and disclosed in various footnotes to
the financial statements. These values are largely dependent on changes in
the individual portfolios of assets and liabilities and the market assumptions
against which the values are derived. Management does not focus on these
changes in managing its overall liquidity and interest rate sensitivity due to
the nature of these fair value disclosures and the accompanying
fluctuations. Management instead focuses on the market value of
portfolio equity and the related interest rate risk sensitivity in managing its
business.
Gap
Table : The following gap table
summarizes the anticipated maturities or repricing of our interest-earning
assets and interest-bearing liabilities as of March
31, 2010 , 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
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 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 to
|
More Than
|
More Than
|
|||||||||||||||||||||
|
Three
|
Twelve
|
One Year to
|
Three Years
|
Over
|
||||||||||||||||||||
|
Months
|
Months
|
Three Years
|
to Five Years
|
Five Years
|
Total
|
|||||||||||||||||||
|
Interest-earning assets:
|
(Dollars in thousands)
|
|||||||||||||||||||||||
|
Loans receivable (1) :
|
||||||||||||||||||||||||
|
Mortgage loans:
|
||||||||||||||||||||||||
|
Fixed
|
$ | 219,701 | $ | 500,274 | $ | 870,963 | $ | 596,422 | $ | 1,990,234 | $ | 4,177,594 | ||||||||||||
|
Adjustable
|
106,457 | 548,618 | 262,394 | 71,427 | 16,310 | 1,005,206 | ||||||||||||||||||
|
Other loans
|
135,353 | 15,572 | 21,378 | 14,273 | 11,173 | 197,749 | ||||||||||||||||||
|
Investment securities (2)
|
140,354 | 377,243 | 117,123 | 309,457 | 26,363 | 970,540 | ||||||||||||||||||
|
MBS (3)
|
311,507 | 510,090 | 389,196 | 205,735 | 291,211 | 1,707,739 | ||||||||||||||||||
|
Other interest-earning assets
|
40,444 | -- | -- | -- | -- | 40,444 | ||||||||||||||||||
|
Total interest-earning assets
|
953,816 | 1,951,797 | 1,661,054 | 1,197,314 | 2,335,291 | 8,099,272 | ||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Checking (4)
|
11,504 | 41,694 | 118,721 | 66,121 | 255,889 | 493,929 | ||||||||||||||||||
|
Savings
(4)
|
96,317 | 9,552 | 22,024 | 17,082 | 94,676 | 239,651 | ||||||||||||||||||
|
Money market (4)
|
41,293 | 113,834 | 261,894 | 144,122 | 372,928 | 934,071 | ||||||||||||||||||
|
Certificates
|
488,878 | 1,035,519 | 944,186 | 181,721 | 1,111 | 2,651,415 | ||||||||||||||||||
|
Borrowings (5)
|
153,610 | 620,000 | 801,000 | 1,170,000 | 395,000 | 3,139,610 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
791,602 | 1,820,599 | 2,147,825 | 1,579,046 | 1,119,604 | 7,458,676 | ||||||||||||||||||
|
Excess
(deficiency) of interest-earning assets over interest-bearing
liabilities
|
$ | 162,214 | $ | 131,198 | $ | (486,771 | ) | $ | (381,732 | ) | $ | 1,215,687 | $ | 640,596 | ||||||||||
|
Cumulative
excess (deficiency) of interest-earning assets over
interest-bearing liabilities
|
$ | 162,214 | $ | 293,412 | $ | (193,359 | ) | $ | (575,091 | ) | $ | 640,596 | ||||||||||||
|
Cumulative
excess (deficiency) of interest-earning assets over
interest-bearing liabilities as a percent of total assets
at
|
||||||||||||||||||||||||
|
March
31, 2010
|
1.91 | % | 3.46 | % | (2.28 | )% | (6.78 | )% | 7.55 | % | ||||||||||||||
|
September
30, 2009
|
0.81 | 6.78 | 4.60 | (2.48 | ) | 8.11 | ||||||||||||||||||
53
(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 $ 34.0 million at March 31,
2010 .
(2)
Based on contractual maturities, or terms to call date or pre-refunding dates as
of March 31, 2010 , and excludes the unrealized loss
adjustment of $ 109 thousand on AFS investment
securities.
(3)
Reflects estimated prepayments of MBS in our portfolio, and excludes the
unrealized gain adjustment of $ 49.6 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. 06 billion, for a cumulative
one-year gap of ( 12.5 )% of total
assets.
(5)
Borrowings exclude $ 30.9 million of deferred
prepayment penalty costs and $ 715 thousand of
deferred gain on the terminated interest rate swaps.
The decrease in the one-year gap to 3.46 % at March 31, 2010 from
6.78% at September 30, 2009 was a result of
a decrease in projected cash flows from
mortgage -related assets. The decrease in
mortgage-related asset cash flows between periods was due to an increase in
interest rates from September 30, 2009 to March 31, 2010 and the reduction in
MBS purchases during the period, as discussed
above.
Financial
Condition
Total assets increased $81.8 million from $8.40 billion at September
30, 2009 to $8. 49 billion at March 31, 2010, due primarily
to growth in the deposit portfolio which was used to fund
investment security purchases.
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 $ 223.1 million
from $5.60 billion at September 30, 2009 to $5. 38 billion
at March 31,
2010 . The
decrease in the portfolio was largely a result of
the loan swap transaction that took place during the
first six months of fiscal year 2010 , 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 December 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 $ 44.1 million
of loans from nationwide lenders during the six
months ended
March 31,
2010 , the
majority of which were adjustable-rate. These loans had an average
credit score of 760 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 March 31,
2010 , loans
purchased from nationwide lenders represented 12 % of our
loan portfolio and were secured by properties located in 47 of the continental
United States and Washington, D.C. As of March 31,
2010 , the
average balance of a purchased nationwide mortgage loan was $354
thousand, the average balance of a purchased correspondent loan was $271
thousand, and the average balance of an originated mortgage loan was
$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.
We have experienced loss rates on loans purchased
from nationwide lenders prior to fiscal year 2008 that are higher than on other
loans we originated or purchased. 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.”
54
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. Loan purchases from nationwide lenders during the period totaled $191.8 million . 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 %, based upon the outstanding loan
balance at the time of purchase and the lower of the
purchase price or appraisal at origination . 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.
Included
in the loan portfolio at March 31,
2010 were
$ 230.0 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 , based upon the outstanding loan
balance at the
time of purchase and the lower of the purchase price
or appraisal at origination . 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 March 31,
2010, $199 .3
million, or 87 % of
interest-only loans were still in their interest-only payment
term. As of March 31,
2010, $87.9 million
will begin to amortize principal within two years, $ 24.7 million
will begin to amortize principal within two-to-five years, $ 75.5 million
will begin to amortize principal within five-to-seven years and the remaining
$ 11.2 million
will begin amortizing in seven-to-ten years. At March 31,
2010, $17.8 million
or 52 % of
non-performing loans were interest-only and $ 3.6 million
was reserved in the ALLL for these loans. Approximately 85% of the $17.8 million non-performing
interest-only loans were non-amortizing. Non-performing
interest-only loans represented approximately 8 % of the
total interest-only portfolio at March 31,
2010 . See
the additional discussion regarding non-performing loans in “Asset
Quality – Loans and REO .”
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 $3.1 million from $30.9 million
at September 30, 2009 to $34.0 million at March 31,
2010 . Non-performing loans increased $17.2 million from $13.7
million at September 30, 2008 to $30.9 million at September 30,
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. 63 % at March 31, 2010 . At March 31,
2010 , our allowance for loan losses was $ 14.7 million or 0. 27 % of the
total loan portfolio and 43 % 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 “Asset Quality – Loans and
REO .”
Capitol
Federal Savings Bank generally prices its one- to four-family loan products
based upon prices available in the secondary market. During the six months ended March 31,
2010 , 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 150 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 90 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.
55
The
following table summarizes the activity in the loan portfolio for the periods
indicated, excluding changes in loans in process, deferred fees and
ALLL. Loans
that were paid-off as a result of refinances are included in “ repayments .” Purchased loans include purchases from
correspondent and nationwide lenders. 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 six
months ended March 31, 2010 , Capitol Federal Savings Bank modified $ 209.3 million loans , with a
weighted average rate decrease of 86 basis
points. The
modified balance and
rate 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 March 31,
2010,
September 30, 2009 and 2008.
|
For
the Three Months Ended
|
||||||||||||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 | September 30, 2009 | June 30 , 2009 | |||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Beginning
balance
|
$ | 5,463,744 | 5. 23 | % | $ | 5,646,950 | 5. 29 | % | $ | 5,587,130 | 5. 36 | % | $ | 5,422,798 | 5. 50 | % | ||||||||||||||||
|
Originations
and refinances:
|
||||||||||||||||||||||||||||||||
|
Fixed
|
107,694 | 4. 93 | 156,507 | 4.95 | 255,441 | 5.07 | 325,640 | 4.96 | ||||||||||||||||||||||||
|
Adjustable
|
38,779 | 4. 44 | 37, 885 | 4. 57 | 37,948 | 4. 75 | 32,652 | 4. 78 | ||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||||||||||
|
Fixed
|
12,417 | 5. 03 | 20,149 | 5. 09 | 24,670 | 5. 08 | 37,912 | 5. 11 | ||||||||||||||||||||||||
|
Adjustable
|
14,011 | 4.03 | 44,930 | 3.69 | 11,662 | 4.82 | 9,544 | 5.04 | ||||||||||||||||||||||||
|
Repayments
|
(208,015 | ) | (243,087 | ) | (262,408 | ) | (322,104 | ) | ||||||||||||||||||||||||
|
Transfer of modified
loans to LHFS (1)
|
-- | (194,759 | ) | -- | 81,190 | |||||||||||||||||||||||||||
|
Other (2)
|
(3,172 | ) | (4,831 | ) | (7,493 | ) | (502 | ) | ||||||||||||||||||||||||
|
Ending balance
|
$ | 5,425,458 | 5. 19 | % | $ | 5,463,744 | 5. 23 | % | $ | 5,646,950 | 5. 29 | % | $ | 5,587,130 | 5. 36 | % | ||||||||||||||||
| 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
|
(1,079,777 | ) | (899,178 | ) | ||||||||||||
|
Transfer
of modified loans to LHFS
|
(94,672 | ) | -- | |||||||||||||
|
Other
(2)
|
(11,559 | ) | (8,069 | ) | ||||||||||||
|
Ending
balance
|
$ | 5,646,950 | 5.29 | % | $ | 5,379,845 | 5.66 | % | ||||||||
|
(1)
|
Transfer
of modified loans to loans receivable held-for-sale
( 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 , modification fees
advanced and reductions in
commitments .
|
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 . The MBS portfolio balance decreased
$235.2 million from $1. 99 billion at September 30, 2009 to
$1.76 billion at March 31, 2010 . The decreases were a result
of some cash flows from the MBS portfolio being reinvested into investment
securities. At
March 31, 2010, the MBS held within our portfolio
were issued by FHLMC, FNMA and GNMA, with the exception of $3.9 million, which
were issued by a private issuer. Unlike MBS issued by
government-sponsored enterprises, the principal and interest payments of
privately issued MBS are not guaranteed, although we generally receive a higher
interest rate as compensation for the relative increase in credit risk.
Should the underlying mortgages in a privately issued MBS security default on
their mortgage payment above the level of credit enhancement, losses could be
realized.
56
During the six months ended March 31, 2010 , 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.
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 March 31, 2010 and September 30, 2009 due
primarily 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 decrease in the WAL at March
31, 2010 compared to September 30, 2009 was due to
principal repayments of securities with WALs greater than
the remaining portfolio and the passing of time. 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 | ||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2010 | December 31 , 2009 | September 30, 2009 | June 30, 2009 | |||||||||||||||||||||||||||||||||||||||||||||
| Amount | Yield | WAL | Amount | Yield | WAL | Amount | Yield | WAL | Amount | Yield | WAL | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Beginning
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 | ||||||||||||||||||||||||||||
|
Maturities and
repayments
|
(121,635 | ) | (112,380 | ) | (142,182 | ) | (155,168 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Sale of securities,
net of gains
|
-- | (192,690 | ) | -- | -- | |||||||||||||||||||||||||||||||||||||||||||
|
Net
amortization of premiums (discounts)
|
(499 | ) | (392 | ) | (366 | ) | (189 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
|
2, 042 | 4. 18 | 7. 08 | 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 | ||||||||||||||||||||||||||||||||||||
|
Fair
value of securities received in loan swap
transaction
|
-- | 192,690 | -- | -- | ||||||||||||||||||||||||||||||||||||||||||||
|
Change in valuation
on AFS securities
|
(567 | ) | (4,716 | ) | 15,478 | (2,214 | ) | |||||||||||||||||||||||||||||||||||||||||
|
Ending balance
|
$ | 1,757,310 | 4. 21 | % | 4.07 | $ | 1,877,969 | 4. 34 | % | 5.09 | $ | 1,992,467 | 4. 42 | % | 4. 67 | $ | 2,100,998 | 4. 59 | % | 4 .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
debentures issued by U.S. government sponsored enterprises
(primarily issued by FNMA, FHLMC, or FHLB) and municipal investments, increased
$ 489.7 million , from
$480.7 million at September 30, 2009 to $ 970.4
million at March 31, 2010 . The increase in the balance was a result
of purchases of $ 611.7 million of investment
securities with a WAL of 1.09 years at the time of
purchase. 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 rate. 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 decrease in the
yield at March 31, 2010
compared to September 30, 2009 was a result of purchases of securities with
yields lower 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 March 31,
2010 decreased from
September 30, 2009 due to the
purchase
of
securities with WALs shorter than the existing
portfolio.
59
| For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2010 | December 31 , 2009 | September 30, 2009 | June 30 , 2009 | |||||||||||||||||||||||||||||||||||||||||||||
| Amount | Yield | WAL | Amount | Yield | WAL | Amount | Yield | WAL | Amount | Yield | WAL | |||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Beginning
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 | ||||||||||||||||||||||||||||
|
Maturities and
calls
|
(1 19,103 | ) | (1,033 | ) | (25, 128 | ) | (25,036 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Net
amortization of premiums(discounts)
|
(1, 053 | ) | (1,061 | ) | (901 | ) | (685 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Purchases:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
|
438,254 | 1.36 | 1. 02 | 173,431 | 2.39 | 1.25 | 183,391 | 1. 95 | 2.17 | 133,047 | 1. 41 | 1. 10 | ||||||||||||||||||||||||||||||||||||
|
Adjustable
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Change
in valuation on AFS securities
|
390 | (98 | ) | 1,176 | 430 | |||||||||||||||||||||||||||||||||||||||||||
|
Ending balance
|
$ | 970,431 | 1.76 | % | 1. 29 | $ | 651,943 | 2.05 | % | 1. 65 | $ | 480,704 | 1. 93 | % | 1.53 | $ | 322,166 | 1.84 | % | 2. 02 | ||||||||||||||||||||||||||||
|
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 increased $77.0 million from $7.46
billion at September 30, 2009 to $7. 54 billion at
March 31, 2010, due primarily
to an increase in deposits of $90.5 million . 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 March 31, 2010 , September 30,
2009 and 2008.
|
At
|
At |
At
|
||||||||||||||||||||||||||||||
| March 31, 2010 |
September
30, 2009
|
September
30, 2008
|
||||||||||||||||||||||||||||||
|
Average
|
% of | Average | % of | Average | % of | |||||||||||||||||||||||||||
| Amount | Rate | Total | Amount | Rate | Total | Amount | Rate | Total | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Checking
|
$ |
493,929
|
0.13
|
%
|
11. 4
|
%
|
$
|
439,975
|
0.17
|
%
|
10.4
|
%
|
$
|
400,461
|
0.21
|
%
|
10.2
|
%
|
||||||||||||||
|
Savings
|
239,651
|
0. 54
|
5. 6
|
226,396
|
0.66
|
5.4
|
232,103
|
1.51
|
5.9
|
|||||||||||||||||||||||
|
Money
market
|
934,071
|
0. 72
|
21. 6
|
848,157
|
0.82
|
20.1
|
772,323
|
1.48
|
19.7
|
|||||||||||||||||||||||
|
Certificates
|
2,651,415
|
2. 66
|
61.4
|
2,714,081
|
3.09
|
64.1
|
2,518,996
|
3.91
|
64.2
|
|||||||||||||||||||||||
|
Total deposits
|
$ |
4,319,066
|
1. 83
|
%
|
100.0
|
%
|
$
|
4,228,609
|
2.20
|
%
|
100.0
|
%
|
$
|
3,923,883
|
2.91
|
%
|
100.0
|
%
|
||||||||||||||
The
Board of Directors has authorized management to utilize brokered deposits
and public unit deposits (deposits from governmental
and other public entities) as sources of funds. The rate paid on
brokered deposits, plus fees, are generally equivalent to the rates offered by
the FHLB on advances and comparable to some rates paid on retail
deposits. In order to qualify to obtain public unit 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
balances in excess of the FDIC insurance limits. The rates paid on
public unit deposits are based on bid rates versus the rate available to retail
customers. Depending on market conditions, management utilizes these
two sources to fund asset growth. Since the pricing of public unit
funds are set by us and we can select posted broker rates for brokered deposits,
they are useful funding tools. Because Capitol Federal Savings Bank
chooses to take longer term maturities for brokered deposits, these assist in
managing our interest rate risk. The primary risk of using these
sources of funds is the volatility of retention at maturity, primarily due to
competition in the market. Due to this volatility, Capitol Federal
Savings Bank’s policies limit the amount of brokered deposits to 10% of total
deposits and public unit deposits to 5% of total
deposits.
At
March 31, 2010, there were no brokered deposits, as the remaining brokered
deposits matured during the quarter ended December 31, 2009, compared to
$71.5 million in brokered deposits at September 30, 2009 . Subsequent to March 31, 2010, Capitol Federal
Savings Bank has begun to accept brokered deposits with maturities ranging from 3 to 5 years . As of
March 31, 2010, $103.8
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 increased $4.8
million, from $941.3 million at September 30, 2009 to $ 946.1 million at March 31, 2010. The increase was due
to net income of $35.6 million during fiscal year 2010, partially offset by
dividend payments of $27.4 million during the period
and a decrease in accumulated other comprehensive income of $3.1 million.
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.
61
Unrealized gains and losses on AFS securities result from changes
in the fair value of the securities, due to fluctuations in market
yields. Fluctuations in market yields result in changes in
stockholders’ equity though unrealized gains and losses on AFS securities, but
they do not impact operations unless the securities are sold and proceeds are
reinvested at market rates. Management is
no longer classifying purchased securities as AFS due to the potential
fluctuations in stockholders’ equity caused by market yield
changes. Management will continue to monitor the size of the AFS
securities portfolio and will begin classifying purchased securities as AFS when
appropriate. If future market yields were to remain at the same level
as March 31, 2010, then the net unrealized gain in stockholders’ equity would
decrease over time due to the decline in the AFS security portfolio balance as a
result of repayments.
CFF repurchases stock from time to time in the open market as one
of the capital management strategies available to enhance stockholder
value. The repurchase of stock has allowed CFF to effectively implement
its dividend policy. CFF was an active buyer of stock when the stock traded on
the open market below its original offering price and when CFF determined market
conditions and timing was appropriate. CFF has completed eight stock repurchase
programs.
The following table presents total dividends paid to public
shareholders, total dividends waived by the MHC, total dividends that would have
been paid if dividends had not been waived by the MHC, and dividends paid per
share based upon the total number of shares of stock outstanding on the record
dates during the periods presented below.
|
Total
Dividends
Paid
to Public
Shareholders
|
Total
Dividends
Waived
by the
MHC
|
Total
Dividends
That Would
Have Been
Paid
if
Not Waived
|
Dividends
Paid Per Share Based Upon
Total Number
of
Shares of Stock
Outstanding |
|||||||||||||
| (Dollars in thousands, except per share amounts) | ||||||||||||||||
|
Six Months Ended March 31, 2010
|
$ | 27,408 | $ | 67,079 | $ | 94,487 | $ | 0.37 | ||||||||
|
Six Months Ended March 31, 2009
|
23,175 | 57,934 | 81,109 | 0.31 | ||||||||||||
|
Fiscal Year Ended September 30, 2009
|
44,070 | 110,127 | 154,197 | 0.60 | ||||||||||||
|
Fiscal Year Ended September 30, 2008
|
41,425 | 104,386 | 145,811 | 0.56 | ||||||||||||
|
Fiscal Year Ended September 30, 2007
|
43,000 | 109,083 | 152,083 | 0.58 | ||||||||||||
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.
62
| At March 31, | At September 30, | |||||||||||
| 2010 | 2009 | 2008 | 2007 | |||||||||
|
Weighted
average yield on:
|
||||||||||||
|
Loans
receivable
|
5. 31
|
%
|
5.38
|
%
|
5.69
|
%
|
5.73
|
%
|
||||
|
MBS
|
4. 21
|
4.42
|
4.82
|
4.46
|
||||||||
|
Investment
securities
|
1.76
|
1.93
|
3.94
|
4.52
|
||||||||
|
Capital
stock of FHLB
|
2.98
|
2.98
|
4.73
|
6.68
|
||||||||
|
Cash
and cash equivalents
|
0. 22
|
0.21
|
2.95
|
4.94
|
||||||||
|
Combined
weighted average yield on interest-earning assets
|
4. 60
|
4.89
|
5.37
|
5.41
|
||||||||
|
Weighted
average rate paid on:
|
||||||||||||
|
Checking
deposits
|
0.13
|
0.17
|
0.21
|
0.21
|
||||||||
|
Savings deposits
|
0. 54
|
0. 66
|
1. 51
|
2.58
|
||||||||
|
Money market
deposits
|
0.72
|
0.82
|
1.48
|
3.18
|
||||||||
|
Certificate of
deposit
|
2.66
|
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. 77
|
3.00
|
3.67
|
4.52
|
||||||||
|
Net interest rate
spread
|
1. 83
|
%
|
1.89
|
%
|
1.70
|
%
|
0.89
|
%
|
||||
|
(1)
|
The
March 31, 2010 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 six months ended
March 31, 2010 and 2009 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.
63
|
Six Months
Ended
|
Year Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2010 | March 31, 2009 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
Interest
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Outstanding
|
Earned/
|
Yield/
|
Outstanding
|
Earned/
|
Yield/
|
Outstanding
|
Earned/
|
Yield/
|
Outstanding
|
Earned/
|
Yield/
|
Outstanding
|
Earned/
|
Yield/
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance
|
Paid
|
Rate
|
Balance
|
Paid
|
Rate
|
Balance
|
Paid
|
Rate
|
Balance
|
Paid
|
Rate
|
Balance
|
Paid
|
Rate
|
||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage
loans (1)
|
$ | 5,277,206 | $ | 139,170 | 5. 27 |
%
|
|
$ | 5,240,144 | $ | 147,881 | 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
|
202,269 | 5,671 | 5. 62 | 211,856 | 6,281 | 5.95 | 208,252 | 12,097 | 5.81 | 216,404 | 15,637 | 7.21 | 222,000 | 18,427 | 8.30 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Total
loans receivable
|
5,479,475 | 144,841 | 5. 29 | 5,452,000 | 154,162 | 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)
|
1,829,990 | 39,381 | 4. 30 | 2,161,451 | 51,490 | 4. 76 | 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)
|
645,267 | 6,285 | 1.95 | 131,171 | 2,281 | 3. 48 | 229,766 | 5,533 | 2.41 | 242,426 | 9,917 | 4.09 | 656,857 | 30,849 | 4.70 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Capital
stock of FHLB
|
133, 570 | 1, 986 | 2.98 | 127,735 | 1,558 | 2. 45 | 129,716 | 3,344 | 2.58 | 129,216 | 6,921 | 5.36 | 153,478 | 10,017 | 6.53 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
86,297 | 101 | 0.23 | 72,342 | 117 | 0. 32 | 72,184 | 201 | 0.28 | 112,522 | 3,553 | 3.11 | 138,756 | 7,188 | 5.11 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Total
interest-earning assets
|
8,174,599 | 192,594 | 4. 71 | 7,944,699 | 209,608 | 5. 28 | 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
|
230,111 | 176,721 | 181,829 | 186,312 | 153,949 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 8,404,710 | $ | 8,121,420 | $ | 8,228,745 | $ | 7,874,213 | $ | 7,953,119 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Liabilities
and
stockholders’ equity Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Checking
|
$ | 457,439 | 319 | 0. 14 |
%
|
|
$ | 414,352 | 425 | 0.21 |
%
|
|
$ | 426,976 | 879 | 0. 21 |
%
|
|
$ | 398,430 | 819 | 0.20 |
%
|
$ | 396,454 | 850 | 0.21 |
%
|
|
|||||||||||||||||||||||||||||||||
|
Savings
|
228,352 | 678 | 0. 60 | 228,497 | 1,032 | 0. 91 | 228,879 | 1,873 | 0. 82 | 230,818 | 4,105 | 1.77 | 195,660 | 4,952 | 2.53 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Money
market
|
886,205 | 3,336 | 0. 75 | 787,634 | 4,691 | 1. 19 | 814,898 | 8,512 | 1.04 | 804,612 | 16,771 | 2.08 | 807,459 | 26,566 | 3.29 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Certificates
|
2,652,159 | 37,548 | 2. 84 | 2,501,123 | 45,348 | 3. 64 | 2,585,560 | 89,207 | 3.45 | 2,507,036 | 111,740 | 4.44 | 2,504,069 | 114,911 | 4.59 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Total
deposits
|
4,224,155 | 41,881 | 1.99 | 3,931,606 | 51,496 | 2. 63 | 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, 945 | 49,118 | 4.11 | 2,465,087 | 56,198 | 4. 56 | 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 | 14,058 | 3.90 | 713, 593 | 14,834 | 4. 11 | 713,601 | 29,122 | 4.03 | 391,009 | 17,455 | 4.39 | 53,493 | 4,468 | 8.24 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
7,331,709 | 105,057 | 2. 87 | 7,110,286 | 122,528 | 3. 45 | 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
|
121,166 | 118,373 | 108,940 | 119,353 | 118,445 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Stockholders’
equity
|
951, 835 | 892,761 | 911,913 | 870,072 | 868,001 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 8,404,710 | $ | 8,121,420 | $ | 8,228,745 | $ | 7,874,213 | $ | 7,953,119 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net
interest
income
|
$ | 87,537 | $ | 87,080 | $ | 176,642 | $ | 134,168 | $ | 106,440 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net interest rate
spread
|
1. 84 |
%
|
|
1. 83 |
%
|
|
1.86 |
%
|
|
1.35 |
%
|
0.93 |
%
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net interest-earning
assets
|
$ | 842,890 | $ | 834,413 | $ | 839,024 | $ | 803,113 | $ | 832,497 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net
interest
margin
|
2. 14 |
%
|
|
2. 19 |
%
|
|
2.20 |
%
|
|
1.75 |
%
|
1.36 |
%
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Ratio
of interest-earning assets to interest-bearing
liabilities
|
1. 11 |
x
|
|
1.12 |
x
|
|
1.12 |
x
|
|
1.12 | x | 1.12 |
x
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
| (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. 9 million
and $ 58.2 million
for the periods ended March
31, 2010 and 2009
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. |
| (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. |
64
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 six months ended March 31,
2010 to the six months
ended March 31, 2009 ,
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.
|
Six Months Ended March
31,
|
Year Ended September 30, | |||||||||||||||||||||||||||||||||||
|
2010
vs. 2009
|
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
|
$ | 757 | $ | (10,078 | ) | $ | (9,321 | ) | $ | 10,443 | $ | (6,681 | ) | $ | 3,762 | $ | 3,873 | $ | 3,403 | $ | 7,276 | |||||||||||||||
|
MBS
|
(7,428 | ) | (4,681 | ) | (12,109 | ) | 10,295 | (764 | ) | 9,531 | 12,824 | 6,819 | 19,643 | |||||||||||||||||||||||
|
Investment
securities
|
5,404 | (1,400 | ) | 4,004 | (494 | ) | (3,890 | ) | (4,384 | ) | (17,380 | ) | (3,552 | ) | (20,932 | ) | ||||||||||||||||||||
|
Capital
stock of FHLB
|
75 | 354 | 429 | 27 | (3,604 | ) | (3,577 | ) | (1,451 | ) | (1,645 | ) | (3,096 | ) | ||||||||||||||||||||||
|
Cash
equivalents
|
20 | ( 37 | ) | (1 7 | ) | (947 | ) | (2,405 | ) | (3,352 | ) | (1,182 | ) | (2,453 | ) | (3,635 | ) | |||||||||||||||||||
|
Total
interest-earning assets
|
(1,172 | ) | (15,842 | ) | (17,014 | ) | 19,324 | (17,344 | ) | 1,980 | (3,316 | ) | 2,572 | (744 | ) | |||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
|
Checking
|
42 | (156 | ) | (114 | ) | 60 | 42 | 102 | 4 | ( 39 | ) | ( 35 | ) | |||||||||||||||||||||||
|
Savings
|
(1 | ) | ( 351 | ) | (35 2 | ) | (35 | ) | (2,218 | ) | (2,253 | ) | 802 | ( 1,640 | ) | ( 838 | ) | |||||||||||||||||||
|
Money
market
|
535 | (1, 887 | ) | (1,352 | ) | 208 | (8,589 | ) | (8,381 | ) | (90 | ) | (9,387 | ) | (9,477 | ) | ||||||||||||||||||||
|
Certificates
|
2,632 | (10,429 | ) | (7,797 | ) | 3,351 | (25,783 | ) | (22,432 | ) | 141 | (3,635 | ) | (3,494 | ) | |||||||||||||||||||||
|
FHLB
advances
|
(831 | ) | (6,249 | ) | (7,080 | ) | (4,606 | ) | (14,591 | ) | (19,197 | ) | (23,533 | ) | (4,082 | ) | (27,615 | ) | ||||||||||||||||||
|
Other
borrowings
|
-- | (776 | ) | (776 | ) | 12,920 | (1,253 | ) | 11,667 | 13,820 | (833 | ) | 12,987 | |||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
2,377 | (19,848 | ) | (17,471 | ) | 11,898 | (52,392 | ) | (40,494 | ) | (8,856 | ) | (19,616 | ) | (28,472 | ) | ||||||||||||||||||||
|
Net
change in net interest and dividend
income
|
$ | (3,549 | ) | $ | 4,006 | $ | 457 | $ | 7,426 | $ | 35,048 | $ | 42,474 | $ | 5,540 | $ | 22,188 | $ | 27,728 |
Operating Results for the Six
Months Ended March 31, 2010 and 2009.
Net
income for the six months ended March 31, 2010 was $ 35.6
million compared to $ 34.0 million for the same
period in the prior fiscal year . The
$1 .6 million increase in net income between periods
was a result of an increase in other income of $6. 1
million, an increase in net
interest income of $ 457 thousand, and a decrease in
income tax expense of $431 thousand, partially offset by an increase in
the provision for loan losses of $ 3.7 million and an
increase in other expenses of $ 1. 7 million.
Despite an increase in net interest income, the net interest
margin decreased 5 basis points, from 2.19% for the six months ended March 31,
2009 to 2.14% for the six months ended March 31, 2010. The decrease
in the net interest margin was due to an increase in the average balance of
interest-earning assets at lower yields compared to the six months ended March
31, 2009.
Interest
and Dividend Income . Total
interest and dividend income for the six months ended March
31, 2010 was $192.6 million compared to $ 209.6 million for the six months
ended March 31, 2009. The $17.0 million decrease was primarily
a result of decreases in interest income on MBS of $ 12.1 million and loans receivable of $ 9.3 million, partially offset by an increase in interest
income on investment securities of $ 4.0
million.
Interest
income on loans receivable for the current six month
period was $ 144.8 million compared to $ 154.2 million for the prior year period. The $ 9.3
million decrease in interest income was primarily a result of a decrease of
37 basis points in the weighted average yield to
5. 29 % for the period , partially offset by a $ 27.5 million increase in the average balance of the
portfolio . The decrease in the weighted
average yield was due to a significant amount of loan modifications and
refinances during the second and third quarters of fiscal year 2009 which
did not impact the yield until the borrowers began paying the lower interest
rate the month after the modification or refinance. The
decrease in the weighted average yield was also due
to purchases and originations at market rates which
were lower than the existing portfolio.
65
Interest income on MBS for the current six month period was $39.4 million compared to $51.5 million for
the prior year period. The $12.1 million decrease was a result of a
$331.5 million decrease in the average balance of the portfolio and a decrease
of 46 basis points in the weighted average yield to 4.30% for the current six
months. The decrease in the average balance of the portfolio
was due to principal repayments which were not replaced in
their entirety. The weighted average yield decreased between
the two periods due to an increase of prepayments on MBS with yields higher than
the existing portfolio , adjustable-rate securities
repricing to lower market rates, and, to a lesser extent, purchases of
MBS at a lower average yield than the existing portfolio between the two
periods .
Interest
income on investment securities for the current six month
period was $6 .3 million compared to $ 2 .3 million for the prior year period. The $ 4.0
million increase was primarily a result of a $ 514.1
million increase in the average balance, partially offset by a decrease in the
average yield of 153 basis points to 1.95% for the
current six month period. The average
balance increased due to the purchase of $ 928 .1
million of investment securities between periods, partially offset by calls and
maturities of $ 170.3 million . The average yield decreased primarily due to purchases at yields lower than the
overall portfolio yield.
Interest
Expense . Interest
expense decreased $ 17.4 million to $105. 1 million
for the current six month period from $ 122.5 million for the prior year period. The decrease in interest expense was
primarily due to a decrease in interest expense on deposits
and FHLB advances.
Interest
expense on FHLB advances for the current six month
period was $ 49.1 million compared to $ 56.2 million for the prior year period. The $7 .1
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 $ 57.2 million primarily due to maturing advances that were not
renewed.
Interest
expense on deposits for the current six month period
was $ 41.9 million compared to $ 51.5 million for the prior year period. The $ 9.6
million decrease in interest expense on deposits was due to a decrease in the
rates on the entire deposit portfolio, primarily the certificate 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. 63% for the six months ended March 31, 2009 to
1. 99% for the six months ended March 31, 2010 . The decrease in interest expense was partially
offset by a $ 292.5 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 $ 6. 3 million during the current six
month period , compared to a provision of $ 2.7
million for the six months ended March 31, 2009. The
$ 6. 3 million provision for loan losses was composed of $4.7 million related to the increase in
certain loss factors in our general valuation
allowance model , primarily on purchased loans, and $1.6
million related to establishing SVAs, also primarily on purchased
loans. The increase in certain loss factors in our general valuation
allowance model reflects the risks inherent in our loan portfolio due to
decreases in real estate values in certain geographic regions where Capitol
Federal Savings Bank has purchased loans, the continued elevated level of
unemployment, the increase in non-performing loans and loan charge-offs, and
SVAs, particularly related to our purchased loan portfolio. These
factors contributed to the increase in the provision for loan losses in fiscal
year 2010 and resulted in an increase in our ALLL. Despite the
current economic operating environment and some deterioration in our purchased
loan portfolio, the overall credit quality of our loan portfolio continued to
compare favorably to the industry and our peers. No assurance can be
given that this trend will continue in future periods. See additional
discussion regarding the allowance for loan losses and provision for loan losses
in the sections entitled “ Critical Accounting Policies – Allowance for
Loan Losses” and “Asset Quality – Loans and REO.”
66
Other
Income and Expense . Total
other income was $ 19.7 million for the current six month period compared to $ 13. 6 million for the prior year period. The $6. 1
million increase was due primarily to the gain on
the sale of trading MBS in conjunction with the loan swap
transaction .
Total other expenses for
the six months ended March 31, 2010 were $ 45.9 million, compared to $ 44 .2 million in the prior year six
month period. The $1.7 million increase was due primarily to
an increase in federal insurance premium of $ 3.3
million, partially offset by a decrease in other expense s , net of $ 1.1 million related to an
impairment and valuation allowance taken on the mortgage-servicing rights asset
in the prior year period. 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 six month period was
$ 19.4 million compared to $ 19.8 million for the prior year six
month period. The $431 thousand decrease was due to a decrease in
the effective tax rate between periods. The effective tax rate for the
six months ended March
31, 2010 was 35.3 %,
compared to 36.9% for the prior year six month
period . 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 (ESOP) in the current
fiscal year and a reduction of unrecognized tax benefits due to the lapse
of the statute of limitations during the first
quarter of fiscal year
2010 .
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.
67
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.
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.
68
Total
other expenses for fiscal year 2009 were $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.
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.
69
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.
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 . The $2.1 million
provision in fiscal year 2008 reflected a decline in
home prices in some of the markets where we have purchased loans, an increase in
specific valuation allowances on non-performing purchased loans, an increase in
charge-offs during the year compared to fiscal year 2007, and an increase in the
balance and trends of delinquent and non-performing loans compared to fiscal
year 2007. Due to the decline in home prices in some of the markets
where we purchased loans, the estimated fair value of the underlying collateral,
less estimated costs to sell, on certain non-performing purchased loans was less
than the related outstanding loan balance. As a result, management
established $683 thousand of specific valuation allowances at September 30, 2008
related to those loans. Charge-offs during fiscal year 2008 were $441
thousand, of which $321 thousand related to purchased loans, compared to total
charge-offs of $27 thousand during fiscal year 2007. The increase in
the charge-offs in fiscal year 2008 was primarily due to the decline in home
prices of the underlying collateral and also the number of loans entering
foreclosure, both primarily related to our purchased loan
portfolio. The amount of loans delinquent 30-89 days increased $3.4
million from $17.7 million at September 30, 2007 to $21.1 million at September
30, 2008. This increase was almost entirely in our purchased loan
portfolio. Non-performing loans increased $6.3 million from $7.4
million at September 30, 2007 to $13.7 million at September 30,
2008. Of the $6.3 million increase in non-performing loans, $4.5
million related to our purchased loan portfolio. The increase in
delinquent and non-performing loans is believed to have been a result of the
negative economic environment, specifically the increase in the level of
unemployment during the year.
70
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 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.
Capitol Federal Savings Bank generally intends to maintain cash
reserves sufficient to meet short-term liquidity needs, which are routinely
forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, Capitol Federal Saving Bank
performs a liquidity stress test in accordance with the Interagency Policy
Statement on Funding and Liquidity Risk Management. The liquidity stress
test incorporates both a short-term and long-term liquidity scenario in order to
quantify liquidity risk. In the event short-term liquidity needs exceed available cash, Capitol Federal Savings Bank has
access to lines of credit at the FHLB and the Federal Reserve Bank
(FRB). The FHLB line of credit, when combined with FHLB advances, may
not exceed 40% of total assets. Our excess capacity at the FHLB as of
March 31, 2010 was $1.31 billion. The FRB line of credit is based upon the fair
values of the securities pledged as collateral and certain other
characteristics of those securities, and is used only when other sources of
short-term liquidity are unavailable. At March 31, 2010, Capitol
Federal Savings Bank had $1.32 billion of securities that were eligible but
unused for collateral for borrowing or other liquidity
needs. Borrowings on the lines of credit are outstanding until
replaced by cash flows from long-term sources of liquidity, generally no longer
than 30 days.
71
If management observes a trend in the amount and frequency of
lines of credit utilization, management will likely utilize long-term wholesale
borrowing sources, such as FHLB advances and/or repurchase agreements, to
provide permanent fixed rate funding. The maturity of these
borrowings is generally structured in such a way as to stagger maturities in
order to reduce the risk of a highly negative cash flow position at
maturity. Additionally, management could utilize the repayment and
maturity of outstanding loans, MBS and other investments for liquidity needs
rather than reinvesting such funds into the related
portfolios.
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 March 31, 2010 , cash and cash
equivalents totaled $ 60.7 million, an increase of
$ 19.6 million from September 30,
2009. The increase was related to normal cash
fluctuations .
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 half of fiscal year 2010, loan
originations and purchases, net of principal repayments provided a cash inflow of $18. 3 million, as principal repayments
exceeded loan originations and purchases, compared to a cash outflow of $240.9 million in the prior year period . Loan originations and purchases were
funded by cash flows from operations, as there were no additional borrowings
during the period .
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 half of fiscal year 2010, Capitol Federal
Savings Bank received principal payments on MBS of $ 234.0 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. The
investment securities purchased during fiscal year 2010 had
a WAL of approximately one year at the time of
purchase . 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.
72
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 March 31, 2010 , 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.”
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 . As of March 31, 2010, Capitol Federal Savings
Bank’s policy allows for repurchase agreements of up
to 15% of total assets, brokered deposits up to 15% of total deposits, and
public unit deposits up to 10% of total deposits . Subsequent to March 31, 2010, the Board of Directors changed the policy limits on
brokered deposits and public units as follows: brokered deposits may
comprise up to 10% of total deposits, and public units may comprise up to 5% of
total deposits. Other limits remain
unchanged.
At
March 31, 2010 , $1. 32 billion of securities
were eligible but unused for collateral. At March
31, 2010 , Capitol Federal Savings Bank had
repurchase agreements of $660.0 million, or approximately 8% of total assets,
and public unit deposits of $ 103.8 million, or approximately 1% of total assets. Capitol
Federal Savings Bank also had pledged securities
with an estimated fair value of $765. 2 million as
collateral for repurchase agreements at that date.
At the maturity date, the securities pledged for the repurchase
agreements will be delivered back to Capitol Federal Savings Bank. There were no additional repurchase
agreements during the first six months of fiscal year
2010. 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.”
At March 31, 2010, $1.52 billion of Capitol Federal Savings
Bank’s $2.65 billion in certificates of deposit were scheduled to mature within
one year. Included in the $1.52 billion were $103.8 million in public
unit deposits, which had a weighted average maturity of less than 6
months. At March 31, 2010, Capitol Federal Savings Bank had pledged
securities with a fair value of $141.1 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 certificates of deposit 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.
In 2004,
CFF issued $53.6 million in 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 half of fiscal year 2010, CFF paid cash dividends of
$ 27.4 million, or $ 1.29
per share. The $ 1.29 per share
consists of two quarterly dividends of $0.50 per share and a $0.29 special dividend
per share related to fiscal year 2009 earnings per
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 “ Our
Policy Regarding Dividends ” and
“Supervision and Regulation.”
73
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 certificates of deposit at
maturity.
|
In
addition to its commitments of the types described above, at March 31, 2010 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 March 31, 2010 (unaudited). The debentures are callable
at any time, in whole or in part.
74
| Maturity Range | ||||||||||||||||||||
| Less than | 1 - 3 | 3 - 5 | More than | |||||||||||||||||
| Total | 1 year | years | years | 5 years | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Operating
leases
|
$
|
12, 501
|
$
|
1, 128
|
$
|
1, 788
|
$
|
1, 504
|
$
|
8, 081
|
||||||||||
|
Certificates of
Deposit
|
$
|
2,651,415
|
$
|
1,519,213
|
$
|
949,028
|
$
|
181,914
|
$
|
1, 350
|
||||||||||
|
Weighted
average rate
|
2. 66
|
%
|
2. 47
|
%
|
2.91
|
%
|
2.97
|
%
|
3. 42
|
%
|
||||||||||
|
FHLB Advances
|
$
|
2,426,000
|
$
|
550,000
|
$
|
526,000
|
$
|
975 ,000
|
$
|
375 ,000
|
||||||||||
|
Weighted
average rate
|
3.79
|
%
|
4.57
|
%
|
3.58
|
%
|
3. 54
|
%
|
3. 59
|
%
|
||||||||||
|
Repurchase
Agreements
|
$
|
660,000
|
$
|
170 ,000
|
$
|
275 ,000
|
$
|
195 ,000
|
$
|
20,000
|
||||||||||
|
Weighted
average rate
|
3.97
|
%
|
3. 73
|
%
|
3.99
|
%
|
4.10
|
%
|
4.45
|
%
|
||||||||||
|
Debentures
|
$
|
53,609
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
53,609
|
||||||||||
|
Weighted
average rate
|
3. 00
|
%
|
--
|
%
|
--
|
%
|
--
|
%
|
3. 00
|
%
|
||||||||||
|
Commitments
to originate and
|
||||||||||||||||||||
|
purchase first mortgage loans
|
$
|
108,812
|
$
|
108,812
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||||
|
Weighted
average rate
|
4. 94
|
%
|
4. 94
|
%
|
--
|
%
|
--
|
%
|
--
|
%
|
||||||||||
|
Commitments
to fund unused
|
||||||||||||||||||||
|
home
equity lines of credit
|
$
|
272,454
|
$
|
272,454
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||||
|
Weighted
average rate
|
4. 48
|
%
|
4. 48
|
%
|
--
|
%
|
--
|
%
|
--
|
%
|
||||||||||
|
Unadvanced
portion of
|
||||||||||||||||||||
|
construction
loans
|
$
|
18,995
|
$
|
18,995
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||||
|
Weighted
average rate
|
5. 11
|
%
|
5. 11
|
%
|
--
|
%
|
--
|
%
|
--
|
%
|
||||||||||
Excluded
from the table above are income tax liabilities of $ 105 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 and
to fund home equity lines of credit 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.
75
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 six months ended March 31, 2010 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 March 31, 2010 , 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 March 31, 2010 based upon regulatory guidelines.
|
Bank
Ratios
|
Regulatory
Requirement
For
Well-
Capitalized
Status
|
|||||||
|
Tangible
equity
|
10. 0 | % | N/A | |||||
|
Tier
1 (core) capital
|
10. 0 | % | 5.0 | % | ||||
|
Tier
1 (core) risk-based capital
|
23. 6 | % | 6.0 | % | ||||
|
Total
risk-based capital
|
23.9 | % | 10.0 | % | ||||
A
reconciliation of Capitol Federal Savings Bank’s equity under GAAP to regulatory
capital amounts as of March 31, 2010 is as follows (dollars in thousands):
|
Total
equity as reported under GAAP
|
$ | 873,053 | ||
|
Unrealized
( gains ) losses on
AFS securities
|
(30, 765 | ) | ||
|
Other
|
(427 | ) | ||
|
Total
tangible and core capital
|
841,861 | |||
|
ALLL
(1)
|
10,204 | |||
|
Total
risk based capital
|
$ | 852,065 |
|
(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
CFF is
the holding company for Capitol Federal Savings
Bank, 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). Capitol Federal Savings Bank
is the only operating subsidiary of CFF. At March 31, 2010, CFF had total
assets of $8. 49 billion, loans of $5. 38 billion, deposits of $4. 32
billion and total equity of $ 946.1
million.
76
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 home equity and other
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.
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
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 greater Kansas City
metropolitan area . 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 offer
commercial deposit accounts, 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.
77
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 March 31,
2010, loans purchased from nationwide lenders
represented 12 % of our total loan portfolio and were
secured by properties located in 47 of the continental United States and
Washington, D.C. At March 31, 2010, purchased loans secured by properties in the
following states comprised 5% or more of all properties securing our nationwide purchased
loans: Illinois 11 %; Texas 8%; New York
7%; Florida 7%; and Colorado 5%.
Capitol Federal Savings
Bank has opened two new branches in our Kansas City ,
Missouri market area and a new branch in our
Wichita market area since the beginning of fiscal year
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 home
equity and other 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. We have experienced
some losses on loans purchased from nationwide lenders prior to fiscal year
2008. At the
time these loans were purchased, they met our underwriting standards.
However, 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 $ 44.1 million
of loans from nationwide lenders during the first
half of fiscal year 2010, the
majority of which were adjustable rate. These loans had an average
credit score of 760 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. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Financial Condition – Loans Receivable.”
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 March 31, 2010 , our one- to
four-family residential real estate loan portfolio totaled $5. 12 billion, which constituted 94.4% of our total loan
portfolio and 60.4 % 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 the 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 March 31, 2010 was $127. 8
million. Our largest lending relationship to a single borrower or a
group of related borrowers at March 31, 2010 consisted of 17 multi-family real estate
projects located in Kansas and Iowa, one
single-family home located in Colorado , and four
commercial real estate projects located in Kansas, Colorado , and Texas. Total commitments and
loans outstanding to this group of related borrowers was $47. 0 million as of March 31,
2010 . 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 its terms at March
31, 2010 . See additional information
under the heading “Multi-family and Commercial Real Estate
Lending.”
78
The
second largest lending relationship at March 31,
2010 , consisted of nine loans totaling $11. 5 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 its terms
at March 31, 2010 .
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 half of
fiscal year 2010, Capitol Federal Savings Bank originated and refinanced $ 260.4 million of one- to four-family fixed-rate mortgage
loans and $ 34.3 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.
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 March 31, 2010 were $ 230.0 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 at
origination and a weighted average LTV ratio of 80% or less , based upon
the loan balance at the time of purchase and the
lower of purchase price or appraisal at origination . 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 March 31, 2010, $199 .3 million, or 87%,
of interest-only loans were still in their interest-only payment
term. As of March 31, 2010, $87.9 million will begin to amortize principal within two
years, $24 .7 million will begin to amortize principal within two-to-five
years, $ 75.5 million will begin to amortize
principal within five-to-seven years and the remaining $ 11.2 million will begin amortizing in seven-to-ten
years. At March 31, 2010, $17.8 million or 52 % of
non-performing loans were interest-only and $ 3.6
million was reserved in the ALLL for these loans. Approximately 85% of the $17.8 million non-performing
interest-only loans were non-amortizing. Non-performing
interest-only loans represented approximately 8 % of the total interest-only portfolio at March 31, 2010 . See
“Asset Quality – Loans and REO.”
79
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 claims 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.
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 half of fiscal 2010, Capitol Federal Savings
Bank purchased $ 47.4 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 documentation
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 documentation 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 half of fiscal year 2010, Capitol Federal
Savings Bank purchased $ 44.1 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.
80
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 half of fiscal year
2010 we modified $ 209.3 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.
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 March 31, 2010 , we had $ 34.3 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 March 31,
2010 , our consumer loan portfolio totaled $ 198.5 million, or 3.7% of our total loan
portfolio.
81
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 $ 190 .0 million, at March 31,
2010 . As of March 31, 2010 , 72. 7 % 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.
Multi-family
and Commercial Real Estate Lending. At
March 31, 2010 ,
multi-family and commercial real estate loans totaled $ 70 .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.”
82
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. At March 31, 2010,
the outstanding principal balance of the loan was $8.1
million. The change in commitment
involved completing the tenant finish for
retail space that was already started, of which 83% was tenant leased as of March 31,
2010 , and postponing the development of additional
retail space. This loan is part of our
largest lending relationship to a single borrower or a group of related
borrowers at March 31, 2010 . 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 March 31,
2010 . 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.
| March 31, | September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2010 | 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
|
$ | 5,122,227 | 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
|
70,447 | 1.3 | 80,493 | 1.4 | 56,081 | 1.0 | 60,625 | 1.1 | 56,774 | 1.1 | 49,563 | 0.9 | ||||||||||||||||||||||||||||||||||||
|
Construction
|
34,297 | 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
|
5,226,971 | 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
|
189,959 | 3.5 | 195,557 | 3.5 | 202,956 | 3.8 | 208,642 | 3.9 | 212,938 | 4.1 | 198,135 | 3.6 | ||||||||||||||||||||||||||||||||||||
|
Other
|
8,528 | 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
|
198,487 | 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
|
5,425,458 | 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
|
18,995 | 20,649 | 43,186 | 42,481 | 22,605 | 14,803 | ||||||||||||||||||||||||||||||||||||||||||
|
Unearned
loan fees and deferred costs
|
10, 872 | 12,186 | 10,088 | 9,893 | 9,318 | 10,856 | ||||||||||||||||||||||||||||||||||||||||||
|
Allowance
for losses
|
14,739 | 10,150 | 5,791 | 4,181 | 4,433 | 4,598 | ||||||||||||||||||||||||||||||||||||||||||
|
Total
loans receivable, net
|
$ | 5,380,852 | $ | 5,603,965 | $ | 5,320,780 | $ | 5,290,071 | $ | 5,221,117 | $ | 5,464,130 | ||||||||||||||||||||||||||||||||||||
83
The
following table presents the contractual maturity of our loan portfolio at March 31, 2010 . 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
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Multi-family
and
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to Four-Family
|
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)
|
$
|
1,884
|
6. 01
|
%
|
$
|
8,148
|
5.95
|
%
|
$
|
17, 867
|
5. 16
|
%
|
$
|
3,826
|
4. 06
|
%
|
$
|
1, 063
|
5. 22
|
%
|
$
|
32,788
|
5. 28
|
%
|
||||||||||||||||||||||||
|
After
one year:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Over
one to two
|
5, 100
|
5. 58
|
168
|
6.24
|
16,430
|
5. 05
|
1, 493
|
4. 79
|
989
|
8. 07
|
24,180
|
5. 28
|
||||||||||||||||||||||||||||||||||||
|
Over
two to three
|
13,612
|
5. 34
|
5,126
|
6.26
|
--
|
--
|
1,912
|
5. 15
|
1, 142
|
6. 49
|
21,792
|
5. 60
|
||||||||||||||||||||||||||||||||||||
|
Over
three to five
|
35,927
|
5. 32
|
182
|
6.03
|
--
|
--
|
3, 394
|
5. 34
|
4,981
|
5. 22
|
44,484
|
5. 31
|
||||||||||||||||||||||||||||||||||||
|
Over
five to ten
|
461,425
|
5. 17
|
25,108
|
6.16
|
--
|
--
|
33,522
|
5. 12
|
325
|
8. 73
|
520,380
|
5. 22
|
||||||||||||||||||||||||||||||||||||
|
Over
10 to 15
|
878,508
|
4.95
|
20,732
|
6. 23
|
--
|
--
|
57,869
|
4.87
|
28
|
6.50
|
957,137
|
4.97
|
||||||||||||||||||||||||||||||||||||
|
After
15 years
|
3,725,771
|
5. 21
|
10,983
|
6. 27
|
--
|
--
|
87,943
|
6. 38
|
--
|
--
|
3,824,697
|
5. 24
|
||||||||||||||||||||||||||||||||||||
|
Total
due after one year
|
5,120,343
|
5. 16
|
62,299
|
6. 21
|
16,430
|
5. 05
|
186,133
|
5.64
|
7, 465
|
5.95
|
5,392,670
|
5. 19
|
||||||||||||||||||||||||||||||||||||
|
Total
loans
|
$
|
5,122,227
|
5. 16
|
%
|
$
|
70,447
|
6.18
|
%
|
$
|
34,297
|
5. 11
|
%
|
$
|
189,959
|
5. 61
|
%
|
$
|
8,528
|
5.86
|
%
|
5,425,458
|
5. 19
|
%
|
|||||||||||||||||||||||||
|
Less:
|
||||
|
Undisbursed loan
funds
|
18,995
|
|||
|
Unearned loan fees and
deferred
costs
|
10, 872
|
|||
|
Allowance for loan
losses
|
14,739
|
|||
|
Total loans receivable,
net
|
$
|
5,380,852
|
|
(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.
|
86
The
following table presents, as of March 31, 2010 , the amount of loans, net of undisbursed loan funds,
due after March 31, 2011 , and whether these loans have fixed or adjustable
interest rates.
| Fixed | Adjustable |
Total
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Real
Estate Loans:
|
||||||||||||
|
One- to four-family
|
$ | 4,101,312 | $ | 1,019,031 | $ | 5,120,343 | ||||||
|
Multi-family and commercial
|
59,855 | 2, 444 | 62,299 | |||||||||
|
Construction
|
15, 700 | 730 | 16,430 | |||||||||
|
Consumer
Loans:
|
||||||||||||
|
Home
equity
|
51,727 | 134,406 | 186,133 | |||||||||
|
Other
|
3, 538 | 3, 927 | 7, 465 | |||||||||
|
Total
|
$ | 4,232,132 | $ | 1,160,538 | $ | 5,392,670 | ||||||
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.
| Six
Months
Ended March 31, |
Year
Ended
|
|||||||||||||||
|
September
30,
|
||||||||||||||||
| 2010 | 2009 |
2008
|
2007
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Originations
by type:
|
||||||||||||||||
|
Adjustable-rate:
|
||||||||||||||||
|
Real
estate - one- to four-family
|
$ | 33,592 | $ | 33,601 | $ | 66,429 | $ | 93,350 | ||||||||
|
-
multi-family and commercial
|
-- | -- | 1,800 | -- | ||||||||||||
|
-
construction
|
730 | 2,261 | 11, 250 | 11,012 | ||||||||||||
|
Home
equity
|
40,533 | 91,053 | 87,614 | 87,022 | ||||||||||||
|
Other
consumer
|
1, 809 | 4,391 | 1,731 | -- | ||||||||||||
|
Total
adjustable-rate loans originated
|
76,664 | 131,306 | 168,824 | 191,384 | ||||||||||||
|
Fixed-rate:
|
||||||||||||||||
|
Real
estate - one- to four-family
|
246,172 | 937,430 | 586,982 | 543,497 | ||||||||||||
|
-
multi-family and commercial
|
-- | 14,891 | 975 | 4,873 | ||||||||||||
|
-
construction
|
14,276 | 24, 063 | 44,783 | 30,392 | ||||||||||||
|
Home
equity
|
2,948 | 10,069 | 14,475 | 25,285 | ||||||||||||
|
Other
consumer
|
805 | 1,922 | 4,796 | 8,019 | ||||||||||||
|
Total
fixed-rate loans originated
|
264,201 | 988,375 | 652,011 | 612,066 | ||||||||||||
|
Total
loans originated
|
340,865 | 1,119,681 | 820,835 | 803,450 | ||||||||||||
|
Purchases
and Participations:
|
||||||||||||||||
|
Real
estate - one- to four-family
|
90,507 | 332,932 | 116,141 | 125,579 | ||||||||||||
|
-
multi-family and commercial
|
-- | -- | -- | -- | ||||||||||||
|
-
construction
|
1,000 | 500 | 3,490 | 18,756 | ||||||||||||
|
Total
loans purchased/participations
|
91,507 | 333,432 | 119,631 | 144,335 | ||||||||||||
|
Transfer
of modified loans to loans held for sale, net
|
(194,759 | ) | (94,672 | ) | -- | -- | ||||||||||
|
Principal
repayments
|
(451,102 | ) | (1,079,777 | ) | (899,178 | ) | (855,980 | ) | ||||||||
|
Decrease
in other items, net
|
(8,003 | ) | (11,559 | ) | (8,069 | ) | (2,652 | ) | ||||||||
|
Net
loan activity
|
$
|
(221,492
|
) | $ |
267,105
|
$ |
33,219
|
$ |
89,153
|
|||||||
87
Asset
Quality – Loans and REO
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 mortgage loans as of March 31,
2010 cross-referenced by LTV ratio and credit score . The
LTV 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 LTV 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 most recently updated in March 2010. Management will continue to update credit
scores as deemed necessary based upon economic conditions . Per the matrix, the greatest concentration of
loans fall into the “751 and above” credit score category and have a LTV ratio of less than 70 %. The loans falling into the “less than 660”
credit score category and having LTV ratios of more
than 80% comprise the lowest concentration . The average LTV
ratio and credit score for our one- to
four-family purchased loans at March 31, 2010 was 58 % and 742 ,
respectively. The average LTV ratio and
credit score for our one- to four-family originated loans at March 31, 2010 was 67 % and 761 ,
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%
|
$
|
133,630
|
2.6
|
%
|
$
|
136,135
|
2.7
|
%
|
$
|
403,122
|
7.9
|
%
|
$
|
1,955,340
|
38.2
|
%
|
$
|
2,628,227
|
51.4
|
%
|
|||||||||||||||||||
|
70% to 80%
|
117,013
|
2.3
|
130,160
|
2.5
|
337,747
|
6.6
|
1,158,967
|
22.6
|
1,743,887
|
34.0
|
|||||||||||||||||||||||||||||
|
More than 80%
|
71,560
|
1.4
|
72,568
|
1.4
|
195,104
|
3.8
|
410,881
|
8.0
|
750,113
|
14.6
|
|||||||||||||||||||||||||||||
|
$
|
322,203
|
6.3
|
%
|
$
|
338,863
|
6.6
|
%
|
$
|
935,973
|
18.3
|
%
|
$
|
3,525,188
|
68.8
|
%
|
$
|
5,122,227
|
100.0
|
%
|
||||||||||||||||||||
88
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.
|
Loans Delinquent for 30-89 Days
at
|
||||||||||||||||||||||||||||||||
| March 31, | September 30, | |||||||||||||||||||||||||||||||
|
2010
|
2009 |
2008
|
2007
|
|||||||||||||||||||||||||||||
| Number |
Amount
|
Number
|
Amount
|
Number |
Amount
|
Number
|
Amount
|
|||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||||||||||||||||||
|
Originated
|
143 | $ | 14,574 | 159 | $ | 15,488 | 125 | $ | 13,244 | 149 | $ | 13,117 | ||||||||||||||||||||
|
Purchased
|
39 | 9,846 | 41 | 10,556 | 37 | 7,083 | 26 | 3,854 | ||||||||||||||||||||||||
|
Multi-family
& commercial
|
-- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Construction
|
-- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Consumer
Loans:
|
||||||||||||||||||||||||||||||||
|
Home
equity
|
35 | 670 | 40 | 708 | 33 | 664 | 28 | 589 | ||||||||||||||||||||||||
|
Other
|
13 | 62 | 15 | 89 | 21 | 118 | 29 | 172 | ||||||||||||||||||||||||
|
Total
|
230 | $ | 25,152 | 255 | $ | 26,841 | 216 | $ | 21,109 | 232 | $ | 17,732 | ||||||||||||||||||||
|
Delinquent
loans to total loans
|
0.47 | % | 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 decreased $1.6 million from $26.8 million at September 30,
2009 to $ 25.2 million at March 31, 2010. We believe the
increase in the 30 to 89 day delinquent balance from September 30, 2008 to
September 30, 2009 was primarily due to the increase in
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 March 31, 2010 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 Days
|
Non-
|
|||||||||||||||||||||||
|
Paid Off
|
Performing
|
Delinquent
|
Performing
|
REO
|
Total
|
|||||||||||||||||||
|
Originated
|
5.0 | % | 38.7 | % | 36.1 | % | 18.3 | % | 1.9 | % | 100.0 | % | ||||||||||||
|
Purchased
|
3.9 | % | 21.9 | % | 39.3 | % | 33.3 | % | 1.6 | % | 100.0 | % | ||||||||||||
|
Total Portfolio Average
|
4.5 | % | 31.5 | % | 37.5 | % | 24.8 | % | 1.7 | % | 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 included in interest income was $ 332 thousand for the six
months ended March 31, 2010 and $ 539 thousand for the
year ended September 30, 2009. The amount of interest income that
would have been recorded on non-performing loans if they were not on
non-accruing status was $ 928 thousand for the six months ended March 31,
2010 and $ 1.2 million
for the year ended September 30, 2009. REO includes assets acquired
in settlement of loans.
89
|
|
September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
|
March
31, 2010
|
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
|
107 | $ | 9,892 | 99 | $ | 9,248 | 70 | $ | 6,488 | 68 | $ | 4,941 | 56 | $ | 3,534 | 74 | $ | 4,471 | ||||||||||||||||||||||||||||||
|
Purchased
|
76 | 23,407 | 70 | 21,259 | 25 | 6,708 | 9 | 2,163 | 13 | 1,857 | 5 | 563 | ||||||||||||||||||||||||||||||||||||
|
Multi-family
& commercial
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Construction
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Consumer
loans:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Home
equity
|
41 | 720 | 22 | 367 | 19 | 379 | 13 | 207 | 12 | 177 | 11 | 113 | ||||||||||||||||||||||||||||||||||||
|
Other
|
6 | 18 | 8 | 45 | 11 | 91 | 7 | 41 | 3 | 41 | 4 | 11 | ||||||||||||||||||||||||||||||||||||
| 230 | 34,037 | 199 | 30,919 | 125 | 13,666 | 97 | 7,352 | 84 | 5,609 | 94 | 5,158 | |||||||||||||||||||||||||||||||||||||
|
Real
estate owned:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Originated
(1)
|
59 | 5,450 | 51 | 5,702 | 36 | 2,228 | 30 | 2,036 | 34 | 2,401 | 30 | 1,368 | ||||||||||||||||||||||||||||||||||||
|
Purchased
|
8 | 1, 411 | 8 | 1,702 | 12 | 2,918 | 1 | 61 | -- | -- | 1 | 245 | ||||||||||||||||||||||||||||||||||||
|
Multi-family
& commercial
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Construction
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Consumer
loans:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Home
equity
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Other
|
-- | -- | -- | -- | -- | -- | -- | -- | 1 | 8 | 1 | 40 | ||||||||||||||||||||||||||||||||||||
| 67 | 6, 861 | 59 | 7,404 | 48 | 5,146 | 31 | 2,097 | 35 | 2,409 | 32 | 1,653 | |||||||||||||||||||||||||||||||||||||
|
Total
non-performing assets
|
297 | $ | 40,898 | 258 | $ | 38,323 | 173 | $ | 18,812 | 128 | $ | 9,449 | 119 | $ | 8,018 | 126 | $ | 6,811 | ||||||||||||||||||||||||||||||
|
Non-performing
loans as a percentage of total
loans.
|
0.63 | % | 0.55 | % | 0.26 | % | 0.14 | % | 0.11 | % | 0.09 | % | ||||||||||||||||||||||||||||||||||||
|
Non-performing
assets as a percentage of total
assets
|
0.48 | % | 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.
|
90
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 $ 3. 1 million from
$30.9 million at September 30, 2009 to $ 34.0 million
at March 31, 2010. 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 March 31, 2010 , one- to four-family non-performing loans totaled $33.3 million and 14% had LTV ratios greater than
80 %. At origination, these loans
generally had LTV ratios less than 80%, but as a
result of declines in real estate values as
reflected in updated appraisals, the LTV ratios are
now in excess of 80%. Of these loans, 65% 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
LTV ratios greater than 80% with no PMI was $1.6 million at March 31,
2010.
The
following table presents the year of origination for
originated and purchased one- to four-family loans, and the origination year for
non-performing originated and purchased one- to four-family loans at March 31,
2010. Purchased loans include loans purchased from nationwide
lenders. The origination date for modified loans is based on when the
loan was originated, not the modification date.
|
Origination
|
Originated
|
Purchased
|
Total
|
|||||||||||||||||||||
|
Calendar
|
Originated
|
Purchased
|
Non-Performing
|
Non-Performing
|
Non-Performing
|
|||||||||||||||||||
|
Year
|
Loans
|
Loans
|
Total
|
Loans
|
Loans
|
Loans
|
||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||
|
2002 and prior
|
$ | 710,517 | $ | 14,819 | $ | 725,336 | $ | 3,544 | $ | 529 | $ | 4,073 | ||||||||||||
|
2003
|
395,457 | 32,969 | 428,426 | 661 | 657 | 1,318 | ||||||||||||||||||
|
2004
|
306,987 | 210,991 | 517,978 | 1,709 | 6,111 | 7,820 | ||||||||||||||||||
|
2005
|
397,060 | 203,949 | 601,009 | 694 | 15,449 | 16,143 | ||||||||||||||||||
|
2006
|
420,836 | 19,702 | 440,538 | 2,071 | 661 | 2,732 | ||||||||||||||||||
|
2007
|
545,004 | 173 | 545,177 | 1,213 | - | 1,213 | ||||||||||||||||||
|
2008
|
614,646 | 79,381 | 694,027 | - | - | - | ||||||||||||||||||
|
2009
|
942,614 | 83,721 | 1,026,335 | - | - | - | ||||||||||||||||||
|
2010
|
136,884 | 6,517 | 143,401 | - | - | - | ||||||||||||||||||
| $ | 4,470,005 | $ | 652,222 | $ | 5,122,227 | $ | 9,892 | $ | 23,407 | $ | 33,299 | |||||||||||||
91
The following table presents the geographic distribution of
our one- to four-family mortgages, 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 March 31,
2010 . 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.
| One- to Four-Family | Loans
30 to 89
Days
Delinquent
|
Non-Performing Loans | ||||||||||||||||||||||||||
|
State
|
Balance |
%
of Total
|
Balance | % of Total | Balance |
%
of Total
|
Average
LTV |
|||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
|
Kansas
|
$ | 3,721,177 | 72.7 | % | $ | 11,703 | 47.8 | % | $ | 8,636 | 25.9 | % | 77 | % | ||||||||||||||
|
Missouri (1)
|
770,429 | 15.0 | 3,700 | 15.2 | 1,278 | 3.8 | 113 | |||||||||||||||||||||
|
Illinois
|
74,752 | 1.5 | 432 | 1.8 | 3,416 | 10.3 | 68 | |||||||||||||||||||||
|
Texas
|
51,654 | 1.0 | 125 | 0.5 | 390 | 1.2 | 74 | |||||||||||||||||||||
|
New York
|
48,179 | 0.9 | 1,677 | 6.9 | 720 | 2.2 | 80 | |||||||||||||||||||||
|
Florida
|
46,541 | 0.9 | 612 | 2.5 | 3,648 | 11.0 | 71 | |||||||||||||||||||||
|
Colorado
|
35,169 | 0.7 | 321 | 1.3 | 508 | 1.5 | 78 | |||||||||||||||||||||
|
Arizona
|
31,629 | 0.6 | 1,271 | 5.2 | 3,120 | 9.4 | 74 | |||||||||||||||||||||
|
Connecticut
|
29,866 | 0.6 | -- | -- | 150 | 0.4 | 67 | |||||||||||||||||||||
|
Virginia
|
29,406 | 0.6 | 567 | 2.3 | 1,405 | 4.2 | 70 | |||||||||||||||||||||
|
New Jersey
|
26,950 | 0.5 | -- | -- | 358 | 1.1 | 59 | |||||||||||||||||||||
|
Minnesota
|
26,703 | 0.5 | 796 | 3.3 | 129 | 0.4 | 70 | |||||||||||||||||||||
|
Other states
|
229,772 | 4.5 | 3,216 | 13.2 | 9,541 | 28.6 | 70 | |||||||||||||||||||||
| $ | 5,122,227 | 100.0 | % | $ | 24,420 | 100.0 | % | $ | 33,299 | 100.0 | % | 74 | % | |||||||||||||||
(1) We
recently received an updated appraisal on a non-performing Missouri loan which
resulted in a LTV ratio significantly in excess of 100% for this loan.
The related SVA is the current loan balance less the estimated fair
value of the collateral and the estimated costs to sell. If this
loan is excluded, the weighted average LTV ratio for non-performing Missouri
loans would be 99%.
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 $ 53.6 million, $41.4 million, $13.7 million,
and $7.4 million at March 31, 2010 and September 30, 2009, 2008, and 2007,
respectively.
A troubled debt restructuring ( 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. All TDRs that have not been performing under the modified loan
terms for 12 consecutive months are considered to be impaired
loans. At March 31, 2010 and September 30, 2009, 2008, and 2007, Capitol
Federal Savings Bank had TDRs of $ 20.5 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 March 31, 2010
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. The balance of TDRs
included in the impaired loan balance at March 31,
2010 was $ 20.5 million,
of which 88 %, or $ 18.0
million, were originated loans. Of the $ 20.5 million, $ 1.1 million was
greater than 90 days delinquent and was included in the non-performing loan
balance at March 31, 2010 . The amount of interest recognized in
interest income on total TDRs was $ 533 thousand for
the six months ended March 31,
2010.
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.
92
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 March 31, 2010 . 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.
|
Special
Mention
|
Substandard
|
|||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Real
Estate Loans:
|
||||||||||||||||
|
One-
to four-family:
|
||||||||||||||||
|
Originated
|
73
|
$
|
12,225
|
142
|
$
|
15, 300
|
||||||||||
|
Purchased
|
2
|
610
|
80
|
20,960
|
||||||||||||
|
Multi-family
and commercial
|
1
|
8, 131
|
--
|
--
|
||||||||||||
|
Construction
|
--
|
--
|
--
|
--
|
||||||||||||
|
Consumer
loans:
|
||||||||||||||||
|
Home
equity
|
6
|
69
|
48
|
1,064
|
||||||||||||
|
Other
|
--
|
--
|
8
|
53
|
||||||||||||
|
Total
loans
|
82
|
21,035
|
278
|
37,377
|
||||||||||||
|
Real
estate owned:
|
||||||||||||||||
|
Originated
|
--
|
--
|
59
|
5,450
|
||||||||||||
|
Purchased
|
--
|
--
|
8
|
1, 411
|
||||||||||||
|
Total
real estate owned
|
--
|
--
|
67
|
6, 861
|
||||||||||||
|
Trust
preferred securities
|
--
|
--
|
1
|
3,064
|
||||||||||||
|
Total
classified assets
|
82
|
$
|
21,035
|
346
|
$
|
47,302
|
||||||||||
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 March 31, 2010 , our ALLL was $ 14.7
million, or 0. 27 % of the total loan portfolio and
43 % 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.
93
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.
|
Six Months Ended
March 31,
|
Year
Ended September 30,
|
|||||||||||||||||||||||
|
2010
|
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
|
181 | 226 | 86 | 8 | 95 | 91 | ||||||||||||||||||
|
One-
to four-family loans-purchased
|
1,549 | 1,781 | 321 | -- | -- | -- | ||||||||||||||||||
|
Multi-family
& commercial
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Construction
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Home
equity
|
23 | 1 | 2 | 3 | -- | -- | ||||||||||||||||||
|
Other
consumer
|
10 | 24 | 32 | 16 | 37 | 56 | ||||||||||||||||||
|
Total
charge-offs
|
1,763 | 2,032 | 441 | 27 | 132 | 147 | ||||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||||||
|
One-
to
four-family
|
172 | -- | -- | -- | 1 | 35 | ||||||||||||||||||
|
Multi-family
&
commercial
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Construction
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Home
equity
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Other
consumer
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Total
recoveries
|
172 | -- | -- | -- | 1 | 35 | ||||||||||||||||||
|
Net
charge-offs
|
1,591 | 2,032 | 441 | 27 | 131 | 112 | ||||||||||||||||||
|
Allowance
on loans in the loan swap transaction
|
(135 | ) | -- | -- | -- | (281 | ) | -- | ||||||||||||||||
|
Provision
(recovery)
|
6,315 | 6,391 | 2,051 | (225 | ) | 247 | 215 | |||||||||||||||||
|
Balance
at end of period
|
$ | 14,739 | $ | 10,150 | $ | 5,791 | $ | 4,181 | $ | 4,433 | $ | 4,598 | ||||||||||||
|
Ratio
of net charge-offs during the period to
average loans outstanding(1)
|
0 .03
|
%
|
0.04
|
% | -- | % | -- | % | -- | % | -- | % | ||||||||||||
|
Ratio
of net charge-offs during the period to
average non-performing assets
|
4.02
|
% | 7.11 | % |
3.12
|
% |
0.31
|
% |
1.77
|
% | 1.31 | % | ||||||||||||
|
ALLL
as a percentage of non-performing loans
|
43.30 |
%
|
32.83 | % | 42.37 | % | 56.87 | % | 79.03 | % | 89.14 | % | ||||||||||||
|
ALLL
as a percentage of total loans
(end of period)
|
0 .27
|
% | 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%.
|
94
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 $ 6. 3 million provision for loan loss recorded in the current
fiscal year
primarily reflects increases in the level of certain factors in our
general valuation allowance model to account for lingering
negative economic conditions and the relatively recent loss experience on our
purchased loan portfolio . 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:
|
March 31,
|
September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2010 |
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 ,061 | 82.4 | % | $ | 3,604 | 81.9 | % | $ | 3,075 | 80.7 | % | $ | 2,962 | 77.0 | % | $ | 2,819 | 72.9 | % | $ | 2,811 | 77.7 | % | ||||||||||||||||||||||||
|
Purchased
|
10,105 | 12. 0 | 5,972 | 12.3 | 2,307 | 13.6 | 773 | 17.1 | 977 | 21.3 | 1,055 | 17.1 | ||||||||||||||||||||||||||||||||||||
|
Multi-family
and commercial
|
291 | 1.3 | 227 | 1.4 | 54 | 1.1 | 57 | 1.1 | 54 | 1.1 | 270 | 0.9 | ||||||||||||||||||||||||||||||||||||
|
Construction
|
10 | 0.6 | 22 | 0.7 | 41 | 0.6 | 69 | 0.6 | 258 | 0.4 | 129 | 0.5 | ||||||||||||||||||||||||||||||||||||
|
Home
equity
|
207 | 3.5 | 268 | 3.5 | 229 | 3.8 | 227 | 4.0 | 249 | 4.1 | 250 | 3.6 | ||||||||||||||||||||||||||||||||||||
|
Other
consumer
|
65 | 0.2 | 57 | 0.2 | 85 | 0.2 | 93 | 0.2 | 76 | 0.2 | 83 | 0.2 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 14,739 | 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.
95
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 March
31, 2010 , 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
six months
ended March 31,
2010 , our
investment securities portfolio increased $ 489.7 million from $480.7
million at September 30, 2009 to $ 970.4 million at March 31, 2010 . The increase was a result of purchases of
$ 611.7
million. All of the purchases during the six months ended
March 31,
2010 were
fixed-rate and had a weighted average yield of 1.65 % and a weighted average
life of 1. 09
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.
Our MBS portfolio
decreased $ 235.2 million from $1.99 billion
at September 30, 2009 to $1. 76 billion at March 31, 2010 . The decrease in the balance was a result of
some cash flows from the MBS portfolio being reinvested into investment
securities.
During
the six months ended March 31, 2010 , 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
this same period . 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 March 31, 2010 , we held CMOs with a carrying value of $ 46.5 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.
96
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.
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 March 31, 2010 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.
| March 31, |
September
30,
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
2010
|
2009 |
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||||||||
| Carrying | % of | Fair |
Carrying
|
%
of
|
Fair
|
Carrying
|
% of |
Fair
|
Carrying
|
% of |
Fair
|
|||||||||||||||||||||||||||||||||||||
| Value | Total | Value |
Value
|
Total |
Value
|
Value | Total |
Value
|
Value
|
Total |
Value
|
|||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
AFS
securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
MBS
|
$ | 1,212,991 | 89.6 | % | $ | 1,212,991 | $ | 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
|
136,094 | 10.0 | 136,094 | 229,875 | 14.2 | 229,875 | 44,188 | 2.9 | 44,188 | 99,705 | 19.8 | 99,705 | ||||||||||||||||||||||||||||||||||||
|
Trust
preferred securities
|
3,064 | 0.2 | 3,064 | 2,110 | 0.1 | 2,110 | 2,655 | 0.2 | 2,655 | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Municipal
bonds
|
2, 735 | 0.2 | 2, 735 | 2,799 | 0.2 | 2,799 | 2,743 | 0.2 | 2,743 | 2,719 | 0.5 | 2,719 | ||||||||||||||||||||||||||||||||||||
|
Total
AFS securities
|
1,354,884 | 100 .0 | 1,354,884 | 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
|
544,319 | 39.7 | 566,397 | 603,256 | 71.0 | 627,829 | 750,284 | 89.0 | 743,764 | 1,011,585 | 70.6 | 995,415 | ||||||||||||||||||||||||||||||||||||
|
U.S.
government-sponsored enterprises
|
759,389 | 55.3 | 760,380 | 175,394 | 20.7 | 175,929 | 37,397 | 4.4 | 36,769 | 401,431 | 28.0 | 398,598 | ||||||||||||||||||||||||||||||||||||
|
Municipal
bonds
|
69, 149 | 5 .0 | 70,732 | 70,526 | 8.3 | 73,000 | 55,376 | 6.6 | 55,442 | 20,313 | 1.4 | 20,342 | ||||||||||||||||||||||||||||||||||||
|
Total
HTM securities
|
1,372,857 | 100.0 | % | 1,397,509 | 849,176 | 100.0 | % | 876,758 | 843,057 | 100.0 | % | 835,975 | 1,433,329 | 100.0 | % | 1,414,355 | ||||||||||||||||||||||||||||||||
| $ | 2,727,741 | $ | 2,752,393 | $ | 2,473,171 | $ | 2,500,753 | $ | 2,376,698 | $ | 2,369,616 | $ | 1,938,439 | $ | 1,919,465 | |||||||||||||||||||||||||||||||||
97
The
composition and maturities of the investment and MBS portfolio at March 31, 2010 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
|
||||||||||||||||||||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||||||||
|
Carrying
|
Average
|
Carrying
|
Average
|
Carrying
|
Average
|
Carrying
|
Average
|
Carrying
|
Average
|
Fair
|
||||||||||||||||||||||||||||||||||
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
|
AFS securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
MBS
|
$ | -- | -- | % | $ | -- | -- | % | $ | 140,687 | 4.97 | % | $ | 1,072,304 | 4.29 | % | $ | 1,212,991 | 4.37 | % | $ | 1,212,991 | ||||||||||||||||||||||
|
U.S.
government- sponsored
enterprises
|
25,750 | 1.57 | 110,344 | 1.60 | -- | -- | -- | -- | 136,094 | 1. 59 | 136,094 | |||||||||||||||||||||||||||||||||
|
Trust preferred
securities
|
-- | -- | -- | -- | -- | -- | 3,064 | 1.92 | 3,064 | 1.92 | 3,064 | |||||||||||||||||||||||||||||||||
|
Municipal bonds
|
-- | -- | 587 | 3.58 | 914 | 3.72 | 1, 234 | 3.90 | 2,735 | 3.77 | 2,735 | |||||||||||||||||||||||||||||||||
|
Total AFS securities
|
25,750 | 1.57 | 110,931 | 1.61 | 141,601 | 4.96 | 1,076,602 | 4.28 | 1,354,884 | 4.08 | 1,354,884 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
HTM Securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
MBS
|
-- | -- | -- | -- | 299,920 | 4.40 | 244,399 | 3.23 | 544,319 | 3.87 | 566,397 | |||||||||||||||||||||||||||||||||
|
U.S.
government- sponsored enterprises
|
-- | -- | 759,389 | 1.68 | -- | -- | -- | -- | 759,389 | 1.68 | 760,380 | |||||||||||||||||||||||||||||||||
|
Municipal bonds
|
1, 676 | 3.07 | 20,452 | 2. 52 | 34,240 | 3.23 | 12,781 | 2.94 | 69,149 | 2.96 | 70,732 | |||||||||||||||||||||||||||||||||
|
Total HTM securities
|
1,676 | 3.07 | 779,841 | 1.70 | 334,160 | 4.28 | 257,180 | 3.22 | 1,372,857 | 2.61 | 1,397,509 | |||||||||||||||||||||||||||||||||
| $ | 27,426 | 1.66 | % | $ | 890,772 | 1.69 | % | $ | 475,761 | 4.48 | % | $ | 1,333,782 | 4.08 | % | $ | 2,727,741 | 3.34 | % | $ | 2,752,393 | |||||||||||||||||||||||
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 $ 103.8 million, $163.0
million, $180.6 million, and $193.0 million at March
31, 2010 and September 30, 2009, 2008, and 2007,
respectively.
98
|
Six
Months
Ended March
31,
|
Year
Ended September 30,
|
|||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Opening
balance
|
$
|
4,228,609
|
$
|
3,923,883
|
$
|
3,922,782
|
$
|
3,900,431
|
||||||||
|
Deposits
|
3,579,067
|
7,021,015
|
7,108,677
|
7,168,045
|
||||||||||||
|
Withdrawals
|
3,532,241
|
6,818,534
|
7,242,121
|
7,289,077
|
||||||||||||
|
Interest
credited
|
43,631
|
102,245
|
134,545
|
143,383
|
||||||||||||
|
Ending
balance
|
$
|
4,319,066
|
$
|
4,228,609
|
$
|
3,923,883
|
$
|
3,922,782
|
||||||||
|
Net
increase
|
$
|
90,457
|
$
|
304,726
|
$
|
1,101
|
$
|
22,351
|
||||||||
|
Percent
increase
|
2.14%
|
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 March
31,
|
At
September 30,
|
|||||||||||||||||||||||||||||||
|
2010
|
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
|
$ | 493,929 | 11. 4 | % | $ | 439,975 | 10.4 | % | $ | 400,461 | 10.2 | % | $ | 394,109 | 10.1 | % | ||||||||||||||||
|
Savings
|
239,651 | 5. 6 | 226,396 | 5.4 | 232,103 | 5.9 | 237,148 | 6.0 | ||||||||||||||||||||||||
|
Money
market
|
934,071 | 21. 6 | 848,157 | 20.1 | 772,323 | 19.7 | 790,277 | 20.2 | ||||||||||||||||||||||||
|
Total
non-certificates
|
1,667,651 | 38. 6 | 1,514,528 | 35.9 | 1,404,887 | 35.8 | 1,421,534 | 36.3 | ||||||||||||||||||||||||
|
Certificates
(by rate):
|
||||||||||||||||||||||||||||||||
|
0.00
– 0.99%
|
143,493 | 3 .3 | 78,036 | 1.8 | 114 | -- | 134 | -- | ||||||||||||||||||||||||
|
1.00
– 1.99%
|
712,367 | 16.5 | 254,846 | 6.0 | 7,426 | 0.2 | -- | -- | ||||||||||||||||||||||||
|
2.00
– 2.99%
|
781,931 | 18.1 | 971,605 | 23.0 | 413,102 | 10.5 | 35,815 | 0.9 | ||||||||||||||||||||||||
|
3.00
– 3.99%
|
615,619 | 14.3 | 848,991 | 20.1 | 935,470 | 23.8 | 225,162 | 5.7 | ||||||||||||||||||||||||
|
4.00
– 4.99%
|
255,487 | 5.9 | 326,087 | 7.7 | 747,612 | 19.1 | 746,707 | 19.0 | ||||||||||||||||||||||||
|
5.00
– 5.99%
|
141,682 | 3. 3 | 233,572 | 5.5 | 414,347 | 10.6 | 1,489,706 | 38.0 | ||||||||||||||||||||||||
|
6.00
– 6.99%
|
836 | -- | 944 | -- | 925 | -- | 3,724 | 0.1 | ||||||||||||||||||||||||
|
Total
certificates
|
2,651,415 | 61.4 | 2,714,081 | 64.1 | 2,518,996 | 64.2 | 2,501,248 | 63.7 | ||||||||||||||||||||||||
| $ | 4,319,066 | 100.0 | % | $ | 4,228,609 | 100.0 | % | $ | 3,923,883 | 100.0 | % | $ | 3,922,782 | 100.0 | % | |||||||||||||||||
99
The
following table sets forth the maturity and rate range of our certificate of
deposit portfolio at March 31, 2010 .
|
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%
|
$
|
143,414
|
$
|
3 9
|
$
|
40
|
$
|
--
|
$
|
143,493
|
5.4
|
%
|
||||||||||||
|
1.00
– 1.99%
|
518,837
|
181,360
|
12,170
|
--
|
712,367
|
26.9
|
||||||||||||||||||
|
2.00
– 2.99%
|
404,990
|
172,205
|
83,761
|
120,975
|
781,931
|
29 .5
|
||||||||||||||||||
|
3.00
– 3.99%
|
151,695
|
277,788
|
125,006
|
61,130
|
615,619
|
23.2
|
||||||||||||||||||
|
4.00
– 4.99%
|
158,115
|
78,472
|
17,741
|
1,159
|
255,487
|
9.6
|
||||||||||||||||||
|
5.00
– 5.99%
|
141,236
|
446
|
--
|
--
|
141,682
|
5.3
|
||||||||||||||||||
|
6.00
– 6.99%
|
836
|
--
|
--
|
--
|
836
|
0.1
|
||||||||||||||||||
|
$
|
1,519,123
|
$
|
710,310
|
$
|
238,718
|
$
|
183,264
|
$
|
2,651,415
|
100.0
|
%
|
|||||||||||||
|
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
|
$
|
302,055
|
$
|
278,901
|
$
|
460,825
|
$
|
839,283
|
$
|
1,881,064
|
||||||||||
|
Certificates
of deposit of $100,000 or more
|
165,163
|
126,800
|
185,379
|
293,009
|
770,351
|
|||||||||||||||
|
Total
certificates of deposit
|
$
|
467,218
|
$
|
405,701
|
$
|
646,204
|
$
|
1,132,292
|
$
|
2,651,415
|
||||||||||
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 10 % 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 March 31, 2010 .
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 5 % 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 March 31, 2010 and September
30, 2009, the balance of public unit deposits was $ 103.8 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.
100
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.
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 March 31, 2010 , we had
$2. 43 billion in FHLB advances ,
at par .
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 was 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. During fiscal year 2009, all of the
FHLB advances associated with the terminated interest rate swaps were
prepaid. The deferred gain related to the prepaid advances is now being
amortized over the remaining life of the new FHLB advances. 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 March 31, 2010 , 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 March 31, 2010 , we had securities with a fair value of $765. 2 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 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 March 31, 2010 .
101
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 29 % of stockholders’ equity
at the end of the period. The maximum balance, average balance, and
weighted average interest rate during the six
months ended March 31, 2010 and 2009 , 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 periods ended September 30, 2008 and March 31, 2009, there
were no repurchase agreements scheduled to mature within one year.
| At or for the Six Months Ended March 31, |
At
or for the Year Ended September 30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
FHLB
Advances:
|
||||||||||||||||||||
|
Balance
|
$ | 550,000 | $ | 320,000 | $ | 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
|
500 ,000 | 528 ,333 | 396,250 | 742,500 | 1,118,907 | |||||||||||||||
|
Weighted
average contractual interest rate during the
period
|
4.53 | % | 4.52 | % | 4.54 | % | 4.31 | % | 3.95 | % | ||||||||||
|
Weighted
average contractual interest rate at end of
period
|
4.57 | % | 4.37 | % | 4.49 | % | 4.27 | % | 4.23 | % | ||||||||||
|
Repurchase Agreements:
|
||||||||||||||||||||
|
Balance
|
$ | 170,000 | $ | -- | $ | 45,000 | $ | -- | $ | -- | ||||||||||
|
Maximum balance outstanding at any
|
||||||||||||||||||||
|
month-end during the
period
|
170,000 | -- | 45,000 | -- | -- | |||||||||||||||
|
Average balance
|
115,833 | -- | 11,250 | -- | -- | |||||||||||||||
|
Weighted average contractual interest rate during the
period
|
3.73 | % | -- | % | 3.05 | % | -- | % | -- | % | ||||||||||
|
Weighted average contractual interest rate at end of
period
|
3.73 | % | -- | % | 3.05 | % | -- | % | -- | % | ||||||||||
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 $ 169.7 million at March 31, 2010 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 March 31, 2010 , Capitol Federal Savings Bank had one subsidiary,
Capitol Funds, Inc. At March 31, 2010 , Capitol Funds, Inc. had a capital balance of
$5. 7 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 six
months ended March 31, 2010 and the year ended September 30, 2009, Capitol Funds,
Inc. reported consolidated net income of $ 213
thousand and $460 thousand, respectively, which was primarily composed of income
from CFMRC.
Properties
At March 31, 2010 , we had 35 traditional branch offices and 10 in-store branch offices. Capitol Federal
Savings Bank owns the office building in which its home office and executive
offices are located, and 25 of its other branch
offices. The remaining 19 branch offices, including the
10 in-store locations, were leased.
For additional information regarding our lease
obligations, see “Notes to Consolidated Financial Statements — Note
5.” Capitol Federal Savings Bank has
opened two new branches in our Kansas City, Missouri market area and a new
branch in the Wichita market area since the beginning of fiscal year
2010. We added three branches in
our Kansas City and Wichita markets in fiscal year
2009. 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.
102
General
Set forth
below is a description of certain laws and regulations that are applicable to
Capitol Federal Financial, Inc. and Capitol Federal Savings Bank. All material information regarding these laws and
regulations has been provided .
Congress
is currently considering significant financial
reform legislation . If new
legislation is enacted, it could have a significant impact on the regulation and
operations of financial institutions and their holding companies. The
legislation provides for the elimination of the
Office of Thrift Supervision, our primary regulator, and could make Capitol Federal Financial, Inc. subject
to regulatory capital requirements . The
legislation also would create a new consumer
financial protection agency that would issue and enforce consumer protection
initiatives governing financial products and services. The details
and impact of financial reform legislation 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.
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 March 31, 2010 , Capitol Federal Savings Bank met the qualified
thrift lender test.
103
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 March
31, 2010 , Capitol Federal Savings Bank had 0. 10 % 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 March
31, 2010 , Capitol Federal Savings Bank’s lending limit
under this restriction was $ 127.8
million. We have no loans or loan relationships
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.
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.
104
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%.
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.
105
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 March 31, 2010 , 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.
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.
106
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.
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. Neither Capitol
Federal Financial, Inc. nor Capitol Federal Savings Bank has been subject to an
IRS audit during the past five years.
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.
107
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
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.
108
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 Operations of
Capitol Federal Savings Bank
|
N/A
|
N/A
|
|
Kent
G. Townsend
|
48
|
Executive
Vice President and Chief Financial Officer of CFF 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.
109
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.
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.
110
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.
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.
111
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 ($18 thousand in total) for his service as a
director of Capitol Federal Savings Bank and CFF.
The following table sets forth certain
information regarding the compensation earned by or awarded to each director,
other than Messrs. John C. Dicus, John B. Dicus and Huey, who served on the
Board of Directors of CFF in fiscal 2009. Compensation payable to
Messrs. John C. Dicus, John B. Dicus and Huey for their service as directors is
included in the “Salary” column of the Summary Compensation Table, under
“Executive Compensation” below.
|
Name
|
Fees
Earned
Or
Paid in
Cash
($)(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 CFF’s other
directors held unvested shares of restricted stock as of September 30,
2009.
|
112
|
(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.
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.
113
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.
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.
114
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.
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 CFF 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.
115
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.
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.
116
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.
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.
117
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.
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 $1.0 million per year, to the extent such
compensation is not performance-based compensation under a plan approved by
stockholders. Income recognized by executives upon the exercise of
stock options granted by the Sub-Committee under the 2000 Stock Option and
Incentive Plan constitutes performance-based compensation that is exempt from
the 162(m) limitation. However, we have in the past awarded, and may
in the future award, compensation that causes a portion of one or more of our
executive’s total compensation for a particular year to not be tax
deductible. The Committee has reviewed and will continue to review on
an ongoing basis our executive compensation programs, and propose appropriate
modifications to these programs, if the Committee deems them necessary to
implement our compensation programs in a manner that avoids or minimizes any
disallowance of tax deductions under Section 162(m). The Committee
will balance these considerations against the need to be able to compensate
executives in a manner commensurate with performance and the competitive
environment for executive talent.
With our
adoption of ASC 718-10 on October 1, 2005, which requires the recognition of
compensation expense for stock options, we do not expect that the accounting
treatment of differing forms of equity awards to vary
significantly. Accordingly, accounting treatment is not expected to
have a material effect on the selection of forms of equity compensation in the
foreseeable future.
118
Executive
Compensation
Summary
Compensation Table. The following table sets forth information
concerning the compensation paid to or earned by the named executive officers
for fiscal year 2009:
|
Name
and
Principal
Position
|
Year
|
Salary
($)(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 Chairman,
President and
CEO
|
2009 | $ | 516,308 | $ | --- | $ | --- | $ | --- | $ | 150,308 | $ | --- | $ | 141,744 | $ | 808,360 | |||||||||||||||||||
| 2008 | 506,492 | --- | --- | --- | 338,999 | --- | 251,735 | 1,097,226 | ||||||||||||||||||||||||||||
| 2007 | 503,769 | --- | --- | --- | 91,942 | --- | 175,016 | 770,727 | ||||||||||||||||||||||||||||
|
Morris
J. Huey II EVP
and Chief Lending Officer(1)
|
2009 | $ | 237,616 | $ | --- | $ | --- | $ | --- | $ | 36,537 | $ | --- | $ | 65,519 | $ | 339,672 | |||||||||||||||||||
|
Kent
G. Townsend EVP
and CFO
|
2009 | $ | 222,308 | $ | --- | $ | 20,346 | $ | 25,452 | $ | 45,540 | $ | --- | $ | 65,352 | $ | 378,998 | |||||||||||||||||||
| 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 EVP
for Retail
Operations |
2009 | $ | 221,039 | $ | --- | $ | --- | $ | --- | $ | 36,432 | $ | --- | $ | 65,930 | $ | 323,401 | |||||||||||||||||||
| 2008 | 215,385 | --- | --- | --- | 84,316 | --- | 117,321 | 417,022 | ||||||||||||||||||||||||||||
| 2007 | 210,538 | --- | --- | --- | 20,699 | --- | 79,608 | 310,845 | ||||||||||||||||||||||||||||
|
Larry
K. Brubaker EVP
for Corporate Services
|
2009 | $ | 221,039 | $ | --- | $ | --- | $ | --- | $ | 36,432 | $ | --- | $ | 61,288 | $ | 318,759 | |||||||||||||||||||
| 2008 | 215,385 | --- | --- | --- | 84,316 | --- | 124,831 | 424,532 | ||||||||||||||||||||||||||||
| 2007 | 210,538 | --- | --- | --- | 25,873 | --- | 79,614 | 316,025 | ||||||||||||||||||||||||||||
|
John
C. Dicus Former
Chairman(2)
|
2009 | $ | 284,307 | $ | --- | $ | --- | $ | --- | $ | 19,440 | $ | --- | $ | 76,435 | $ | 380,182 | |||||||||||||||||||
| 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:
|
|
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
$2,532.
|
119
Grants of
Plan-Based Awards. The following table provides information
concerning annual non-equity incentive plan awards made to the named executive
officers in 2009.
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan
Awards
|
|||||||||||||||
|
Name
|
Grant
Date
|
Threshold
($)(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.
|
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.
|
120
|
(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 CFF’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 CFF’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 CFF’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.
|
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.
|
121
|
(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.
|
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
thousand , $208
thousand, $210 thousand, $214 thousand or $214 thousand,
respectively.
122
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.
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.
123
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
$ 6.1 million and $ 5.7 million at March 31, 2010 and September 30, 2009, respectively, which was 0. 7% and
0. 6 %, respectively, of our equity at those dates . All loans to directors and
executive officers were performing in accordance with their terms at March 31, 2010 and September 30, 2009.
The
following table presents information regarding the beneficial ownership of CFF
common stock, as of May 28 , 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 May 28 , 2010, there were 73,990,478 shares of CFF common stock
outstanding.
|
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. 5 | % | ||||
|
Directors
and Named Executive Officers
|
||||||||
|
John
C. Dicus, Former Chairman of the Board
|
584,102 | (3) | * | |||||
|
John
B. Dicus, Chairman, President, CEO
|
562,774 | (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, 311 | (10) | * | |||||
|
R.
Joe Aleshire, EVP for Retail Operations
|
190, 124 | (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)
|
2,073,629 | (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 May 28 , 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.
|
124
|
(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 May
28 , 2010.
|
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 May 28 , 2010;
|
|
(ii)
|
the
proposed purchases of subscription shares, assuming sufficient shares of
common stock are available to satisfy their subscription;
and
|
|
(iii)
|
the
total amount of Capitol Federal Financial, Inc. common stock to be held
upon consummation of the
conversion.
|
125
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
|
1,902,537 | 20,000 | $ | 200,000 | 1,922,537 | * | ||||||||||||||
|
John
B. Dicus
|
1,833,067 | 50,000 | 500,000 | 1,883,067 | * | |||||||||||||||
|
B.
B. Andersen
|
201,891 | 61,000 | 610,000 | 262,891 | * | |||||||||||||||
|
Jeffrey
M. Johnson
|
35,829 | 15,000 | 150,000 | 50,829 | * | |||||||||||||||
|
Michael
T. McCoy, M.D.
|
26,057 | 10,000 | 100,000 | 36,057 | * | |||||||||||||||
|
Jeffrey
R. Thompson
|
36,480 | 15,000 | 150,000 | 51,480 | * | |||||||||||||||
|
Marilyn
S. Ward
|
233,586 | 10,000 | 100,000 | 243,586 | * | |||||||||||||||
|
Morris
J. Huey, II
|
346,276 | 5,000 | 50,000 | 351,276 | * | |||||||||||||||
|
Executive
Officers who are not Directors
|
||||||||||||||||||||
|
R.
Joe Aleshire
|
619,271 | 5,000 | 50,000 | 624,271 | * | |||||||||||||||
|
Larry
K. Brubaker
|
593,741 | 5,000 | 50,000 | 598,741 | * | |||||||||||||||
|
Kent
G. Townsend
|
210,607 | 2,500 | 25,000 | 213,107 | * | |||||||||||||||
|
Rick
C. Jackson
|
119,203 | 5,000 | 50,000 | 124,203 | * | |||||||||||||||
|
Tara
D. Van Houweling
|
28,920 | 1,500 | 15,000 | 30,420 | * | |||||||||||||||
|
Total
for Directors, Chairman Emeritus and Executive Officers
|
6,187,465 | 205,000 | $ | 2,050,000 | 6,392,465 | 2. 7 | % | |||||||||||||
|
*
|
Less
than 1%.
|
|
(1)
|
Based
on information presented in the Beneficial Ownership of Common Stock table
above. Assumes an exchange ratio of 3. 2572
shares for each share of CFF and that 240,974,218 shares are outstanding after the
conversion.
|
|
(2)
|
Includes
proposed subscriptions, if any, by associates of the director or
officer.
|
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.
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.
126
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 $ 695.4 million and $ 941.8 million
of net proceeds to Capitol Federal Savings Bank and to retain between
$ 543.9 million and $ 770.0 million of the net proceeds (excluding the portion
of the net proceeds loaned to our employee stock ownership plan , the cash contributed to the Capitol Federal Foundation and the
repayment of our subordinated debentures ). 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 whose loan remains
outstanding at [ ],
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 will begin at the same time as
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.”
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 offering
through a syndicate of selected dealers.
We have
the right to accept or reject orders received in the syndicated offering at our
sole discretion. The syndicated 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. See “- Syndicated 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.
127
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 are expected to
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.
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.
128
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
number of shares of common stock issued in the offering and
the number of shares of CFF common stock outstanding at the conclusion of the
conversion . The exchange ratio is expected to range from 2.7686 exchange shares for each publicly held share of CFF
at the minimum of the offering range to 3.7457
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.
129
|
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
|
144,500 ,000 | 70. 6 | % | 60,328,085 | 29. 4 | % | 204,828,085 | 2.7686 | 276 | |||||||||||||||||||
|
Midpoint
|
170 ,000,000 | 70. 6 | % | 70,974,218 | 29. 4 | % | 240,974,218 | 3. 2572 | 325 | |||||||||||||||||||
|
Maximum
|
195,500 ,000 | 70. 6 | % | 81,620,351 | 29. 4 | % | 277,120,351 | 3.7457 | 374 | |||||||||||||||||||
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.
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.
130
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.
131
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.
The appraisal peer group consists of the following
companies. Total assets are as of March 31, 2010.
|
Company Name and Ticker Symbol
|
Exchange
|
Headquarters
|
Total Assets
(in millions)
|
|||||
|
Washington Federal, Inc. (WFSL)
|
NASDAQ
|
Seattle, WA
|
$ | 13,803 | ||||
|
NewAlliance Bancshares (NAL)
|
NYSE
|
New Haven, CT
|
$ | 8,501 | ||||
|
Flushing Financial Corp. (FFIC)
|
NASDAQ
|
Lake Success, NY
|
$ | 4,183 | ||||
|
Dime Community Bancshares (DCOM)
|
NASDAQ
|
Brooklyn, NY
|
$ | 4,114 | ||||
|
TrustCo Bank Corp NY (TRST)
|
NASDAQ
|
Glenville, NY
|
$ | 3,719 | ||||
|
Bank Mutual Corp. (BKMU)
|
NASDAQ
|
Milwaukee, WI
|
$ | 3,445 | ||||
|
First Financial Holding Inc. (FFCH)
|
NASDAQ
|
Charleston, SC
|
$ | 3,381 | ||||
|
Provident NY Bancorp, Inc. (PBNY)
|
NASDAQ
|
Montebello, NY
|
$ | 2,936 | ||||
|
Brookline Bancorp, Inc. (BRKL)
|
NASDAQ
|
Brookline, MA
|
$ | 2,639 | ||||
|
Danvers Bancorp, Inc. (DNBK)
|
NASDAQ
|
Danvers, MA
|
$ | 2,455 | ||||
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 March 31, 2010, stock price
information as of May 28, 2010, as reflected in RP Financial, LC.’s appraisal
report, dated May 28, 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
premium of 83.6% on a price-to-core earnings basis and a discount of 23.0% on a
price-to-tangible book value 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
|
27.38 | x | 92.00 | % | ||||
|
Midpoint
|
31.27 | x | 98.04 | % | ||||
|
Maximum
|
34.95 | x | 103.09 | % | ||||
|
Valuation of peer group companies,
as of May 28,
2010
|
||||||||
|
Average
|
19.04 | x | 133.93 | % | ||||
|
Median
|
16.84 | x | 133.17 | % | ||||
_______________________
|
(1)
|
Information is derived from the RP Financial, LC. appraisal
report and is based upon estimated core earnings for the twelve months
ended March 31, 2010. These ratios are different from the
ratios in “Pro Forma Data.”
|
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.;
|
132
|
●
|
the repayment of the
debentures;
|
|
●
|
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 May 28 ,
2010, the estimated pro forma market value of Capitol Federal Financial, Inc.
was $2. 41 billion. Based on regulations,
the market value is the midpoint of a range with a minimum of $2. 05 billion and a maximum of $ 2.77 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 71 % 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 144,500 ,000 shares,
the midpoint of the offering range will be 170 ,000,000 shares and the maximum of the offering range
will 195,500 ,000 shares of common
stock.
The Board
of Directors of CFF reviewed the independent valuation and, in particular,
considered the following:
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●
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CFF’s
financial condition and results of
operations;
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a
comparison of financial performance ratios of CFF to those of other
financial institutions of similar
size;
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●
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market
conditions generally and in particular for financial institutions;
and
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●
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the
historical trading price of the publicly held shares of CFF common
stock.
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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. 05 billion
or more than $ 2.77 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.
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 $ 2.77 billion and a corresponding increase in the offering
range to more than 195,500 ,000 shares, or a decrease
in the minimum of the valuation range to less than $2. 05 billion and a corresponding decrease in the offering
range to fewer than 144,500 ,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, return all funds with
interest, and all subscribers will be provided with updated information and
given the opportunity to place a new order.
133
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.”
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) $ 70 .0 million (7, 000 ,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.
134
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) $ 70 .0
million (7, 000 ,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.
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 whose loan remains
outstanding on the voting record 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 $ 70 .0 million (7, 000 ,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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135
(ii) CFF’s
public stockholders as of [ ],
2010; and
(iii) Other
members of the general public.
Purchasers
in the community offering may purchase up to $ 70 .0
million (7, 000 ,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.
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 will
begin at the same time as 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
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 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
offering, any person may purchase up to $ 70 .0
million (7, 000 ,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
offering. Unless the Office of Thrift Supervision permits otherwise,
accepted orders for Capitol Federal Financial, Inc. common stock in the
syndicated 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 offering begins during the
community offering, the syndicated offering will begin as soon as possible after
the completion of the subscription and community offerings.
136
If a
syndicated 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 offering. The syndicated
offering will be conducted in accordance with certain Securities and Exchange
Commission rules applicable to best efforts offerings. Under these rules, Sandler O’Neill & Partners, L.P., Keefe
Bruyette & Woods, Inc. or the other broker-dealers participating in the
syndicated offering generally will accept payment for shares of common stock to
be purchased in the syndicated offering through a sweep arrangement, provided we
have received subscriptions to meet the minimum of the offering range, under
which a customer’s brokerage account at the applicable participating
broker-dealer will be debited in the amount of the purchase price for the shares
of common stock that such customer wishes to purchase in the syndicated offering
on the settlement date. Participating broker-dealers will only sell to customers
who have accounts at the participating broker-dealer and who authorize the
broker-dealer to debit their accounts. Customers who authorize participating
broker-dealers to debit their brokerage accounts are required to have the funds
for the payment in their accounts on, but not before, the settlement date.
Certain investors may pay Sandler O’Neill & Partners, L.P. or Keefe,
Bruyette & Woods, Inc. for shares purchased in the syndicated offering on
the settlement date through the services of the Depository Trust Company on a
delivery versus payment basis. The closing of the syndicated 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 offering, less fees and
commissions payable, will be delivered promptly to us. Normal
customer ticketing will be used for order placement.
If for
any reason we cannot affect a syndicated 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.
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, 000 ,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 $ 70 .0 million (7, 000 ,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.
137
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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(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.”
138
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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●
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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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●
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assisting
in the design and implementation of a marketing strategy for the
offering;
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●
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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 offering, we will pay (i) a management fee of
1.00% of the aggregate dollar amount of the common stock sold in the syndicated
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 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 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.
139
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.
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.
140
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.
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. 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.
|
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 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.
141
Regulations
prohibit Capitol Federal Savings Bank from lending funds or extending credit to
any persons to purchase shares of common stock in the offering.
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
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. 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, within five business days
following consummation of the conversion.
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.
142
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.
143
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 Deloitte Tax LLP 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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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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144
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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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145
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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
reasoning in support of items 16 and 19 is set forth below. 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.
146
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 reasoning in support of item 17 is set forth below. Silver, Freedman & Taff, L.L.P.
understands 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.
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.
147
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 $ 14.4 million in cash and
other assets and 1,462,287 shares of CFF common
stock, which will be converted into 4,762,961 shares of Capitol
Federal Financial, Inc. common stock based on
the exchange ratio at the midpoint of the offering
range, held by the Capitol Federal Foundation at May
28 , 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.
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.
148
Dr. Ronald W.
Roskens. Dr. Roskens has served as a trustee of the Capitol Federal
Foundation since its inception in 1999. Since 1996, he has 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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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.
149
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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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.
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.
150
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.
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.
151
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.
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.
152
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.
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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153
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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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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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154
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.
155
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.
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.
156
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.”)
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.
157
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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158
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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●
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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.
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.
159
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.
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.
160
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.
|
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 195,500 ,000 shares of common
stock, and up to 81,620,351 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.
161
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.
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 Deloitte Tax LLP , and have been included herein upon the
authority of said firm.
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.
162
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 ,
Washington, D.C .
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.
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
INDEX TO CONSOLIDATED
FINANCIAL
STATEMENTS OF
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
F-2
|
||
|
F-3
|
||
|
F-5
|
||
|
F-7
|
||
|
F-11
|
||
|
F-14
|
||
|
All financial statement schedules have been omitted as the
required information either is not applicable or is included in the
financial statements or related
notes.
|
||
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.
Kansas
City, Missouri
November
30, 2009
F-2
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
March 31,
|
September
30,
|
|||||||||||
|
ASSETS
|
2010
|
2009
|
2008
|
|||||||||
|
(unaudited)
|
||||||||||||
|
CASH
AND CASH EQUIVALENTS (includes interest-earning deposits of
$ 46,059 , $32,319 and
$77,246)
|
$ | 60,735 | $ | 41,154 | $ | 87,138 | ||||||
|
INVESTMENT
SECURITIES:
|
||||||||||||
|
Available-for-sale
(“AFS”),
at fair value (amortized cost of $ 142,002 ,
$235,185 and $51,700)
|
141,893 | 234,784 | 49,586 | |||||||||
|
Held-to-maturity
(“HTM”),
at cost (fair value of $ 831,112 , $248,929 and
$92,211)
|
828,538 | 245,920 | 92,773 | |||||||||
|
MORTGAGE-BACKED
SECURITIES (“MBS”):
|
||||||||||||
|
AFS,
at fair value (amortized cost of $1, 163,420 ,
$1,334,357 and $1,491,536)
|
1, 212,991 | 1,389,211 | 1,484,055 | |||||||||
|
HTM,
at cost (fair value of $ 566,397 , $627,829 and
$743,764)
|
544,319 | 603,256 | 750,284 | |||||||||
|
LOANS
RECEIVABLE, net (less allowance for loan losses of $ 14,739 , $10,150 and
$5,791 )
|
5, 380,852 | 5,603,965 | 5,320,780 | |||||||||
|
BANK-OWNED
LIFE INSURANCE (“BOLI”)
|
54,000 | 53,509 | 52,350 | |||||||||
|
CAPITAL
STOCK OF FEDERAL HOME LOAN BANK (“FHLB”), at cost
|
135,050 | 133,064 | 124,406 | |||||||||
|
ACCRUED
INTEREST RECEIVABLE
|
31, 789 | 32,640 | 33,704 | |||||||||
|
PREMISES
AND EQUIPMENT, net
|
40,379 | 37,709 | 29,874 | |||||||||
|
REAL
ESTATE OWNED, (“REO”) net
|
6, 861 | 7,404 | 5,146 | |||||||||
|
PREPAID
FEDERAL INSURANCE PREMIUM
|
24,005 | -- | -- | |||||||||
|
OTHER
ASSETS
|
24, 053 | 21,064 | 25,153 | |||||||||
|
TOTAL
ASSETS
|
$ | 8, 485,465 | $ | 8,403,680 | $ | 8,055,249 | ||||||
(Continued)
F-3
|
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
|
||||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||
|
March 31,
|
September
30,
|
|||||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
2010
|
2009
|
2008
|
|||||||||
|
(unaudited)
|
||||||||||||
|
LIABILITIES:
|
||||||||||||
|
Deposits
|
$ | 4, 319,066 | $ | 4,228,609 | $ | 3,923,883 | ||||||
|
Advances
from FHLB
|
2, 395,842 | 2,392,570 | 2,447,129 | |||||||||
|
Other
borrowings
|
713,609 | 713,609 | 713,581 | |||||||||
|
Advance
payments by borrowers for taxes and insurance
|
48,806 | 55,367 | 53,213 | |||||||||
|
Income
taxes payable, net
|
2,441 | 6,016 | 6,554 | |||||||||
|
Deferred
income taxes, net
|
31, 335 | 30,970 | 3,223 | |||||||||
|
Accounts
payable and accrued expenses
|
28,293 | 35,241 | 36,450 | |||||||||
|
Total
liabilities
|
7, 539,392 | 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; 73,983,078 , 74,099,355 and
74,079,868 shares outstanding as of March 31,
2010 (unaudited), September
30, 2009 and 2008, respectively
|
915 | 915 | 915 | |||||||||
|
Additional
paid-in capital
|
455,413 | 452,872 | 445,391 | |||||||||
|
Unearned
compensation - Employee Stock Ownership Plan (“ESOP”)
|
(7, 057 | ) | (8,066 | ) | (10,082 | ) | ||||||
|
Unearned
compensation - Recognition and Retention Plan (“RRP”)
|
( 341 | ) | (330 | ) | (553 | ) | ||||||
|
Retained
earnings
|
789,831 | 781,604 | 759,375 | |||||||||
|
Accumulated other
comprehensive income (loss), net of tax es of $18,697,
$20,583 and $(3,627)
|
30, 765 | 33,870 | (5,968 | ) | ||||||||
| 1, 269,526 | 1,260,865 | 1,189,078 | ||||||||||
|
Treasury
stock, at cost; 17, 529,209 , 17,412,932 and
17,432,419 shares as of March 31, 2010 (unaudited), September 30, 2009 and 2008,
respectively
|
||||||||||||
| ( 323,453 | ) | (319,567 | ) | (317,862 | ) | |||||||
|
Total
stockholders’ equity
|
946,073 | 941,298 | 871,216 | |||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 8, 485,465 | $ | 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 Six Months Ended
|
For
the Year Ended
|
|||||||||||||||||||
|
March 31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
INTEREST
AND DIVIDEND INCOME:
|
||||||||||||||||||||
|
Loans
receivable
|
$ | 144,841 | $ | 154,162 | $ | 305,782 | $ | 302,020 | $ | 294,744 | ||||||||||
|
MBS
|
39,381 | 51,490 | 97,926 | 88,395 | 68,752 | |||||||||||||||
|
Investment
securities
|
6,285 | 2,281 | 5,533 | 9,917 | 30,849 | |||||||||||||||
|
Capital
stock of FHLB
|
1, 986 | 1,558 | 3,344 | 6,921 | 10,017 | |||||||||||||||
|
Cash
and cash equivalents
|
101 | 117 | 201 | 3,553 | 7,188 | |||||||||||||||
|
Total
interest and dividend income
|
192,594 | 209,608 | 412,786 | 410,806 | 411,550 | |||||||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||||||||
|
FHLB
advances
|
49,118 | 56,198 | 106,551 | 125,748 | 153,363 | |||||||||||||||
|
Deposits
|
41,881 | 51,496 | 100,471 | 133,435 | 147,279 | |||||||||||||||
|
Other
borrowings
|
14,058 | 14,834 | 29,122 | 17,455 | 4,468 | |||||||||||||||
|
Total
interest expense
|
105,057 | 122,528 | 236,144 | 276,638 | 305,110 | |||||||||||||||
|
NET
INTEREST AND DIVIDEND INCOME
|
87,537 | 87,080 | 176,642 | 134,168 | 106,440 | |||||||||||||||
|
PROVISION
(RECOVERY) FOR LOAN LOSSES
|
6,315 | 2,656 | 6,391 | 2,051 | (225 | ) | ||||||||||||||
|
NET
INTEREST AND DIVIDEND INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES
|
||||||||||||||||||||
| 81,222 | 84,424 | 170,251 | 132,117 | 106,665 | ||||||||||||||||
|
OTHER
INCOME:
|
||||||||||||||||||||
|
Retail
fees and charges
|
8,936 | 8,561 | 18,023 | 17,805 | 16,120 | |||||||||||||||
|
Insurance
commissions
|
1,335 | 1,364 | 2,440 | 2,238 | 2,059 | |||||||||||||||
|
Loan
fees
|
1,255 | 1,166 | 2,327 | 2,325 | 2,467 | |||||||||||||||
|
Income
from BOLI
|
491 | 625 | 1,158 | 2,323 | 27 | |||||||||||||||
|
Gains
on securities and loans receivable, net
|
6, 617 | 540 | 2,171 | 829 | 75 | |||||||||||||||
|
Other,
net
|
1,033 | 1,322 | 2,475 | 4,507 | 3,218 | |||||||||||||||
|
Total
other income
|
19,667 | 13,578 | 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 Six Months Ended
|
For
the Year Ended
|
|||||||||||||||||||
|
March 31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
OTHER
EXPENSES:
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
21,339 | 21,732 | 43,318 | 43,498 | 41,269 | |||||||||||||||
|
Occupancy
of premises
|
7,796 | 7,492 | 15,226 | 13,957 | 13,135 | |||||||||||||||
|
Federal
insurance premium
|
3,659 | 393 | 7,558 | 735 | 490 | |||||||||||||||
|
Advertising
|
2,981 | 3,689 | 6,918 | 4,925 | 4,317 | |||||||||||||||
|
Deposit
and loan transaction costs
|
2,696 | 2,722 | 5,434 | 5,240 | 4,709 | |||||||||||||||
|
Regulatory
and outside services
|
2,442 | 2,129 | 4,318 | 5,457 | 7,078 | |||||||||||||||
|
Mortgage
servicing activity, net
|
582 | 1,644 | 3,148 | 1,108 | 1,421 | |||||||||||||||
|
Office
supplies and related expenses
|
1,414 | 1,448 | 2,636 | 2,234 | 2,913 | |||||||||||||||
|
Other,
net
|
2,940 | 2,933 | 5,065 | 4,835 | 2,393 | |||||||||||||||
|
Total
other expenses
|
45,849 | 44,182 | 93,621 | 81,989 | 77,725 | |||||||||||||||
|
INCOME
BEFORE INCOME TAX EXPENSE
|
55,040 | 53,820 | 105,224 | 80,155 | 52,906 | |||||||||||||||
|
INCOME
TAX EXPENSE
|
19,405 | 19,836 | 38,926 | 29,201 | 20,610 | |||||||||||||||
|
NET
INCOME
|
$ | 35,635 | $ | 33,984 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
|
Basic
earnings per share
|
$ | 0. 49 | $ | 0. 46 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Diluted
earnings per share
|
$ | 0. 49 | $ | 0. 46 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Dividends
declared per public share
|
$ | 1.29 | $ | 1.11 | $ | 2.11 | $ | 2.00 | $ | 2.09 | ||||||||||
|
Basic
weighted average common shares
|
73, 240,538 | 73, 087,907 | 73,144,116 | 72,938,871 | 72,849,095 | |||||||||||||||
|
Diluted
weighted average common shares
|
73, 263,798 | 73, 168,070 | 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 SIX MONTHS ENDED MARCH 31, 2010 (UNAUDITED
)
(in
thousands, except share amounts)
|
Additional
|
Unearned
|
Unearned
|
Accumulated 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
|
35,635 | 35,635 | ||||||||||||||||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||
|
Changes
in unrealized gain/losses on securities AFS, net of deferred income
taxes of $1, 886
|
(3,105 | ) | (3,105 | ) | ||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
32,530 | |||||||||||||||||||||||||||||||||||||||
|
ESOP
activity, net
|
2,254 | 1,009 | 3,263 | |||||||||||||||||||||||||||||||||||||
|
RRP
activity, net
|
120 | (163 | ) | (5,000 | ) | 47 | 4 | |||||||||||||||||||||||||||||||||
|
Stock
based compensation - stock options and RRP
|
133 | 152 | 285 | |||||||||||||||||||||||||||||||||||||
|
Acquisition
of treasury stock
|
130,368 | (4,019 | ) | (4,019 | ) | |||||||||||||||||||||||||||||||||||
|
Stock options exercised
|
34 | (9,091 | ) | 86 | 120 | |||||||||||||||||||||||||||||||||||
|
Dividends
on common stock to stockholders ($ 1.29
per public share)
|
(27,408 | ) | (27,408 | ) | ||||||||||||||||||||||||||||||||||||
|
Balance, March 31, 2010
|
91,512,287 | $ | 915 | $ | 455,413 | $ | (7, 057 | ) | $ | ( 341 | ) | $ | 789,831 | $ | 30, 765 | 17,529,209 | $ | ( 323,453 | ) | $ | 946,073 | |||||||||||||||||||
|
See
notes to consolidated financial statements
|
||||||||||||||||||||||||||||||||||||||||
F-10
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
(in
thousands)
|
|
For
the Six Months Ended
March 31, (unaudited)
|
For
the Year Ended
September
30,
|
||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
|
Net
income
|
$ | 35,635 | $ | 33,984 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
|
Adjustments
to reconcile net income to net cash provided by
|
||||||||||||||||||||
|
operating
activities:
|
||||||||||||||||||||
|
FHLB
stock dividends
|
(1, 986 | ) | (1,558 | ) | (3,344 | ) | (6,921 | ) | (10,017 | ) | ||||||||||
|
Provision
(recovery) for loan losses
|
6,315 | 2,656 | 6,391 | 2,051 | (225 | ) | ||||||||||||||
|
Originations
of loans receivable held-for-sale (“LHFS”)
|
(5,035 | ) | (863 | ) | (851 | ) | (47,062 | ) | (4,062 | ) | ||||||||||
|
Proceeds
from sales of LHFS
|
3,188 | 31,631 | 97,838 | 48,444 | 3,405 | |||||||||||||||
|
Amortization
and accretion of premiums and discounts on
|
||||||||||||||||||||
|
MBS
and investment securities
|
3,005 | 503 | 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
|
2,410 | 2,415 | 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
|
3,272 | 584 | 3,829 | (536 | ) | -- | ||||||||||||||
|
Common
stock committed to be released for allocation - ESOP
|
3,263 | 4,153 | 7,929 | 7,487 | 7,513 | |||||||||||||||
|
Stock
based compensation - stock options and RRP
|
285 | 309 | 604 | 722 | 669 | |||||||||||||||
|
Gain
on the sale of trading securities received in the loan swap
transaction
|
(6,454 | ) | -- | -- | -- | -- | ||||||||||||||
|
Provision for deferred income
taxes
|
2,224 | 2,233 | 3,548 | 8,160 | 18,714 | |||||||||||||||
|
Other, net
|
(1,693 | ) | 41 | (1,947 | ) | (1,271 | ) | (648 | ) | |||||||||||
|
Changes
in:
|
||||||||||||||||||||
|
Prepaid federal
insurance premium, net
|
(24,005 | ) | -- | -- | -- | -- | ||||||||||||||
|
Accured interest
receivable
|
851 | 1, 140 | 1,064 | 2,165 | 2, 163 | |||||||||||||||
|
Other
assets
|
1,064 | 4, 665 | 2,784 | (4,871 | ) | 2,241 | ||||||||||||||
|
Income taxes payable /receivable
|
(3,545 | ) | 1, 979 | 8 | 12,978 | (1,239 | ) | |||||||||||||
|
Accounts payable and
accrued expenses
|
(6,948 | ) | (4,120 | ) | (1,209 | ) | 1,610 | (5,367 | ) | |||||||||||
|
Net
cash provided by operating activities
|
11,846 | 79,752 | 190,718 | 81,720 | 446,714 | |||||||||||||||
(Continued)
F-11
CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
For
the Six Months Ended
|
For
the Year Ended
|
||||||||||||||||||
|
|
March 31 (unaudited),
|
September
30,
|
||||||||||||||||||
|
|
||||||||||||||||||||
|
2010
|
2009
|
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
|
92,046 | 19,996 | 70,057 | 99,810 | 88,990 | |||||||||||||||
|
Purchases
of investment securities AFS
|
-- | (127,151 | ) | (255,046 | ) | (49,248 | ) | (1,520 | ) | |||||||||||
|
Proceeds
from maturities or calls of investment securities HTM
|
28,090 | 39,600 | 39,703 | 514,208 | 511,500 | |||||||||||||||
|
Purchases
of investment securities HTM
|
(611,685 | ) | (3,962 | ) | (193,507 | ) | (185,138 | ) | (689,519 | ) | ||||||||||
|
Principal
collected on MBS AFS
|
170,042 | 119,712 | 326,044 | 233,225 | 230,934 | |||||||||||||||
|
Purchases
of MBS AFS
|
-- | (118,469 | ) | (169,452 | ) | (1,324,872 | ) | (91,294 | ) | |||||||||||
|
Proceeds
from sale of MBS AFS
|
-- | -- | -- | -- | 15,237 | |||||||||||||||
|
Principal
collected on MBS HTM
|
63,973 | 77,870 | 168,888 | 266,853 | 256,083 | |||||||||||||||
|
Purchases
of MBS HTM
|
(5,032 | ) | -- | (21,756 | ) | (5,483 | ) | (136,798 | ) | |||||||||||
|
Proceeds
from the redemption of capital stock of FHLB
|
-- | 3,688 | 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
|
20,860 | (84,890 | ) | (293,947 | ) | (92,656 | ) | (144,710 | ) | |||||||||||
|
Loan
purchases, net of principal collected
|
(2,587 | ) | (155,984 | ) | (102,939 | ) | 51,872 | 71,399 | ||||||||||||
|
Purchase
of BOLI
|
-- | -- | -- | -- | (50,000 | ) | ||||||||||||||
|
Net
deferred fee activity
|
(578 | ) | 490 | 2,101 | 195 | 574 | ||||||||||||||
|
Purchases
of premises and equipment
|
(5,094 | ) | (5,838 | ) | (13,053 | ) | (8,721 | ) | (4,625 | ) | ||||||||||
|
Proceeds
from sales of REO
|
5,967 | 3,273 | 7,669 | 5,197 | 4,929 | |||||||||||||||
|
Net
cash (used in) provided by investing
activities
|
(44,854 | ) | (240,667 | ) | (440,552 | ) | (472,582 | ) | 96,666 | |||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Dividends
paid
|
(27,408 | ) | (23,173 | ) | (44,069 | ) | (41,426 | ) | (43,000 | ) | ||||||||||
|
Dividends
in excess of debt service cost of ESOP, net
|
-- | -- | -- | -- | 670 | |||||||||||||||
|
Deposits,
net of withdrawals
|
90,457 | 192,631 | 304,726 | 1,101 | 22,351 | |||||||||||||||
|
Proceeds
from advances/line of credit from FHLB
|
-- | 1,261,102 | 1,561,612 | 834,700 | 206,901 | |||||||||||||||
|
Repayments
on advances/line of credit from FHLB
|
-- | (1,261,102 | ) | (1,581,612 | ) | (1,134,700 | ) | (756,901 | ) | |||||||||||
|
Deferred
FHLB prepayment penalty
|
-- | (36,153 | ) | (38,388 | ) | -- | -- | |||||||||||||
|
Proceeds
from repurchase agreements
|
-- | -- | -- | 660,000 | -- | |||||||||||||||
|
Change
in advance payments by borrowers for taxes and insurance
|
(6,561 | ) | (6,780 | ) | 2,154 | 2,104 | 2,756 | |||||||||||||
|
Acquisitions
of treasury stock
|
(4,019 | ) | (2,426 | ) | (2,426 | ) | (7,307 | ) | (3,198 | ) | ||||||||||
|
Stock
options exercised
|
86 | 1, 203 | 1, 337 | 623 | 3,942 | |||||||||||||||
|
Excess tax benefits from stock
options
|
34 | 500 | 516 | 114 | 2,648 | |||||||||||||||
|
Net
cash provided by (used in) financing activities
|
52,589 | 125,802 | 203,850 | 315,209 | (563,831 | ) | ||||||||||||||
|
(Continued)
|
||||||||||||||||||||
F-12
CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
For the Six Months Ended
|
For the Year Ended
|
|||||||||||||||||||
|
March 31 (unaudited),
|
September 30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
19,581 | (35,113 | ) | (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
|
$ | 60,735 | $ | 52,025 | $ | 41,154 | $ | 87,138 | $ | 162,791 | ||||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||||||||||
|
Income
tax payments, net of refunds
|
$ | 20,687 | $ | 15,596 | $ | 35,334 | $ | 8,050 | $ | 711 | ||||||||||
|
Interest payments, net of interest credited to deposits of
$43,631, $52,850, $102,245, $134,545 and $143,383, respectively
|
||||||||||||||||||||
| $ | 59,550 | $ | 71,907 | $ | 133,892 | $ | 140,774 | $ | 163,158 | |||||||||||
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||||||||||||||
|
Loans
transferred to REO
|
$ | 5,344 | $ | 5,137 | $ | 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
|
$ | -- | $ | 175,862 | $ | 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 FOR THE SIX MONTHS ENDED MARCH
31, 2010
(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 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. 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, the Bank, Capitol Funds, Inc. and Capitol Federal
Mortgage Reinsurance Company have a tax allocation agreement. The
Bank is the paying agent to the taxing authorities for the
group. Each company is liable for taxes as if separate tax returns
were filed and reimburses the Bank for its related tax liability. If
any entity has a tax benefit due to a taxable loss, the Bank reimburses the
entity for the related tax benefit.
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 March 31, 2010 (unaudited),
MHC owned 71 % 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 the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation for interim periods presented have
been included. In preparing these financial statements,
management has evaluated events occurring subsequent to March 31, 2010 (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 March 31, 2010 (unaudited).
F-14
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 six months
ended March 31, 2010
(unaudited) and the years ended September 30, 2009 and 2008, the average balance
of required reserves at the Federal Reserve Bank was $ 10.9 million, $11.6 million and $25.0 million,
respectively.
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 six months ended March 31, 2010 (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.
F-15
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.
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.
F-16
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.
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.
Bank Owned Life
Insurance – During fiscal year 2007, the Bank
paid $50.0 million to purchase $120.0 million of BOLI policies on key
employees. BOLI is an insurance investment designed to help offset
costs associated with the Bank’s compensation and benefit
programs. In the event of the death of an insured individual, the
Bank would receive a death benefit. If the insured individual is
employed by the Bank at the time of death, a death benefit will be paid to the
insured individual’s designated beneficiary equal to the insured individual’s
base compensation at the time BOLI was approved by the Bank’s board of
directors. If the individual is not employed by the Bank at the time
of death, no death benefits will be paid to the insured individual’s designated
beneficiary.
The Bank is subject to various regulatory restrictions related to
BOLI, outlined in the Office of Thrift Supervision Thrift Bulletin 84 and the
Office of Comptroller of Currency Bulletin 2004-56. The regulatory limit
for BOLI is 25% of tier 1 capital plus the allowance for loan
losses.
The cash surrender value of the policies is reported in BOLI in
the consolidated balance sheets. Changes in the cash surrender
value are recorded in Income from BOLI in the consolidated statements of
income.
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. Buildings have an
estimated useful life of 39 years. Furniture, fixtures and equipment have an
estimated useful life of three to seven years. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the term of the respective leases , which is generally three to 15 years . 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.
F-17
Prepaid Federal
Insurance Premium – The Bank prepaid its
estimated FDIC insurance assessments for calendar years 2010, 2011 and
2012. The Bank is amortizing the prepaid federal insurance premium each
quarter by recording an expense based on the Bank’s actual quarterly FDIC
assessment. The expense is reported in Federal Insurance Premium on 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.
Stock-based
Compensation - At March 31, 2010 (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 March 31, 2010
(unaudited), September 30, 2009 or 2008.
F-18
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 March 31, 2010 (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.
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 March 31, 2010 (unaudited).
|
Total
voting shares outstanding at March 31, 2010
|
73,983,078 | |||
|
Unvested
shares in ESOP
|
(806,556 | ) | ||
|
Shares
held by MHC
|
(52,192,817 | ) | ||
|
Total
public shares at March 31, 2010
|
20,983,705 |
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.
F-19
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.
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.
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.
F-20
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.
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.
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.
F-21
In January 2010, the FASB issued Accounting Standards Update
(“ASU”) 2010-06, Improving Disclosures About Fair
Value Measurements , which amends ASC 820-10
to require new disclosures about transfers in and out of Level 1 and Level 2
fair value measurements and the roll forward of activity in Level 3 fair value
measurements. ASU 2010-06 also clarifies existing disclosure
requirements regarding the level of disaggregation of each class of assets and
liabilities within a line item in the statement of financial condition and
clarifies that a reporting entity should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements that fall in either Level 2 or Level 3 fair
value measurements. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the new disclosures about the roll
forward of activity in Level 3 fair value measurements which are effective for
fiscal years beginning after December 15, 2010 and for interim periods within
those fiscal years. Since the provisions of ASU 2010-06 are
disclosure related, the Company’s adoption of this guidance did not have an
impact on its financial condition or results of operations.
In February 2010, the FASB issued ASU 2010-09, Amendments to
Certain Recognition and Disclosure Requirements , which amends ASC 855, Subsequent Events to address implementation issues of ASC 855. ASU 2010-09
requires SEC filers to evaluate subsequent events through the date the financial
statements are issued and exempts SEC filers from disclosing the date through
which subsequent events have been evaluated. The ASU was effective
immediately for the Company. Since the provisions of ASU 2010-09 are disclosure
related, the Company’s adoption of this guidance did not have an impact on its
financial condition or results of operations.
F-22
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 Six Months Ended
|
For
the Year Ended
|
|||||||||||||||||||
|
March 31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Net
income(1)
|
$ | 35,635 | $ | 33,984 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
|
Average
common shares outstanding
|
73, 215,056 | 73,062, 425 | 73,067,880 | 72,862,705 | 72,772,859 | |||||||||||||||
|
Average
committed ESOP shares outstanding
|
25,482 | 25,482 | 76,236 | 76,166 | 76,236 | |||||||||||||||
|
Total
basic average common shares outstanding
|
73, 240,538 | 73, 087,907 | 73,144,116 | 72,938,871 | 72,849,095 | |||||||||||||||
|
Effect
of dilutive RRP
|
3,985 | 6,535 | 5,378 | 5,460 | 5,902 | |||||||||||||||
|
Effect
of dilutive stock options
|
19,275 | 73,628 | 58,607 | 68,335 | 115,391 | |||||||||||||||
|
Total
diluted average common shares outstanding
|
73, 263,798 | 73, 168,070 | 73,208,101 | 73,012,666 | 72,970,388 | |||||||||||||||
|
Net
EPS:
|
||||||||||||||||||||
|
Basic
|
$ | 0. 49 | $ | 0. 46 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Diluted
|
$ | 0. 49 | $ | 0. 46 | $ | 0.91 | $ | 0.70 | $ | 0.44 | ||||||||||
|
Antidilutive
stock options and RRP, excluded from the diluted average
common shares outstanding calculation
|
285 ,350 | 55,800 | 74,050 | 31,100 | 31,500 | |||||||||||||||
|
___________________
|
|
(1)
|
Net
income available to participating securities (unvested RRP shares) was
inconsequential for the six months ended March 31, 2010 and 2009
(unaudited) and for the years ended September 30, 2009, 2008 and
2007.
|
F-23
3. SECURITIES
The
following tables reflect the amortized cost, estimated fair value, and gross
unrealized gains and losses of AFS and HTM securities at March 31, 2010 (unaudited),
September 30, 2009 and 2008. The majority of the securities portfolio
is composed of securities issued by U.S. government-sponsored
enterprises.
|
March 31, 2010 (unaudited)
|
||||||||||||||||
|
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
AFS:
|
||||||||||||||||
|
U.S.
government sponsored
enterprises
|
$ | 135,596 | $ | 498 | $ | -- | $ | 136,094 | ||||||||
|
Municipal bonds
|
2, 658 | 90 | 13 | 2, 735 | ||||||||||||
|
Trust preferred securities
|
3, 748 | -- | 684 | 3,064 | ||||||||||||
|
MBS
|
1, 163,420 | 49,640 | 69 | 1, 212,991 | ||||||||||||
| 1, 305,422 | 50,228 | 766 | 1, 354,884 | |||||||||||||
|
HTM:
|
||||||||||||||||
|
U.S.
government sponsored
enterprises
|
759,389 | 1,280 | 289 | 760,380 | ||||||||||||
|
Municipal
bonds
|
69, 149 | 1, 686 | 103 | 70,732 | ||||||||||||
|
MBS
|
544,319 | 22,199 | 121 | 566,397 | ||||||||||||
| 1,372,857 | 25,165 | 513 | 1, 397,509 | |||||||||||||
| $ | 2, 678,279 | $ | 75,393 | $ | 1,279 | $ | 2, 752,393 | |||||||||
|
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-24
|
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 | |||||||||
At March 31, 2010 (unaudited), September 30, 2009 and 2008, the
MBS held within our portfolio were issued by FNMA, FHLMC, or GNMA, with the
exception of $3.9 million, $4.6 million, and $6.6 million at those respective
dates, which were issued by a private issuer. The following table
presents the carrying value of the MBS in our portfolio by
issuer:
|
At
|
At
September 30, |
|||||||||||
|
March
31, 2010(unaudited)
|
2009 | 2008 | ||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
FNMA
|
$ | 919,813 | $ | 1,035,271 | $ | 1,150,224 | ||||||
|
FHLMC
|
830,994 | 949,639 | 1,073,935 | |||||||||
|
GNMA
|
2,642 | 2,921 | 3,536 | |||||||||
|
Private Issuer
|
3,861 | 4,636 | 6,644 | |||||||||
| $ | 1,757,310 | $ | 1,992,467 | $ | 2,234,339 | |||||||
The following table presents the taxable and non-taxable
components of interest income on investment securities for the quarters ended
March 31, 2010 and 2009 (unaudited) and for the fiscal years ended September 30,
2009, 2008 and 2007.
|
For the Six Months Ended
|
For the Year Ended
|
|||||||||||||||||||
|
March 31 (unaudited),
|
September 30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Taxable
|
$ | 5,213 | $ | 1,300 | $ | 3,526 | $ | 8,313 | $ | 30,444 | ||||||||||
|
Non-taxable
|
1,072 | 981 | 2,007 | 1,604 | 405 | |||||||||||||||
| $ | 6,285 | $ | 2,281 | $ | 5,533 | $ | 9,917 | $ | 30,849 | |||||||||||
At March 31, 2010 (unaudited), September 30, 2009 and 2008,
accrued interest receivable on MBS was $7.5 million, $9.0 million and $10.9
million, respectively. At March 31, 2010 (unaudited), September 30,
2009 and 2008, accrued interest receivable on investment securities was $5.0
million, $3.1 million and $1.9 million, respectively.
F-25
The
following tables summarize the estimated fair value and gross unrealized losses
of those securities on which an unrealized loss at March 31, 2010 (unaudited),
September 30, 2009 and 2008 was reported and the continuous unrealized loss
position for the twelve months prior to March 31,
2010 (unaudited), September 30, 2009 and 2008 or for
a shorter period of time, as applicable.
|
March 31, 2010
(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
|
-- | $ | -- | $ | -- | -- | $ | -- | $ | -- | ||||||||||||||
|
Municipal
bonds
|
1 | 412 | 13 | -- | -- | -- | ||||||||||||||||||
|
Trust
preferred securities
|
-- | -- | -- | 1 | 3,064 | 684 | ||||||||||||||||||
|
MBS
|
43 | 12,174 | 53 | 10 | 1,640 | 16 | ||||||||||||||||||
| 44 | $ | 12,586 | $ | 66 | 11 | $ | 4, 704 | $ | 700 | |||||||||||||||
|
HTM:
|
||||||||||||||||||||||||
|
U.S.
government sponsored
enterprises
|
9 | $ | 217,763 | $ | 289 | -- | $ | -- | $ | -- | ||||||||||||||
|
Municipal
bonds
|
10 | 5,966 | 46 | 2 | 1, 322 | 57 | ||||||||||||||||||
|
MBS
|
7 | 16,280 | 121 | 1 | 53 | -- | ||||||||||||||||||
| 26 | $ | 240,009 | $ | 456 | 3 | $ | 1, 375 | $ | 57 | |||||||||||||||
F-26
|
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 (1) the Company intends to sell the
security, (2) if it is more likely than not the
Company will be required to sell the security before recovery of its amortized
cost basis , or (3) if
the present value of expected cash flows is not sufficient to recover the entire
amortized cost.
F-27
The
unrealized losses at March 31, 2010 (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.
|
March 31, 2010
(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, 543 | $ | 25,750 | $ | 1, 676 | $ | 1, 703 | $ | 27, 219 | $ | 27, 453 | ||||||||||||
|
One
year through five years
|
110,635 | 110,931 | 779,841 | 781,414 | 890,476 | 892,345 | ||||||||||||||||||
|
Five
years through ten years
|
133,073 | 141,601 | 334,160 | 348,959 | 467,233 | 490,560 | ||||||||||||||||||
|
Ten
years and thereafter
|
1, 036,171 | 1, 076,602 | 257,180 | 265,433 | 1,293,351 | 1,342,035 | ||||||||||||||||||
| $ | 1, 305,422 | $ | 1, 354,884 | $ | 1,372,857 | $ | 1, 397,509 | $ | 2, 678,279 | $ | 2, 752,393 | |||||||||||||
|
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 March 31, 2010 (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 $ 877.8 million and $334.1 million,
respectively.
As of
March 31, 2010
(unaudited), September 30, 2009 and 2008, the Bank had pledged AFS and HTM MBS
with an amortized cost of $ 732 .3 million, $764.4
million and $744.7 million, respectively, and an estimated fair value of
$765. 2 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 March 31,
2010 (unaudited), September 30, 2009 and 2008, the
Bank also had pledged AFS and HTM MBS with an amortized cost of $ 177.5 million, $193.6 million and $59.1 million,
respectively, and an estimated fair value of $ 185.8
million, $202.8 million and $58.2 million, respectively, as collateral for
public unit depositors and the Federal Reserve Bank. As of March 31, 2010
(unaudited), there were no securities pledged for treasury, tax, and loan
requirements at the Federal Reserve Bank.
F-28
During
the six months ended March 31, 2010 (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 six month
period .
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 March 31, 2010 (unaudited), September 30, 2009 and 2008 is
summarized as follows:
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Mortgage
loans:
|
||||||||||||
|
Residential
- one- to-four family
|
$ | 5, 122,227 | $ | 5,321,935 | $ | 5,026,358 | ||||||
|
Multi-family
and commercial
|
70,447 | 80,493 | 56,081 | |||||||||
|
Construction
|
34,297 | 39,535 | 85,178 | |||||||||
| 5, 226,971 | 5,441,963 | 5,167,617 | ||||||||||
|
Other
loans:
|
||||||||||||
|
Home
equity
|
189,959 | 195,557 | 202,956 | |||||||||
|
Other
|
8,528 | 9,430 | 9,272 | |||||||||
| 198,487 | 204,987 | 212,228 | ||||||||||
|
Less:
|
||||||||||||
|
Undisbursed
loan funds
|
( 18,995 | ) | (20,649 | ) | (43,186 | ) | ||||||
|
Allowance
for loan losses
|
( 14,739 | ) | (10,150 | ) | (5,791 | ) | ||||||
|
Unearned
loan fees and deferred costs
|
(10, 872 | ) | (12,186 | ) | (10,088 | ) | ||||||
| $ | 5, 380,852 | $ | 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 March 31, 2010 (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 six months ended March 31,
2010 (unaudited). The Bank originated
$ 11.9 million of commercial real estate and business
loans during the six months ended March 31, 2009
(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.
At March 31, 2010 (unaudited), September 30, 2009 and 2008,
accrued interest receivable on loans receivable was $19.3 million, $20.5
million, and $20.9 million, 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 March 31, 2010 (unaudited),
the Bank was in compliance with this limitation.
F-29
Aggregate
loans to executive officers, directors and their associates did not exceed 5% of
stockholders’ equity as of March 31, 2010 (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.
As of
March 31, 2010 (unaudited), March 31, 2009
(unaudited), September 30, 2009 , 2008 and 2007 , the Bank serviced loans for others aggregating
approximately $ 717.0 million, $592.1 million, $576.0
million , $623.0 million and
$674.8 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 $8 .4
million, $7.9 million and $8.4 million as of March
31, 2010 (unaudited), September 30, 2009 and 2008,
respectively.
As of
March 31, 2010
(unaudited), September 30, 2009, 2008 and 2007, loans totaling approximately
$ 34.0 million, $30.9 million, $13.7 million and $7.4
million, respectively, were on nonaccrual status. Gross interest income would
have increased by $ 596 thousand and $ 437 thousand for the six
months ended March 31, 2010 and 2009 (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. Substantially all of the
impaired loans at March 31, 2010 (unaudited), September 30, 2009 and 2008 were
secured by residential real estate. Generally, 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
values are estimated through such methods as current appraisals, automated
valuation models, broker price opinions or listing prices. Fair
values may be adjusted by management to reflect current economic and market
conditions. If the outstanding loan balance is in excess of the
estimated fair value determined by management, less estimated costs to sell,
then a specific valuation allowance is recorded for the
difference. The following is a summary of information
pertaining to impaired loans.
|
March 31,
|
September
30,
|
||||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Impaired
loans without a specific valuation allowance
|
$ | 33,207 | $ | 19,052 | $ | 7,646 | |||||||
|
Impaired
loans with a specific valuation allowance
|
20,352 | 22,347 | 6,020 | ||||||||||
| $ | 53,559 | $ | 41,399 | $ | 13,666 | ||||||||
|
Specific
valuation allowance related to impaired loans
|
$ | 4, 535 | $ | 4,596 | $ | 758 | |||||||
|
For
the Six Months Ended
March 31
(unaudited),
|
For
the Year Ended September 30, |
||||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Average
investment in impaired loans
|
$ | 38,773 | $ | 16,382 | $ | 25,156 | $ | 10,878 | $ | 6,606 | |||||||||||
|
Interest
income recognized on impaired loans
|
$ | 238 | $ | 139 | $ | 473 | $ | 150 | $ | 111 | |||||||||||
No
additional principal is committed to be advanced in connection with impaired
loans.
F-30
At March 31, 2010 (unaudited),
September 30, 2009, 2008 and 2007, loans totaling $ 20.5 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 March 31, 2010 (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 March 31, 2010 and 2009 (unaudited) and for the years ended September 30,
2009, 2008 and 2007 is as follows:
|
For
the Six Months Ended
|
For
the Year Ended
|
|||||||||||||||||||
|
March 31 (unaudited),
|
September
30,
|
|||||||||||||||||||
|
2010
|
2009
|
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
|
6,315 | 2,656 | 6,391 | 2,051 | (225 | ) | ||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Residential
- one- to four-family
|
( 1,730 | ) | ( 970 | ) | (2,007 | ) | (407 | ) | (8 | ) | ||||||||||
|
Home
equity
|
(23 | ) | (13 | ) | (1 | ) | (2 | ) | (3 | ) | ||||||||||
|
Other
loans
|
( 10 | ) | -- | (24 | ) | (32 | ) | (16 | ) | |||||||||||
|
Total
charge-offs
|
( 1,763 | ) | ( 983 | ) | (2,032 | ) | (441 | ) | (27 | ) | ||||||||||
|
Recoveries
|
172 | -- | -- | -- | -- | |||||||||||||||
|
Allowance
on loans in the loan swap transaction
|
(135 | ) | -- | -- | -- | -- | ||||||||||||||
|
Balance
at end of period
|
$ | 14,739 | $ | 7,464 | $ | 10,150 | $ | 5,791 | $ | 4,181 | ||||||||||
F-31
5. PREMISES
AND EQUIPMENT, NET
A summary of the net carrying value of
banking premises and equipment at March 31, 2010 (unaudited) and September 30, 2009 and
2008 is as follows:
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Land
|
$ | 7,872 | $ | 7,866 | $ | 7,618 | ||||||
|
Building
and leasehold improvements
|
43,134 | 40,167 | 31,027 | |||||||||
|
Furniture,
fixtures and equipment
|
37,074 | 35,874 | 32,419 | |||||||||
| 88,080 | 83,907 | 71,064 | ||||||||||
|
Less
accumulated depreciation
|
(47,701 | ) | (46,198 | ) | (41,190 | ) | ||||||
| $ | 40,379 | $ | 37,709 | $ | 29,874 | |||||||
Depreciation
and amortization expense was $2.4 million for the
six months ended March
31, 2010 and 2009
(unaudited). 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
$ 616 thousand and $ 586
thousand for the six months ended March 31, 2010 and 2009
(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
March 31, 2010
(unaudited) are as follows (dollars in thousands):
|
2010
|
$ | 514 | ||
|
2011
|
1, 004 | |||
|
2012
|
899 | |||
|
2013
|
775 | |||
|
2014
|
763 | |||
|
2015
|
708 | |||
|
Thereafter
|
7,732 | |||
| $ | 12, 395 |
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-32
6. DEPOSITS
Deposits
at March 31, 2010
(unaudited), September 30, 2009 and 2008 are summarized as follows:
|
March 31,
|
September
30,
|
|||||||||||||||||||||||||||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||||||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||
|
Average
|
%
of
|
Average
|
%
of
|
Average
|
%
of
|
|||||||||||||||||||||||||||||||
|
Amount
|
Rate
|
Total
|
Amount
|
Rate
|
Total
|
Amount
|
Rate
|
Total
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Non-certificates:
|
||||||||||||||||||||||||||||||||||||
|
Checking
|
$ | 493,929 | 0.13 | % | 11. 4 | % | $ | 439,975 | 0.17 | % | 10.4 | % | $ | 400,461 | 0.21 | % | 10.2 | % | ||||||||||||||||||
|
Savings
|
239,651 | 0. 54 | 5. 6 | 226,396 | 0.66 | 5.4 | 232,103 | 1.51 | 5.9 | |||||||||||||||||||||||||||
|
Money
market
|
934,071 | 0. 72 | 21. 6 | 848,157 | 0.82 | 20.1 | 772,323 | 1.48 | 19.7 | |||||||||||||||||||||||||||
|
Total
non-certificates
|
1, 667,651 | 0.52 | 38. 6 | 1,514,528 | 0.61 | 35.9 | 1,404,887 | 1.12 | 35.8 | |||||||||||||||||||||||||||
|
Certificates
of deposit:
|
||||||||||||||||||||||||||||||||||||
|
0.00
– 0.99%
|
143,493 | 0. 50 | 3 .3 | 78,036 | 0.55 | 1.8 | 114 | 0.59 | -- | |||||||||||||||||||||||||||
|
1.00
– 1.99%
|
712,367 | 1. 48 | 16.5 | 254,846 | 1.55 | 6.0 | 7,426 | 1.98 | 0.2 | |||||||||||||||||||||||||||
|
2.00
– 2.99%
|
781,931 | 2. 44 | 18.1 | 971,605 | 2.42 | 23.0 | 413,102 | 2.78 | 10.5 | |||||||||||||||||||||||||||
|
3.00
– 3.99%
|
615,619 | 3. 49 | 14.3 | 848,991 | 3.45 | 20.1 | 935,470 | 3.39 | 23.8 | |||||||||||||||||||||||||||
|
4.00
– 4.99%
|
255,487 | 4.43 | 5.9 | 326,087 | 4.41 | 7.7 | 747,612 | 4.52 | 19.1 | |||||||||||||||||||||||||||
|
5.00
– 5.99%
|
141,682 | 5.16 | 3. 3 | 233,572 | 5.17 | 5.5 | 414,347 | 5.17 | 10.6 | |||||||||||||||||||||||||||
|
6.00
– 6.99%
|
836 | 6. 44 | -- | 944 | 6.48 | -- | 925 | 6.47 | -- | |||||||||||||||||||||||||||
|
Total
certificates of deposit
|
2, 651,415 | 2. 66 | 61.4 | 2,714,081 | 3.09 | 64.1 | 2,518,996 | 3.91 | 64.2 | |||||||||||||||||||||||||||
| $ | 4, 319,066 | 1.83 | % | 100.0 | % | $ | 4,228,609 | 2.20 | % | 100.0 | % | $ | 3,923,883 | 2.91 | % | 100.0 | % | |||||||||||||||||||
Interest expense on deposits for the periods presented is as
follows (in thousands):
|
Six Months Ended
March 31 (unaudited),
|
Year Ended September 30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Checking
|
$ | 319 | $ | 425 | $ | 879 | $ | 819 | $ | 850 | ||||||||||
|
Savings
|
678 | 1,032 | 1,873 | 4,105 | 4,952 | |||||||||||||||
|
Money market
|
3,336 | 4,691 | 8,512 | 16,771 | 26,566 | |||||||||||||||
|
Certificates
|
37,548 | 45,348 | 89,207 | 111,740 | 114,911 | |||||||||||||||
| $ | 41,881 | $ | 51,496 | $ | 100,471 | $ | 133,435 | $ | 147,279 | |||||||||||
F-33
As of
March 31, 2010
(unaudited) and September 30, 2009, certificates of deposit mature as
follows:
|
March 31, 2010 (unaudited)
|
September 30, 2009
|
|||||||||||||||
|
Amount
|
Weighted
Average Rate
|
Amount
|
Weighted
Average Rate
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Within
one year or less
|
$ | 1, 519,123 | 2. 47 | % | $ | 1,634,399 | 2.97 | % | ||||||||
|
Between
one and two years
|
710,310 | 2.89 | 609,704 | 3.15 | ||||||||||||
|
Between
two and three years
|
238,718 | 3. 00 | 333,648 | 3.49 | ||||||||||||
|
Between
three and four years
|
143,758 | 2.95 | 115,465 | 3.22 | ||||||||||||
|
Between
four and five years
|
38,156 | 3. 02 | 19,744 | 3.15 | ||||||||||||
|
Thereafter
|
1, 350 | 3. 42 | 1,121 | 3.61 | ||||||||||||
| $ | 2, 651,415 | 2.66 | % | $ | 2,714,081 | 3.09 | % | |||||||||
The
amount of noninterest-bearing deposits was $79. 8
million, $71.7 million and $66.8 million as of March
31, 2010 (unaudited), September 30, 2009 and 2008,
respectively. Certificates of deposit with a minimum denomination of
$100 thousand were $ 770.4 million, $790.8 million
and $686.3 million as of March 31, 2010 (unaudited), September 30, 2009 and 2008,
respectively . Deposits in excess of $250
thousand generally are not federally insured . The aggregate amount of
deposits that were reclassified as loans receivable due to customer overdrafts
was $ 181 thousand, $235 thousand and $296 thousand
as of March 31, 2010
(unaudited), September 30, 2009 and 2008, respectively.
F-34
7. BORROWED
FUNDS
At March 31, 2010 (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 March 31, 2010 (unaudited), September 30, 2009 and 2008 were
comprised of the following:
| March 31, | September 30, | |||||||||||
|
2010 (unaudited)
|
2009
|
2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Fixed-rate
FHLB advances
|
$ | 2,426,000 | $ | 2,426,000 | $ | 2,446,000 | ||||||
|
Deferred
prepayment penalty
|
( 30,873 | ) | (34,227 | ) | -- | |||||||
|
Deferred
gain on terminated interest rate swaps
|
715 | 797 | 1,129 | |||||||||
|
|
$ | 2, 395,842 | $ | 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 March 31, 2010
(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 March 31, 2010 (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 March 31, 2010 (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 March 31, 2010 (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 March 31, 2010 (unaudited).
F-35
Other
Borrowings –The
following summarizes the components of other borrowings as of March 31, 2010 (unaudited),
September 30, 2009 and 2008:
|
March 31,
|
September
30,
|
|||||||||||||||||||||||
|
2010 (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. 00 | 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. 2 million, at March 31, 2010 (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 March 31, 2010 (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 March 31, 2010 (unaudited) and September 30, 2009.
F-36
Maturity of
Borrowed Funds –
At March 31, 2010
(unaudited) and September 30, 2009, the FHLB advances, repurchase agreements and
Debentures mature as follows:
|
At
March 31, 2010
(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. 16 | ||||||||||||||||||
| $ | 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-37
8. INCOME
TAXES
Income
tax expense for the six months ended March 31, 2010 and 2009
(unaudited), and for the years ended September 30, 2009, 2008, and 2007
consisted of the following:
| March 31 (unaudited), | September 30, | |||||||||||||||||||
| 2010 | 2009 | 2009 | 2008 |
2007
|
||||||||||||||||
|
Current:
|
(Dollars in thousands) | |||||||||||||||||||
|
Federal
|
$ | 15,710 | $ | 16,154 | $ | 32,590 | $ | 19,523 | $ | 1,563 | ||||||||||
|
State
|
1,471 | 1,450 | 2,788 | 1,518 | 333 | |||||||||||||||
| 17,181 | 17,604 | 35,378 | 21,041 | 1,896 | ||||||||||||||||
|
Deferred:
|
||||||||||||||||||||
|
Federal
|
2,059 | 2,067 | 3,285 | 7,556 | 17,328 | |||||||||||||||
|
State
|
165 | 165 | 263 | 604 | 1,386 | |||||||||||||||
| 2,224 | 2,232 | 3,548 | 8,160 | 18,714 | ||||||||||||||||
| $ | 19,405 | $ | 19,836 | $ | 38,926 | $ | 29,201 | $ | 20,610 | |||||||||||
Income
tax expense has been provided at effective rates of 35.3 % and 36.9% for the six
months ended March 31, 2010 and 2009 (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:
| March 31 (unaudited), | September 30, | |||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Federal
income tax expense
|
||||||||||||||||||||||||||||||||||||||||
|
computed
at statutory Federal rate
|
$ | 19,264 | 35.0 | % | $ | 18,837 | 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
|
1,525 | 2.8 | 1,512 | 2.8 | 3,051 | 2.9 | 2,122 | 2.6 | 1,719 | 3.3 | ||||||||||||||||||||||||||||||
|
Net tax-exempt interest income
|
(884 | ) | (1 .6 | ) | (797 | ) | (1.5 | ) | (579 | ) | (0. 6 | ) | (450 | ) | (0.6 | ) | (112 | ) | ( 0. 2 | ) | ||||||||||||||||||||
| Other | (500 | ) | (0.9 | ) | 284 | 0.6 | (374 | ) | ( 0 .3 | ) | (525 | ) | (0.6 | ) | 486 | 0 .9 | ||||||||||||||||||||||||
| $ | 19,405 | 35.3 | % | $ | 19,836 | 36.9 | % | $ | 38,926 | 37.0 | % | $ | 29,201 | 36.4 | % | $ | 20,610 | 39.0 | % | |||||||||||||||||||||
F-38
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 six
months ended March 31, 2010 and 2009 (unaudited) and the years ended September
30, 2009, 2008 and 2007 were as follows:
| March 31 (unaudited), | September 30, | |||||||||||||||||||
| 2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
FHLB
prepayment penalty
|
$ | 644 | $ | 2,308 | $ | 4,601 | $ | 10,586 | $ | 21,225 | ||||||||||
|
FHLB
stock dividends
|
2,855 | ( 88 | ) | 694 | (1,901 | ) | (440 | ) | ||||||||||||
|
Allowance
for loan losses
|
(1,719 | ) | -- | (1,628 | ) | (611 | ) | 117 | ||||||||||||
|
Other,
net
|
444 | 12 | (119 | ) | 86 | (2,188 | ) | |||||||||||||
| $ | 2, 224 | $ | 2,232 | $ | 3,548 | $ | 8,160 | $ | 18,714 | |||||||||||
The
components of the net deferred income tax (liabilities) assets as of March 31, 2010 (unaudited),
September 30, 2009 and 2008 are as follows:
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Deferred
income tax assets:
|
||||||||||||
|
FHLB
prepayment penalty
|
$ | 639 | $ | 1,283 | $ | 5,884 | ||||||
|
Unrealized
loss on AFS securities
|
-- | -- | 3,627 | |||||||||
|
Salaries
and employee benefits
|
1, 279 | 1,259 | 1,567 | |||||||||
|
Allowance
for loan losses
|
3,614 | 1,895 | 267 | |||||||||
|
ESOP
compensation
|
887 | 887 | 977 | |||||||||
|
Other
|
1, 925 | 2,401 | 2,018 | |||||||||
|
Gross
deferred income tax assets
|
8,344 | 7,725 | 14,340 | |||||||||
|
Valuation
allowance
|
(261 | ) | (261 | ) | (241 | ) | ||||||
| Gross deferred income tax asset, net of valuation allowance | 8,083 | 7,464 | 14,099 | |||||||||
|
Deferred
income tax liabilities:
|
||||||||||||
|
Unrealized
gain on AFS securities
|
18, 697 | 20,583 | -- | |||||||||
|
FHLB
stock dividends
|
18,045 | 15,190 | 14,496 | |||||||||
|
Other
|
2, 676 | 2,661 | 2,826 | |||||||||
|
Gross
deferred income tax liabilities
|
39,418 | 38,434 | 17,322 | |||||||||
|
Net
deferred tax liabilities
|
$ | (31, 335 | ) | $ | (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 March 31, 2010 (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-39
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
for the periods ended March 31, 2010 (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.
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (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
|
8 | 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
|
$ | 105 | $ | 2,848 | $ | 2,409 | ||||||
Included in the unrecognized tax benefits above is
accrued penalties and interest of $ 8 thousand for the six months
March 31, 2010 (unaudited), and
accrued penalties and interest of $763 thousand and $609 thousand for the years
ended September 30, 2009 and 2008, respectively. The net reversal of penalties
and interest expense due to the lapse of statute of limitations for the six months ended
March 31, 2010 (unaudited)
was $468
thousand. Estimated penalties
and interest expense for the six months ended March
31, 2009 (unaudited) and the years ended
September 30, 2009 and 2008 were $ 6 thousand,
$ 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 $ 96 thousand and $ 92 thousand
at March 31, 2010 and
2009 (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 March 31, 2010 (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-40
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 $ 3.3 million for the six
months ended March 31, 2010 (unaudited), $ 4 .2 million
for the six months ended March 31, 2009 (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 $ 2.2
million for the six months ended March 31, 2010 (unaudited),
$ 1.8 million for the six months ended March 31, 2009 (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 March 31, 2010 (unaudited), September 30, 2009, and
2008:
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Allocated
ESOP shares
|
1,680,943 | 1,751,474 | 1,604,939 | |||||||||
|
Unreleased
ESOP shares
|
806,556 | 806,556 | 1,008,194 | |||||||||
|
Total
ESOP shares
|
2,487,499 | 2,558,030 | 2,613,133 | |||||||||
|
Fair
value of unreleased ESOP shares
|
$ | 30,214 | $ | 26,552 | $ | 44,693 | ||||||
10. STOCK
BASED COMPENSATION
At March 31, 2010 (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 10 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 March 31, 2010 (unaudited) and September 30, 2009, the Company had 1, 256,396 shares and 1,303,915
shares, respectively, available for future grants under the Option
Plan. The share counts
include 1, 046,861 shares and 1, 044,380
shares at March 31, 2010 (unaudited) and September
30, 2009, respectively, 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-41
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 six
months ended March 31, 2010 and 2009 (unaudited) was $3. 44 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 six months ended March 31, 2010 and 2009
(unaudited) totaled $ 133 thousand ($ 113 thousand, net of tax) and $ 150 thousand ($ 127 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:
|
Six Months Ended
March 31 (unaudited),
|
Year Ended September 30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Risk-free interest rate
|
2.1 | % | 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
|
6.2 | % | 2.4 | % | 4.8 | % | 6.2 | % | 5.2 | % | ||||||||||
|
Estimated
forfeitures
|
2.7 | % | 15.0 | % | 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 six months ended March 31, 2010 and 2009
(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 six months ended March 31, 2010 and 2009
(unaudited) and the years ended September 30, 2009, 2008 and 2007
follows:
|
March 31 (unaudited),
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
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
|
50 ,000 | 32.29 | 25,500 | 43.46 | ||||||||||||
|
Forfeited
|
-- | -- | -- | -- | ||||||||||||
|
Exercised
|
(9,091 | ) | 9.53 | ( 67,250 | ) | 17.68 | ||||||||||
|
Options
outstanding
|
||||||||||||||||
|
at
end of period
|
412,931 | $ | 33. 68 | 361,572 | $ | 32.86 | ||||||||||
F-42
|
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.
During
the six months ended March 31, 2010 and 2009
(unaudited), the total pretax intrinsic value of stock options exercised was
$1 89 thousand and $1.6 million,
respectively, and the tax benefits realized from the exercise of stock options
were $34 thousand and $500 thousand, respectively . 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 six months ended March 31,
2010 and 2009 (unaudited) was $ 222 thousand and $ 246
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-43
The
following summarizes information about the stock options outstanding and
exercisable as of March 31, 2010 (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
|
10,881 | 1. 83 | $ | 9.22 | $ | 307 | ||||||||||
|
14.03
- 19.68
|
3,700 | 1. 28 | 18. 78 | 69 | ||||||||||||
|
25.66
- 28.78
|
2,500 | 2. 42 | 26.91 | 26 | ||||||||||||
|
30.19
- 39.83
|
370 ,350 | 8. 94 | 33.92 | 1,389 | ||||||||||||
|
43.46
|
25,500 | 8. 58 | 43.46 | -- | ||||||||||||
| 412,931 | 8. 62 | $ | 33. 68 | $ | 1,791 | |||||||||||
|
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
|
10,881 | 1. 83 | $ | 9.22 | $ | 307 | ||||||||||
|
14.03
- 19.68
|
3,700 | 1. 28 | 18. 78 | 69 | ||||||||||||
|
25.66
- 28.78
|
2,500 | 2. 42 | 26.91 | 26 | ||||||||||||
|
30.19
- 39.83
|
282,450 | 8. 63 | 33. 91 | 1,041 | ||||||||||||
|
43.46
|
10,200 | 8. 58 | 43.46 | -- | ||||||||||||
| 309,731 | 8.25 | $ | 33.12 | $ | 1,443 | |||||||||||
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-44
|
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 $ 37 .46 and $32.92 as of March
31, 2010 (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 March 31, 2010 (unaudited) and
September 30, 2009 was 272,281 and 141,272,
respectively.
As of
March 31, 2010
(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 $ 319 thousand and $283
thousand, respectively, and the weighted average period over which these awards
are expected to be recognized was 2. 8 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 March 31, 2010 (unaudited) and September 30, 2009, the Company had
158,487 shares and 163,487 shares , respectively, 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 six months
ended March 31, 2010 and
2009 (unaudited) totaled $ 152 thousand
($ 98 thousand, net of tax) and $ 159 thousand ($ 100 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 six months ended March 31,
2010 and 2009 (unaudited) and
for the years ended September 30, 2009, 2008 and 2007
follows:
F-45
|
March 31 (unaudited),
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
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
|
5,000 | 32.66 | -- | -- | ||||||||||||
|
Vested
|
( 8,500 | ) | 33. 32 | ( 9,500 | ) | 33. 92 | ||||||||||
|
Forfeited
|
-- | -- | -- | -- | ||||||||||||
|
Unvested
RRP shares at end of period
|
11,600 | $ | 34. 37 | 13,700 | $ | 33. 51 | ||||||||||
|
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 six months ended March 31,
2010 and 2009 (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 six months ended March 31, 2010 and 2009
(unaudited) totaled $ 283 thousand and $322 thousand, respectively. 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 March 31, 2010 (unaudited) and September 30, 2009, there was $ 341 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. 6 years and 2. 1
years , respectively .
F-46
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 six months ended March 31, 2010 and 2009
(unaudited), the amount expensed in conjunction with the earnings on the
deferred amounts was $ 100 thousand and $ 23 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 $ 328 thousand, $337 thousand and $363
thousand as of March 31, 2010 (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 March 31, 2010 (unaudited), September 30, 2009 and 2008 as
follows:
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
|
||||||||||||
|
Originate
fixed-rate
|
$ | 86,210 | $ | 105,316 | $ | 105,419 | ||||||
|
Originate
adjustable-rate
|
9,718 | 8,945 | 16,302 | |||||||||
|
Purchase
fixed-rate
|
10,534 | 12,948 | 14,366 | |||||||||
|
Purchase
adjustable-rate
|
4,478 | 9,000 | 133,153 | |||||||||
| $ | 110,940 | $ | 136,209 | $ | 269,240 | |||||||
As of
March 31, 2010
(unaudited), the Bank had commitments to originate non-mortgage loans
approximating $ 24 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. The weighted average interest rate on commitments to originate or
purchase fixed-rate loans was 5.04%, 5.11% and 5.94% as of March 31, 2010
(unaudited), September 30, 2009 and 2008, respectively.
F-47
As of
March 31, 2010
(unaudited), September 30, 2009 and 2008, the Bank had approved but unadvanced
home equity lines of credit of $ 272.5 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 March 31, 2010 (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 March 31,
2010 (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 March 31, 2010 (unaudited),
that the Bank meets all capital adequacy requirements to which it is subject and
there were no conditions or events subsequent to March 31, 2010 (unaudited),
that would change the Bank’s category.
F-48
|
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 March 31, 2010
(unaudited):
|
|
|||||||||||||||||||||||
|
Tangible equity
|
$ | 841,861 | 10. 0 | % | $ | 126,808 | 1.5 | % | N/A | N/A | ||||||||||||||
|
Tier 1 (core) capital
|
841,861 | 10. 0 | 338,156 | 4.0 | $ | 422,694 | 5.0 | % | ||||||||||||||||
|
Tier I risk-based capital
|
841,861 | 23. 6 | N/A | N/A | 213, 896 | 6.0 | ||||||||||||||||||
|
Total risk-based capital
|
852,065 | 23.9 | 285,195 | 8.0 | 356,494 | 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 March 31, 2010 (unaudited) and September 30, 2009 and 2008 is
as follows:
|
| March 31,
2010 (unaudited)
|
September 30, | |||||||||||
|
2009
|
2008
|
|||||||||||
| (Dollars in thousands) | ||||||||||||
|
Total
Bank equity as reported under GAAP
|
$ | 873,053 | $ | 869,029 | $ | 803,643 | ||||||
|
Unrealized
(gains) losses on AFS securities
|
(30, 765 | ) | (33,870 | ) | 5,968 | |||||||
|
Other
|
( 427 | ) | (280 | ) | (2,903 | ) | ||||||
|
Total
tangible equity and Tier 1 (core) capital
|
841,861 | 834,879 | 806,708 | |||||||||
|
Allowance
for loan losses
|
10,204 | 5,560 | 5,008 | |||||||||
|
Other
|
-- | -- | (9,830 | ) | ||||||||
|
Total
risk based capital
|
$ | 852,065 | $ | 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 March 31, 2010 (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 allowance for loan
loss 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-49
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 March 31, 2010 (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 March
31, 2010 (unaudited) and September 30,
2009.
F-50
|
March 31, 2010
(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
|
$ | 136,094 | $ | -- | $ | 136,094 | $ | -- | ||||||||
|
Municipal
bonds
|
2, 735 | -- | 2, 735 | -- | ||||||||||||
|
Trust
preferred securities
|
3,064 | -- | -- | 3,064 | ||||||||||||
|
MBS
|
1, 212,991 | -- | 1, 212,991 | -- | ||||||||||||
|
|
$ | 1, 354,884 | $ | -- | $ | 1, 351,820 | $ | 3,064 | ||||||||
|
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)( 2)
|
|||||||||||||
|
(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 have had no activity since September 30, 2009 , except for reductions in net unrealized losses recognized in other comprehensive income. Reductions of net unrealized losses included in other comprehensive income for the six months ended March 31, 2010 (unaudited) were $610 thousand. | |
| (2) | The Company’s Level 3 AFS securities were not significant at September 30, 2009 and had no material activity during the year ended September 30, 2009. |
F-51
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 March 31,
2010 (unaudited) and September 30, 2009 were $ 53.6 million and $41.4 million, respectively.
Substantially all of the Bank’s impaired loans at March 31, 2010 (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, automated valuation models, 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. 5 million at March 31, 2010 (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. Fair
value is estimated through current appraisals, automated
valuation models, broker price opinions 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 March 31,
2010 (unaudited) and September 30, 2009 was $6. 9 million and $7.4 million, respectively. During the six months ended March 31,
2010 (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 $ 634 thousand and $1.5
million, respectively. Write downs related to REO that were charged to other
expense were $ 345 thousand for the six months ended March 31,
2010 (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 March 31, 2010
(unaudited) and September 30, 2009.
|
March 31, 2010
(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
|
$ | 53,559 | $ | -- | $ | -- | $ | 53,559 | ||||||||
|
REO
|
6, 861 | -- | -- | 6, 861 | ||||||||||||
|
|
$ | 60,420 | $ | -- | $ | -- | $ | 60,420 | ||||||||
|
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-52
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 March 31, 2010 (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 March 31, 2010 (unaudited), September 30, 2009 and 2008 were as
follows:
|
March 31,
|
September
30,
|
|||||||||||||||||||||||
|
2010 (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
|
$ | 60,735 | $ | 60,735 | $ | 41,154 | $ | 41,154 | $ | 87,138 | $ | 87,138 | ||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||
|
AFS
|
141,893 | 141,893 | 234,784 | 234,784 | 49,586 | 49,586 | ||||||||||||||||||
|
HTM
|
828,538 | 831,112 | 245,920 | 248,929 | 92,773 | 92,211 | ||||||||||||||||||
|
MBS:
|
||||||||||||||||||||||||
|
AFS
|
1, 212,991 | 1, 212,991 | 1,389,211 | 1,389,211 | 1,484,055 | 1,484,055 | ||||||||||||||||||
|
HTM
|
544,319 | 566,397 | 603,256 | 627,829 | 750,284 | 743,764 | ||||||||||||||||||
|
Loans
receivable
|
5, 380,852 | 5, 565,577 | 5,603,965 | 5,801,724 | 5,320,780 | 5,301,179 | ||||||||||||||||||
|
BOLI
|
54,000 | 54,000 | 53,509 | 53,509 | 52,350 | 52,350 | ||||||||||||||||||
|
Capital
stock of FHLB
|
135,050 | 135,050 | 133,064 | 133,064 | 124,406 | 124,406 | ||||||||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||||||||||
|
Deposits
|
4, 319,066 | 4, 374,285 | 4,228,609 | 4,294,454 | 3,923,883 | 3,934,188 | ||||||||||||||||||
|
Advances
from FHLB
|
2, 395,842 | 2, 535,992 | 2,392,570 | 2,554,206 | 2,447,129 | 2,485,545 | ||||||||||||||||||
|
Other
borrowings
|
713,609 | 740,580 | 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-53
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-54
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 | $ | 93,707 | n/a | n/a | $ | 192,594 | ||||||||||||
|
Net
interest and dividend income
|
44,854 | 42,683 | n/a | n/a | 87,537 | |||||||||||||||
|
Provision
for loan losses
|
3,115 | 3,200 | n/a | n/a | 6,315 | |||||||||||||||
|
Net
income
|
20,980 | 14,655 | n/a | n/a | 35,635 | |||||||||||||||
|
Basic
earnings per share
|
0.29 | 0.20 | n/a | n/a | 0. 49 | |||||||||||||||
|
Diluted
earnings per share
|
0.29 | 0.20 | n/a | n/a | 0. 49 | |||||||||||||||
|
Dividends
paid per public share
|
0.79 | 0.50 | n/a | n/a | 1.29 | |||||||||||||||
|
Average
number of shares outstanding
|
73,267 | 73,214 | n/a | n/a | 73, 241 | |||||||||||||||
|
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-55
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 March 31, 2010 (unaudited),
September 30, 2009 and 2008, and the related statements of income and cash flows
for the quarters ended March 31, 2010 and 2009 (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)
|
||||||||||||
|
March 31,
|
September
30,
|
|||||||||||
|
2010 (unaudited)
|
2009
|
2008
|
||||||||||
|
ASSETS
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 54,525 | $ | 54,101 | $ | 44,508 | ||||||
|
Investment
in the Bank
|
873,053 | 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, 922 | 1,622 | 4,621 | |||||||||
|
Income
tax receivable
|
146 | 162 | 67 | |||||||||
|
TOTAL
ASSETS
|
$ | 1,000,057 | $ | 995,324 | $ | 925,506 | ||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||
|
LIABILITIES:
|
||||||||||||
|
Accounts
payable and accrued expenses
|
$ | 375 | $ | 417 | $ | 709 | ||||||
|
Other
borrowings
|
53,609 | 53,609 | 53,581 | |||||||||
|
Total
liabilities
|
53,984 | 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; 73,983,078 ,
74,099,355 and 74,079,868 shares outstanding as of March 31, 2010
(unaudited), September 30, 2009 and September 30, 2008,
respectively
|
915 | 915 | 915 | |||||||||
|
Additional
paid-in capital
|
455,413 | 452,872 | 445,391 | |||||||||
|
Unearned
compensation - ESOP
|
(7, 057 | ) | (8,066 | ) | (10,082 | ) | ||||||
|
Unearned
compensation - RRP
|
(341 | ) | (330 | ) | (553 | ) | ||||||
|
Retained
earnings
|
789,831 | 781,604 | 759,375 | |||||||||
|
Accumulated
other comprehensive income (loss)
|
30, 765 | 33,870 | (5,968 | ) | ||||||||
| 1,269,526 | 1,260,865 | 1,189,078 | ||||||||||
|
Treasury
stock, at cost, 17, 529,209 , 17,412,932 and
17,432,419 shares as of March 31,
2010 (unaudited), September 30, 2009 and
September 30, 2008, respectively
|
(323,453 | ) | (319,567 | ) | (317,862 | ) | ||||||
|
Total
stockholders’ equity
|
946,073 | 941,298 | 871,216 | |||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 1,000,057 | $ | 995,324 | $ | 925,506 | ||||||
F-56
|
STATEMENTS
OF INCOME
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
For
the Six Months Ended
|
For
the Years Ended
|
|||||||||||||||||||
|
March 31(unaudited),
|
September
30,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
INTEREST
AND DIVIDEND INCOME:
|
||||||||||||||||||||
|
Dividend
income from the Bank
|
$ | 32,200 | $ | 31,840 | $ | 50,056 | $ | 41,511 | $ | 35,956 | ||||||||||
|
Interest
income from other investments
|
1,468 | 1,896 | 3,612 | 4,683 | 5,751 | |||||||||||||||
|
Total
interest and dividend income
|
33,668 | 33,736 | 53,668 | 46,194 | 41,707 | |||||||||||||||
|
INTEREST
EXPENSE
|
820 | 1, 596 | 2,573 | 3,624 | 4,468 | |||||||||||||||
|
NET
INTEREST AND DIVIDEND INCOME
|
32,848 | 32,140 | 51,095 | 42,570 | 37,239 | |||||||||||||||
|
OTHER
INCOME
|
25 | 47 | 76 | 107 | 132 | |||||||||||||||
|
OTHER
EXPENSES:
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
471 | 558 | 1,108 | 975 | 945 | |||||||||||||||
|
Other,
net
|
619 | 278 | 471 | 380 | 438 | |||||||||||||||
|
Total
other expenses
|
1,090 | 836 | 1,579 | 1,355 | 1,383 | |||||||||||||||
|
INCOME
BEFORE INCOME TAX (BENEFIT) EXPENSE AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (EXCESS OF DISTRIBUTION
OVER)
|
||||||||||||||||||||
| 31,783 | 31,351 | 49,592 | 41,322 | 35,988 | ||||||||||||||||
|
INCOME
TAX (BENEFIT) EXPENSE
|
(146 | ) | (171 | ) | (162 | ) | (66 | ) | 11 | |||||||||||
|
INCOME
BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY
(EXCESS OF DISTRIBUTION OVER)
|
||||||||||||||||||||
| 31,929 | 31,522 | 49,754 | 41,388 | 35,977 | ||||||||||||||||
|
EQUITY
IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY
(EXCESS
OF DISTRIBUTION OVER)
|
||||||||||||||||||||
| 3,706 | 2,462 | 16,544 | 9,566 | (3,681 | ) | |||||||||||||||
|
|
||||||||||||||||||||
|
NET
INCOME
|
$ | 35,635 | $ | 33,984 | $ | 66,298 | $ | 50,954 | $ | 32,296 | ||||||||||
F-57
STATEMENTS
OF CASH FLOWS
(in
thousands)
| For the Six Months Ended March 31 (unaudited), |
For
the Years Ended September 30,
|
|||||||||||||||||||
| 2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||
|
Net
income
|
$ | 35,635 | $ | 33,984 | $ | 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
|
( 3,706 | ) | (2,462 | ) | (16,544 | ) | (9,566 | ) | 3,681 | |||||||||||
|
Amortization
of deferred debt issuance costs
|
-- | 28 | 28 | 57 | 57 | |||||||||||||||
|
Other,
net
|
1 | -- | 14 | 3 | (5 | ) | ||||||||||||||
|
Changes
in:
|
||||||||||||||||||||
|
Other
assets
|
( 300 | ) | 2, 630 | 2,999 | (2,982 | ) | 33 | |||||||||||||
|
Income
taxes receivable/payable
|
16 | ( 105 | ) | (95 | ) | (295 | ) | 351 | ||||||||||||
|
Accounts
payable and accrued expenses
|
(42 | ) | (228 | ) | (292 | ) | (1,669 | ) | 1,321 | |||||||||||
|
Net
cash flows provided by operating activities
|
31,604 | 33,847 | 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:
|
||||||||||||||||||||
|
Change in treasury stock related to RRP
shares
|
161 | (15 | ) | 87 | 322 | 180 | ||||||||||||||
|
Dividends
paid
|
( 27,408 | ) | (23,173 | ) | (44,069 | ) | (41,426 | ) | (43,000 | ) | ||||||||||
|
Acquisition
of treasury stock
|
( 4,019 | ) | (2,426 | ) | (2,426 | ) | (7,307 | ) | (3,198 | ) | ||||||||||
|
Stock
options exercised
|
86 | 1, 203 | 1,337 | 623 | 3,942 | |||||||||||||||
|
Net
cash flows used in financing activities
|
( 31,180 | ) | (24,411 | ) | (45,071 | ) | (47,788 | ) | (42,076 | ) | ||||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
424 | 9,436 | 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
|
$ | 54,525 | $ | 53,944 | $ | 54,101 | $ | 44,508 | $ | 53,662 | ||||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||||||||||
|
Interest
payments
|
$ | 862 | $ | 1, 824 | $ | 2,866 | $ | 3,929 | $ | 4,511 | ||||||||||
F-58
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 March 31, 2010
(unaudited).
F-59
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 195,500 ,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.
SYNDICATED
OFFERING
PROSPECTUS
Capitol
Federal Financial, Inc.
(Proposed
Holding Company for Capitol Federal Savings Bank)
Up
to 195,500,000 Shares of Common Stock
$10.00
per Share
________________________________________________
Capitol
Federal Financial, Inc., a newly formed Maryland corporation, is offering up to
195,500,000 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 71% ownership interest in Capitol Federal
Financial currently owned by Capitol Federal Savings Bank MHC. 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. We must
sell a minimum of 144,500,000 shares in order to complete the
offering. In addition to the shares we are selling in the offering,
we will issue up to 81,620,351 shares of common stock in exchange for the
remaining 29% interest in CFF common stock currently held by the public, which
will result in those shareholders owning approximately the same percentage of
Capitol Federal Financial, Inc. common stock upon completion of the
conversion. Capitol Federal Financial, Inc. also intends to
contribute $40.0 million in cash to the Capitol Federal Foundation in connection
with the conversion.
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, and in a community offering, with a preference given to residents of
the communities served by Capitol Federal Savings Bank and existing stockholders
of CFF.
Shares
of common stock not subscribed for in the subscription and community offerings
are being offered in the syndicated offering through a syndicate of broker
dealers. Sandler O’Neill & Partners, L.P. is serving as sole
book-running manager for the syndicated offering and Keefe, Bruyette &
Woods, Inc. is serving as co-manager. Neither Sandler O’Neill &
Partners, L.P., Keefe, Bruyette & Woods, Inc., nor any member of the
syndicate group is required to purchase any shares of common stock in the
offering.
Completion
of the conversion and the offering is subject to several conditions, including
the approval of the plan of conversion and reorganization by a vote of at least
a majority of the outstanding shares of CFF common stock, excluding shares held
by Capitol Federal Savings Bank MHC. See “Summary – Conditions to
Completion of the Conversion.”
OFFERING
SUMMARY
[same
as cover page of the prospectus]
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.
|
KEEFE
BRUYETTE & WOODS, INC.
|
The date
of this prospectus is [ ],
2010
[The
remainder of this prospectus is the same as the subscription and community
offering prospectus filed as part of this Registration
Statement]
CAPITOL
FEDERAL FINANCIAL LOGO
[ ],
2010
Dear
Fellow Stockholder:
You are
cordially invited to attend the special meeting of stockholders of Capitol
Federal Financial. The meeting will be held on
[ ],
2010 at [ ],
Central Time, at the
[ ]
Topeka, Kansas.
We are
soliciting shareholder votes regarding:
|
●
|
The
conversion of Capitol Federal Savings Bank from a partially public mutual
holding company form of organization to a fully public stock holding
company structure. Currently, Capitol Federal Savings Bank is a
wholly-owned subsidiary of Capitol Federal Financial (“CFF”), and Capitol
Federal Savings Bank MHC owns 71% of CFF’s common stock. The
remaining 29% of CFF’s common stock is owned by public
stockholders. As a result of the conversion, a newly formed
company, Capitol Federal Financial, Inc., will become the parent of
Capitol Federal Savings Bank. Each share of CFF common stock
owned by the public will be exchanged for shares of common stock of
Capitol Federal Financial, Inc. so that our existing public stockholders
will own the same percentage of Capitol Federal Financial, Inc. common
stock as they owned of our common stock immediately prior to the
conversion; and
|
|
●
|
The
contribution of $40 million in cash from the proceeds of the stock
offering, to the Capitol Federal Foundation, a Kansas corporation
not-for-profit that is dedicated to charitable purposes within the
communities in which Capitol Federal Savings Bank conducts its
business.
|
|
●
|
The
adjournment of the special meeting, if necessary, to solicit additional
proxies in the event that there are not sufficient votes to approve the
conversion or the contribution to the Capitol Federal
Foundation.
|
The
Proxy Vote — Your Vote Is Very Important
We have received
conditional regulatory approval to implement the conversion; however, we must
also receive the approval of our stockholders. Enclosed is a proxy
statement/prospectus describing the proposals before our
stockholders. Please
promptly vote the enclosed Proxy Card. Our Board of Directors urges
you to vote “FOR” each of the proposals set forth in attached the proxy
statement/prospectus.
The
Exchange
At the
conclusion of the conversion, your shares of CFF common stock will be exchanged
for shares of Capitol Federal Financial, Inc. The number of shares of
Capitol Federal Financial, Inc. common stock that you receive will be based on
an exchange ratio that is described in the proxy
statement/prospectus. Shortly after the completion of the conversion,
our exchange agent will send a transmittal form to each stockholder of CFF who
holds stock certificates. The transmittal form will explain the
procedure to follow to exchange your shares. Please do not deliver
your certificate(s) before you receive the transmittal form. Shares
of CFF that are held in street name (e.g. in a brokerage account) will be
converted automatically at the conclusion of the conversion; no action or
documentation is required of you.
The
Stock Offering
We are offering the shares
of common stock of Capitol Federal Financial, Inc. for sale at $10.00 per
share. The shares are being offered in a Subscription Offering to
eligible customers of Capitol Federal Savings Bank. If all shares are
not subscribed for in the Subscription Offering, shares are expected to be
available in a Community Offering, to CFF public stockholders and others not
eligible to place orders in the Subscription Offering. If
you are interested in purchasing shares of Capitol Federal Financial, Inc.
common stock, you may request a stock order form and prospectus by calling our
Stock Information Center at the phone number in the Questions and Answers
section that follows. The stock offering period is expected to expire
on
[ ],
2010.
Should
you have any questions, please refer to the Questions & Answers
section.
As
Chairman of the Board, I want to express my appreciation for your confidence and
support.
Very
truly yours,
John B.
Dicus
Chairman
of the Board
This
letter is neither an offer to sell nor a solicitation of an offer to buy shares
of common stock. The offer is made only by the
prospectus. 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.
PROSPECTUS
OF CAPITOL FEDERAL FINANCIAL, INC.
PROXY
STATEMENT OF CAPITOL FEDERAL FINANCIAL
Capitol
Federal Savings Bank is converting from a mutual holding company structure to a
fully-public stock holding company structure. Currently, Capitol
Federal Savings Bank is a wholly-owned subsidiary of Capitol Federal Financial
(“CFF”), and Capitol Federal Savings Bank MHC owns 71% of CFF’s common
stock. The remaining 29% of CFF’s common stock is owned by public
stockholders. As a result of the conversion, a newly formed company,
Capitol Federal Financial, Inc., will become the parent of Capitol Federal
Savings Bank. Each share of CFF common stock owned by the public will
be exchanged for shares of common stock of Capitol Federal Financial, Inc. so
that CFF’s existing public stockholders will own the same percentage of Capitol
Federal Financial, Inc. common stock as they owned of CFF’s common stock
immediately prior to the conversion, excluding any new shares purchased by them
in the offering and their receipt of cash in lieu of fractional exchange shares,
as further discussed below. The actual number of shares that you will
receive will depend on the percentage of CFF common stock held by the public at
the completion of the conversion, the final independent appraisal of Capitol
Federal Financial, Inc. and the number of shares of Capitol Federal Financial,
Inc. common stock sold in the offering described in the following
paragraph. It will not depend on the market price of CFF common
stock. See “Proposal 1 - Approval of the Plan of Conversion and
Reorganization -- Share Exchange Ratio for Current Stockholders” for a
discussion of the exchange ratio.
Concurrently
with the exchange, we are offering up to 195,500,000 shares of common stock of
Capitol Federal Financial, Inc., representing the 71% ownership interest of
Capitol Federal Savings Bank MHC in CFF for sale to eligible depositors and
certain borrowers of Capitol Federal Savings Bank and to the public, including
CFF stockholders, at a price of $10.00 per share. The conversion of
Capitol Federal Savings Bank MHC and the offering and exchange of common stock
by Capitol Federal Financial, Inc. is referred to herein as the “conversion and
offering.” After the conversion and offering are completed, Capitol Federal
Savings Bank will be a wholly-owned subsidiary of Capitol Federal Financial,
Inc. and 100% of the common stock of Capitol Federal Financial, Inc. will be
owned by public stockholders. As a result of the conversion and
offering, CFF and Capitol Federal Savings Bank MHC will cease to
exist.
In
connection with the conversion and offering, Capitol Federal Financial, Inc.
also intends to contribute to the Capitol Federal Foundation $40 million in
cash. “See Proposal 2— Contribution to the Charitable Foundation.”
CFF’s
common stock is currently traded on the Nasdaq Global Select Market under the
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.
The conversion and
offering cannot be completed unless the stockholders of CFF approve the Plan of
Conversion and Reorganization of Capitol Federal Savings Bank MHC, referred to
herein as the “plan of conversion.” CFF is holding a special meeting
of stockholders at
[ ]
Topeka, Kansas, on
[ ],
2010, at [ ],
Central Time, to consider and vote upon the plan of conversion. CFF’s
Board of Directors unanimously recommends that stockholders vote “FOR” the plan
of conversion.
The contribution to the
charitable foundation must also be approved by the stockholders of CFF at the
special meeting of stockholders. However, the completion of the
conversion and offering is not dependent upon the approval of the contribution
to the charitable foundation. CFF’s
board of directors unanimously recommends that stockholders vote “FOR” the
contribution to the charitable foundation.
This
document serves as the proxy statement for the special meeting of stockholders
of CFF and the prospectus for the shares of Capitol Federal Financial, Inc.
common stock to be issued in exchange for shares of CFF common
stock. We urge you to read this entire document
carefully. You can also obtain information about us from documents
that we have filed with the Securities and Exchange Commission and the Office of
Thrift Supervision. This document does not serve as the prospectus
relating to the offering by Capitol Federal Financial, Inc. of its shares of
common stock in the offering, which will be made pursuant to a separate
prospectus. Stockholders of CFF are not required to participate in
the stock offering.
This proxy
statement/prospectus contains information that you should consider in evaluating
the plan of conversion. In
particular, you should carefully read the section captioned “Risk Factors”
beginning on page [ ] for a discussion of certain risk
factors relating to the conversion and offering.
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 or
any state securities regulator has approved or disapproved of these securities
or determined if this proxy statement/prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
For
answers to your questions, please read this proxy statement/prospectus,
including the Questions and Answers section, beginning on page
1. Questions about voting on the plan of conversion or any other
proposal set forth in this proxy statement/prospectus may be directed to our
proxy information agent, [ ], at
[ ], Monday through Friday from 10:00 a.m. to
4:00 p.m., Central Time.
The date
of this proxy statement/prospectus is [ ],
2010, and it is first being mailed to stockholders of CFF on or about [ ],
2010.
CAPITOL
FEDERAL FINANCIAL
700
South Kansas Avenue
Topeka,
Kansas 66603
(785)270-6055
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
On
[ ], 2010, Capitol Federal Financial will
hold a special meeting of stockholders [ ]
Topeka, Kansas. The meeting will begin at
[ ], Central Time. At the meeting,
stockholders will consider and act on the following:
1. Approval
of a Plan of Conversion and Reorganization (referred to as the “plan of
conversion”) pursuant to which: (a) Capitol Federal Savings Bank MHC, which
currently owns 71% of the common stock of Capitol Federal Financial, will merge
with and into Capitol Federal Financial, with Capitol Federal Financial being
the surviving entity, (b) Capitol Federal Financial will merge with and
into Capitol Federal Financial, Inc., a Maryland corporation recently formed to
be the holding company for Capitol Federal Savings Bank, with Capitol Federal
Financial, Inc. being the surviving entity, (c) the outstanding shares of
Capitol Federal Financial, other than those held by Capitol Federal Savings Bank
MHC, will be converted into shares of common stock of Capitol Federal Financial,
Inc., and (d) Capitol Federal Financial, Inc. will offer shares of its
common stock for sale in a subscription offering and community offering, and, if
necessary, a syndicated offering;
2.
The
contribution of $40 million in cash to the
Capitol Federal Foundation, a Kansas corporation not-for-profit
that is dedicated to charitable purposes within the communities in which Capitol
Federal Savings Bank conducts its business;
3.
The
approval of the adjournment of the special meeting, if necessary, to solicit
additional proxies in the event that there are not sufficient votes at the time
of the special meeting to approve the plan of conversion and/or the contribution
to the Capitol Federal Foundation;
4.
The
following informational proposals:
4a. Approval
of a provision in Capitol Federal Financial, Inc.’s articles of incorporation to
limit the ability of stockholders to remove directors;
4b. Approval
of a provision in Capitol Federal Financial, Inc.’s articles of incorporation
requiring a super-majority vote to approve certain amendments to Capitol Federal
Financial, Inc.’s articles of incorporation;
4c. Approval
of a provision in Capitol Federal Financial, Inc.’s articles of incorporation
requiring a super-majority vote of stockholders to approve stockholder-proposed
amendments to Capitol Federal Financial, Inc.’s bylaws;
4d. Approval
of a provision in Capitol Federal Financial, Inc.’s articles of incorporation to
limit the voting rights of shares beneficially owned in excess of 10% of Capitol
Federal Financial, Inc.’s outstanding voting stock; and
5.
Such
other business that may properly come before the meeting.
NOTE: The
Board of Directors is not aware of any other business to come before the
meeting.
The
provisions of Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws which are summarized as informational proposals 4a through 4d were
approved as part of the process in which our Board of Directors approved the
plan of conversion. These proposals are informational in nature only,
because the Office of Thrift Supervision’s regulations governing mutual-to-stock
conversions do not provide for a separate vote on these matters apart from the
vote on the plan of conversion. While we are asking you to vote with
respect to each of the informational proposals listed above, the proposed
provisions for which an informational vote is requested will become effective if
stockholders approve the plan of conversion, regardless of whether stockholders
vote to approve any or all of the informational proposals.
The Board of Directors has
fixed [ ],
2010, as the record date for the determination of stockholders entitled to
notice of and to vote at the special meeting and at an adjournment or
postponement thereof.
Please
complete and sign the enclosed proxy, which is solicited by the Board of
Directors, and mail it promptly in the enclosed envelope. If you
prefer, you may vote by using the telephone or Internet. For
information on submitting your proxy or voting by telephone or Internet, please
refer to instructions on the enclosed proxy card. The proxy will not
be used if you attend the meeting and vote in person.
BY ORDER OF THE BOARD OF
DIRECTORS
JOHN B.
DICUS
CHAIRMAN
OF THE BOARD
Topeka,
Kansas
[ ],
2010
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F-1
|
ABOUT
THE PLAN OF CONVERSION AND REORGANIZATION
AND
THE SPECIAL MEETING
You
should read this document for more information about the conversion and
reorganization, as well as the special meeting of stockholders. The
plan of conversion and reorganization described herein (referred to as the “plan
of conversion”) and the contribution to our charitable foundation have been
conditionally approved by our primary federal regulator, the Office of Thrift
Supervision; however, such approval does not constitute a recommendation or
endorsement of the plan of conversion by that agency.
Q. WHAT
ARE STOCKHOLDERS BEING ASKED TO APPROVE AT THE SPECIAL MEETING?
A. CFF
stockholders as of [ ],
2010 are being asked to vote on the plan of conversion pursuant to which Capitol
Federal Savings Bank MHC will convert from the mutual to the stock form of
organization. As part of the conversion, a newly formed Maryland
corporation, Capitol Federal Financial, Inc., is offering its common stock to
eligible depositors and certain borrowers of Capitol Federal Savings Bank, to
stockholders of CFF as of [ ],
2010 and to the public. The shares offered represent Capitol Federal
Savings Bank MHC’s current 71% ownership interest in CFF. Voting for
approval of the plan of conversion will also include approval of the exchange
ratio and the articles of incorporation and bylaws of Capitol Federal Financial,
Inc. (including the anti-takeover provisions and provisions limiting stockholder
rights).
Stockholders
are also being asked to vote on and approve a proposal to fund the
Capitol Federal Foundation with $40 million
in cash and a proposal to adjourn the special meeting if necessary to
solicit additional proxies in the event that there are not sufficient votes at
the time of the special meeting to approve the plan of conversion and/or the
contribution to the charitable foundation.
Stockholders
also are asked to vote on the following informational proposals with respect to
the articles of incorporation and bylaws of Capitol Federal Financial,
Inc.:
|
●
|
Approval
of a provision in Capitol Federal Financial, Inc.’s articles of
incorporation to limit the ability of stockholders to remove
directors;
|
|
●
|
Approval
of a provision in Capitol Federal Financial, Inc.’s articles of
incorporation requiring a super-majority vote to approve certain
amendments to Capitol Federal Financial, Inc.’s articles of
incorporation;
|
|
●
|
Approval
of a provision in Capitol Federal Financial, Inc.’s articles of
incorporation requiring a super-majority vote of stockholders to approve
stockholder-proposed amendments to Capitol Federal Financial, Inc.’s
bylaws; and
|
|
●
|
Approval
of a provision in Capitol Federal Financial, Inc.’s articles of
incorporation to limit the voting rights of shares beneficially owned in
excess of 10% of Capitol Federal Financial, Inc.’s outstanding voting
stock.
|
The
provisions of Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws that are included as informational proposals were approved as part of the
process in which our Board of Directors approved the plan of
conversion. These proposals are informational in nature only, because
the Office of Thrift Supervision’s regulations governing mutual-to-stock
conversions do not provide for a separate vote on these matters apart from the
vote on the plan of conversion. While we are asking you to vote with
respect to each of the informational proposals listed above, the proposed
provisions for which an informational vote is requested will become effective if
stockholders approve the plan of conversion, regardless of whether stockholders
vote to approve any or all of the informational proposals. The
provisions of Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws which are summarized above as informational proposals may have the effect
of deterring, or rendering more difficult, attempts by third parties to obtain
control of Capitol Federal Financial, Inc. if such attempts are not approved by
the Board of Directors, or may make the removal of the Board of Directors or
management, or the appointment of new directors, more difficult.
1
Your
vote is important. Without sufficient votes “FOR” approval of the plan of
conversion, we cannot implement the plan of conversion and the related stock
offering. We also cannot fund the charitable foundation without
sufficient votes “FOR” that proposal.
Q. WHAT
ARE THE REASONS FOR THE CONVERSION AND RELATED OFFERING?
A. 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 are expected to 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.
|
Q. WHAT
ARE THE REASONS FOR THE CONTRIBUTION TO THE CHARITABLE FOUNDATION?
A. Capitol
Federal Savings Bank has a long-standing commitment to charitable contributions
within the communities in which we conduct our business. The
foundation has enhanced our ability to support community development and
charitable causes and additional funding will enable us to increase our
commitment to our communities.
Q. HOW
WILL THE CONTRIBUTION
TO
THE CHARITABLE FOUNDATION AFFECT THE NEW STOCK HOLDING COMPANY AND ITS
STOCKHOLDERS?
A. The
contribution of cash to the charitable foundation will result in an expense, and
a related reduction in earnings, for the new holding company for the quarter in
which the conversion is completed.
Q. WHAT
WILL STOCKHOLDERS RECEIVE FOR THEIR EXISTING CFF
SHARES?
A. As
more fully described in “Proposal 1 — Approval of the Plan of Conversion and
Reorganization —Share Exchange Ratio for Current Stockholders,” depending on the
number of shares sold in the offering, each share of common stock that you own
at the time of the completion of the conversion will be exchanged for between
2.7686
shares at the minimum and 3.7457 shares
at the maximum of the offering range of Capitol Federal Financial, Inc. common
stock (cash will be paid in lieu of any fractional shares). For
example, if you own 100 shares of CFF common stock, and the exchange ratio is
3.2572
(at the midpoint of the offering range), after the conversion you will receive
325
shares of Capitol Federal Financial, Inc. common stock and $7.20 in
cash, the value of the fractional share, based on the $10.00 per share purchase
price of stock in the offering.
Stockholders
who hold shares in street-name at a brokerage firm or other nominee do not need
to take any action to exchange their shares of common stock. Your
shares will be automatically exchanged within your
account. Stockholders with CFF stock certificates will receive a
transmittal form from our exchange agent with instructions on how to surrender
their existing stock certificates for common stock of Capitol Federal Financial,
Inc. after completion of the conversion. You should not submit a
stock certificate until you receive a transmittal form.
2
Q. WHY
WILL THE SHARES THAT I RECEIVE BE BASED ON A PRICE OF $10.00 PER SHARE RATHER
THAN THE TRADING PRICE OF THE COMMON STOCK PRIOR TO COMPLETION OF THE
CONVERSION?
A. The
$10.00 per share price was selected primarily because it is a commonly selected
per share price for mutual-to-stock conversion offerings. The amount
of common stock Capitol Federal Financial, Inc. will issue at $10.00 per share
in the offering and the exchange is based on an independent appraisal of the
estimated market value of Capitol Federal Financial, Inc. and the number of
shares sold in the offering, assuming the conversion and offering are
completed. RP Financial, LC., an appraisal firm experienced in
appraisals of financial institutions, has estimated that, as of May 28, 2010,
this market value ranged from $2.05 billion
to $2.77 billion, with a midpoint of $2.41 billion. Based on this
valuation, the number of shares of common stock of C apitol Federal Financial,
Inc. that existing public stockholders of CFF will receive in exchange for their
shares of CFF common stock will range from 60,328,085 to
81,620,351,
with a midpoint of 70,974,218 (with
a value of $603.28 million to
$816.20 million, with a midpoint of $709.74 million, at $10.00 per
share). The number of shares received by the existing public
stockholders of CFF is intended to maintain their existing 29% ownership in our
organization (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 ten publicly traded savings bank and thrift holding companies that RP
Financial, LC. considered comparable to CFF.
Q. DOES
THE EXCHANGE RATIO DEPEND ON THE TRADING PRICE OF CFF COMMON
STOCK?
A. No,
the exchange ratio will not be based on the market price of CFF common
stock. Therefore, changes in the price of CFF common stock between
now and the completion of the conversion and offering will not affect the
calculation of the exchange ratio.
Q. SHOULD
I SUBMIT MY STOCK CERTIFICATES NOW?
A. No. If
you hold stock certificate(s), instructions for exchanging the certificates will
be sent to you by our exchange agent after
completion of the conversion. If your shares are held in
“street name” (e.g.,
in a brokerage account) rather than in certificate form, the share
exchange will be reflected automatically in your account upon completion of the
conversion.
Q. HOW
DO I VOTE?
A. Mark
your vote, sign each proxy card enclosed and return the card(s) to us, in the
enclosed proxy reply envelope. If you prefer, you may vote by using
the telephone or Internet. For information on submitting your proxy
or voting by telephone or Internet, please refer to instructions on the enclosed
proxy card. Your
vote is important! Please vote promptly.
You may
also vote in person at the special meeting. If you plan to attend the
special meeting and wish to vote in person, we will give you a ballot at the
special meeting. However, if your shares are held in the name of your
broker, bank or other nominee, you will need to obtain a proxy form from the
institution that holds your shares indicating that you were the beneficial owner
of CFF common stock on [ ],
2010, the record date for voting at the special meeting.
Q. IF
MY SHARES ARE HELD IN STREET NAME, WILL MY BROKER, BANK OR OTHER NOMINEE
AUTOMATICALLY VOTE ON THE PLAN AND THE CONTRIBUTION TO THE FOUNDATION ON MY
BEHALF?
A. No. Your
broker, bank or other nominee will not be able to vote your shares on these
matters without instructions from you. You should instruct your
broker, bank or other nominee to vote your shares, using the directions that
they provide to you.
3
Q. WHAT
HAPPENS IF I DON’T VOTE?
A. Your
vote is very important. Not voting will have the same effect as
voting “AGAINST”
the
plan of conversion. Without sufficient favorable votes “FOR”
the plan of conversion, we will not proceed with the conversion and
offering. Without
sufficient favorable votes “for”
the
contribution to the
charitable foundation, we cannot fund the charitable
foundation. Our
Board of Directors unanimously recommends that you vote “FOR” each of the
proposals set forth in this proxy
statement/prospectus.
Q. WHAT
IF I DO NOT GIVE VOTING INSTRUCTIONS TO MY BROKER, BANK OR OTHER
NOMINEE?
A. Your
vote is important. If you do not instruct your broker, bank or other
nominee to vote your shares, the “unvoted” proxy will have the same effect as a
vote “against”
the plan of conversion and “against” the
contribution to the charitable foundation.
Q. MAY
I PLACE AN ORDER TO PURCHASE SHARES IN THE OFFERING, IN ADDITION TO THE SHARES
THAT I WILL RECEIVE IN THE EXCHANGE?
A. Yes. Eligible
depositors and certain borrowers of Capitol Federal Savings Bank have priority
subscription rights allowing them to purchase common stock in a subscription
offering. Shares not purchased in the subscription offering are
expected to be sold to the public, including CFF stockholders, in a community
offering, as described herein. In the event orders for Capitol
Federal Financial, Inc. common stock in a community offering exceed the number
of shares available for sale, shares may be allocated (to the extent shares
remain available) first to cover orders of natural persons residing
in the counties and metropolitan statistical areas in which we have
offices; second to cover orders of CFF stockholders as of [ ],
2010; and thereafter to cover orders of the general
public. Stockholders of CFF are subject to an ownership
limitation. Shares of common stock that you purchase in the offering
individually and together with associates and persons acting in concert, 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. If
you would like to receive a prospectus and stock order form, you must call our
Stock Information Center at 1-800-[ ], Monday
through Friday between 10:00 a.m. and 4:00 p.m., Central Time. The
Stock Information Center is closed weekends and bank
holidays.
Q. WILL
THE CONVERSION HAVE ANY EFFECT ON DEPOSIT AND LOAN ACCOUNTS AT CAPITOL FEDERAL
SAVINGS BANK?
A. No. The
account number, amount, interest rate and withdrawal rights of deposit accounts
will remain unchanged. Deposits will continue to be federally insured
by the Federal Deposit Insurance Corporation up to the legal
limit. Loans and rights of borrowers will not be
affected. Depositors will no longer have voting rights in the mutual
holding company, which will cease to exist, after the conversion and
offering. Only stockholders of Capitol Federal Financial, Inc. will
have voting rights after the conversion and offering.
Q. WHAT
IF THE PLAN OF CONVERSION AND REORGANIZATION IS APPROVED BUT THE CONTRIBUTION
TO
THE CHARITABLE FOUNDATION IS NOT APPROVED?
A. The
contribution to the charitable foundation will only be made if both proposals
are approved. If the contribution to the
charitable foundation is not approved, our board of directors will complete the
conversion and stock offering without the contribution to the
charitable foundation.
OTHER
QUESTIONS?
For
answers to other questions, please read this proxy
statement/prospectus. Questions about voting on the plan of
conversion or other matters to be considered at the special meeting may be
directed to our proxy information agent, [ ],
at [ ],
Monday through Friday from [ ]
to [ ],
Central Time. Questions about the stock offering may be directed to
our Stock Information Center at 1-800-[ ],
Monday through Friday between 10:00
a.m. and 4:00
p.m., Central Time. The Stock Information Center is closed
weekends and bank holidays.
4
This
summary highlights material information from this proxy statement/prospectus and
may not contain all the information that is important to you. To
understand the conversion and other proposals fully, you should read this entire
document carefully, including the sections entitled “Risk Factors,” “Proposal 1
— Approval of The Plan of Conversion and Reorganization,” “Proposal 2
—Contribution to the Charitable Foundation,” “Proposal 3 — Adjournment of the
Special Meeting,” “Proposals 4a through 4d — Informational Proposals Related to
the Articles of Incorporation and Bylaws of Capitol Federal Financial, Inc.” and
the consolidated financial statements and the notes to the consolidated
financial statements.
The
Capitol Federal Financial Special
Meeting
Date,
Time and Place. CFF will hold its special meeting of
stockholders at
[ ]
Topeka, Kansas., on [ ], 2010, at
[ ], Central Time.
The
Proposals. Stockholders will be voting on the following
proposals at the special meeting:
1.
Approval
of a plan of conversion pursuant to which: (a) Capitol Federal Savings Bank
MHC, which currently owns 71% of the common stock of CFF, will merge with and
into CFF, with CFF being the surviving entity, (b) CFF will merge with and
into Capitol Federal Financial, Inc., a Maryland corporation recently formed to
be the holding company for Capitol Federal Savings Bank, with Capitol Federal
Financial, Inc. being the surviving entity, (c) the outstanding shares of
CFF, other than those held by Capitol Federal Savings Bank MHC, will be
converted into shares of common stock of Capitol Federal Financial, Inc., and
(d) Capitol Federal Financial, Inc. will offer shares of its common stock
for sale in a subscription offering and community offering, and, if necessary, a
syndicated offering;
2.
The
contribution of $40 million in cash to the
Capitol Federal Foundation, a Kansas corporation not-for-profit
that is dedicated to charitable purposes within the communities in which Capitol
Federal Savings Bank conducts its business;
3.
Approval
of the adjournment of the special meeting, if necessary, to solicit additional
proxies in the event that there are not sufficient votes at the time of the
special meeting to approve the plan of conversion and/or the contribution to the
Capitol Federal Foundation;
4. The
following informational proposals:
4a. Approval
of a provision in Capitol Federal Financial, Inc.’s articles of incorporation to
limit the ability of stockholders to remove directors;
4b. super-majority
vote to approve certain amendments to Capitol Federal Financial, Inc.’s articles
of incorporation;
4c
Approval of a provision in Capitol Federal Financial, Inc.’s articles of
incorporation requiring a super-majority vote of stockholders to approve
stockholder-proposed amendments to Capitol Federal Financial, Inc.’s
bylaws;
4d. Approval
of a provision in Capitol Federal Financial, Inc.’s articles of incorporation to
limit the voting rights of shares beneficially owned in excess of 10% of Capitol
Federal Financial, Inc.’s outstanding voting stock; and
5. Such
other business that may properly come before the meeting.
The
provisions of Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws which are summarized as informational proposals 4a through 4d were
approved as part of the process in which our Board of Directors approved the
plan of conversion. These proposals are informational in nature only,
because the Office of Thrift Supervision’s regulations governing mutual-to-stock
conversions do not provide for a separate vote on these matters apart from the
vote on the plan of conversion. While we are asking you to vote with
respect to each of the informational proposals listed above, the proposed
provisions for which an informational vote is requested will become effective if
stockholders approve the plan of conversion, regardless of whether stockholders
vote to approve any or all of the informational proposals. The
provisions of Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws which are summarized as informational proposals may have the effect of
deterring or rendering more difficult attempts by third parties to obtain
control of Capitol Federal Financial, Inc., if such attempts are not approved by
the Board of Directors, or may make the removal of the Board of Directors or
management, or the appointment of new directors, more difficult.
5
Vote
Required for Approval of Proposals by the Stockholders of Capitol Federal Financial
Proposal
1: Approval of the Plan of Conversion. We must obtain the
affirmative vote of (i) two-thirds of
the total number of votes entitled to be cast by CFF stockholders at the special
meeting, including shares held by Capitol Federal Savings Bank MHC, and
(ii) a majority of the total number of votes entitled to be cast by CFF
stockholders at the special meeting other than Capitol Federal Savings Bank
MHC.
Proposal
2: Approval of the Contribution to the Charitable Foundation. The
contribution of $40 million in cash to the Capitol Federal Foundation must be
approved by at least a majority of the total number of votes entitled to be cast
at the special meeting by CFF stockholders, and by at least a majority of the
total number of votes entitled to be cast at the special meeting by CFF
stockholders other than Capitol Federal Savings Bank MHC.
Proposal
3: Approval of the adjournment of the special meeting. We must
obtain the affirmative vote of a majority of the total number of votes cast at
the special meeting by CFF stockholders to adjourn the special meeting, if
necessary, to solicit additional proxies in the event that there are not
sufficient votes at the time of the special meeting to approve the plan of
conversion and/or the contribution to the Capitol Federal
Foundation.
Informational
Proposals 4a through 4d. The provisions of Capitol Federal
Financial, Inc.’s articles of incorporation and bylaws which are summarized as
informational proposals were approved as part of the process in which the Board
of Directors of CFF approved the plan of conversion. While we are
asking you to vote with respect to each of the informational proposals listed
above, the proposed provisions for which an informational vote is requested will
become effective if stockholders approve the plan of conversion, regardless of
whether stockholders vote to approve any or all of the informational
proposals.
The
Companies
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 71% of the issued and outstanding shares as of May 28,
2010. After the completion of the conversion, Capitol Federal Savings
Bank MHC will cease to exist.
Capitol
Federal Financial. CFF is a
federally chartered stock holding company that owns all of the outstanding
common stock of Capitol Federal Savings Bank. At March 31, 2010, CFF
had consolidated assets of $8.49 billion, deposits of $4.32 billion and
stockholders’ equity of $946.1 million. After the completion of the
conversion, CFF will cease to exist, and will be succeeded by Capitol Federal
Financial, Inc. As of May 28, 2010, CFF had 73,990,478 shares of
common stock issued and outstanding, of which 52,192,817 shares were owned by
Capitol Federal Savings Bank MHC. The remaining 21,797,661 shares of
CFF common stock outstanding as of that date were held by the
public.
Capitol
Federal Savings Bank. Capitol
Federal Savings Bank is a federally chartered stock savings bank headquartered
in Topeka, Kansas. Capitol Federal Savings Bank was 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.
6
Plan
of Conversion and Reorganization
The
Boards of Directors of CFF, Capitol Federal Savings Bank MHC, Capitol Federal
Savings Bank and Capitol Federal Financial, Inc. have adopted a plan of
conversion pursuant to which Capitol Federal Savings Bank will reorganize from a
mutual holding company structure to a stock holding company
structure. Public stockholders of CFF will receive shares of Capitol
Federal Financial, Inc. in exchange for their shares of CFF common stock based
on an exchange ratio. This conversion to a stock holding company
structure also includes the offering by Capitol Federal Financial, Inc. of
shares of its common stock to eligible depositors and certain borrowers of
Capitol Federal Savings Bank in a subscription offering and, if necessary, to
the public in a community offering and/or syndicated
offering. Following the conversion and offering, Capitol Federal
Savings Bank MHC and CFF will no longer exist, and Capitol Federal Financial,
Inc. will be the parent company of Capitol Federal Savings Bank.
The
conversion and offering cannot be completed unless the stockholders of CFF
approve the plan of conversion. CFF’s stockholders will vote on the
plan of conversion at CFF’s special meeting. This document is the
proxy statement used by CFF’s Board of Directors to solicit proxies for the
special meeting. It is also the prospectus of Capitol Federal
Financial, Inc. regarding the shares of Capitol Federal Financial, Inc. common
stock to be issued to CFF’s stockholders in the share exchange. This
document does not serve as the prospectus relating to the offering by Capitol
Federal Financial, Inc. of its shares of common stock in the subscription
offering and any community offering or syndicated offering, which will be made
pursuant to a separate prospectus.
In
connection with the conversion and offering, Capitol Federal Financial, Inc.
also intends to contribute to the Capitol Federal Foundation $40 million
in cash. The contribution to the foundation must be approved by the
stockholders of Capitol Federal Financial. Stockholder approval of
the contribution to the charitable foundation is not, however, a condition to
the completion of the conversion and offering.
Our
Current Organizational Structure
In 1999,
CFF became the mid-tier stock holding company of Capitol Federal Savings Bank,
owning 100% of Capitol Federal Savings Bank’s stock, and conducted an initial
public offering by selling a minority of CFF’s 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 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 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) they had in CFF
immediately prior to the completion of the conversion and
offering.
7
The
following diagram shows our current organizational structure:
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 are expected to 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;
|
8
|
●
|
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.
|
Conditions
to Completion of the Conversion
The
Office of Thrift Supervision has conditionally approved the plan of conversion;
however, this approval does not constitute a recommendation or endorsement of
the plan of conversion by that agency.
We cannot
complete the conversion unless:
|
●
|
The
plan of conversion 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
whose loan remains outstanding on the voting record
date);
|
|
●
|
The
plan of conversion 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 71% 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 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;
|
|
●
|
We
sell at least the minimum number of shares of common stock offered;
and
|
|
●
|
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 by that
agency.
|
Subject
to member, stockholder and regulatory approvals, we intend to fund the
charitable foundation in connection with the conversion. Member and
stockholder approval of the contribution to the Capitol Federal Foundation,
however, 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 in favor of the contribution to the charitable
foundation. At May 28, 2010, Capitol Federal Savings Bank MHC owned
71% of the outstanding shares of common stock of CFF. The directors,
chairman emeritus and executive officers of CFF and their affiliates owned
2,073,629 shares of CFF, or 2.8% of the outstanding shares of common stock as of
May 28, 2010. They have indicated their intention to vote those
shares in favor of the plan of conversion and in favor of the contribution to
the charitable foundation.
The
Exchange of Existing Shares of CFF
Common Stock
Each
publicly held share of CFF common stock, on the effective date of the
conversion, will be 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, excluding any new shares purchased by them
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 Capitol Federal Financial, Inc. prepared by RP
Financial, LC. and the number of shares of common stock sold in the
offering.
9
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 CFF common stock
issued and outstanding as of March 31, 2010. 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
|
144,500,000 | 70.6 | % | 60,328,085 | 29.4 | % | 204,828,085 | 2.7686 | 276 | |||||||||||||||||||
|
Midpoint
|
170,000,000 | 70.6 | % | 70,974,218 | 29.4 | % | 240,974,218 | 3.2572 | 325 | |||||||||||||||||||
|
Maximum
|
195,500,000 | 70.6 | % | 81,620,351 | 29.4 | % | 277,120,351 | 3.7457 | 374 | |||||||||||||||||||
No
fractional shares of CFF common stock will be issued to any public stockholder
of CFF. For each fractional share that would otherwise be issued, CFF
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. See “Proposal 1 - Approval of the Plan of Conversion and
Reorganization -- Exchange of Existing Stockholders’ Stock
Certificates.”
Outstanding
options to purchase shares of CFF common stock 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 March 31,
2010, there were 412,931 outstanding options to purchase shares of CFF common
stock, 309,731 of which have vested. Such options will be converted
into options to purchase 1,143,240 shares of common stock at the minimum of the
offering range and 1,546,715 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.
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. is
an appraisal firm experienced in appraisals of financial
institutions. RP Financial, LC. has estimated that, as of May 28,
2010, this estimated pro forma market value was $2.41 billion. Based
on regulation, the market value is the midpoint of a range with a minimum of
$2.05 billion and a maximum of $2.77 billion. Based on this
valuation, the regulatory established range, the 71% 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 144,500,000 shares to
195,500,000 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 2.7686
shares at the minimum of the offering range to 3.7457 shares
at the maximum of the offering range in order to preserve the existing
percentage ownership of public stockholders of CFF in 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).
10
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 March 31, 2010.
|
Company
Name and Ticker Symbol
|
Exchange
|
Headquarters
|
Total
Assets
(in
millions)
|
|||||
|
Washington
Federal, Inc. (WFSL)
|
NASDAQ
|
Seattle,
WA
|
$ | 13,803 | ||||
|
NewAlliance
Bancshares (NAL)
|
NYSE
|
New
Haven, CT
|
$ | 8,501 | ||||
|
Flushing
Financial Corp. (FFIC)
|
NASDAQ
|
Lake
Success, NY
|
$ | 4,183 | ||||
|
Dime
Community Bancshares (DCOM)
|
NASDAQ
|
Brooklyn,
NY
|
$ | 4,114 | ||||
|
TrustCo
Bank Corp NY (TRST)
|
NASDAQ
|
Glenville,
NY
|
$ | 3,719 | ||||
|
Bank
Mutual Corp. (BKMU)
|
NASDAQ
|
Milwaukee,
WI
|
$ | 3,445 | ||||
|
First
Financial Holding Inc. (FFCH)
|
NASDAQ
|
Charleston,
SC
|
$ | 3,381 | ||||
|
Provident
NY Bancorp, Inc. (PBNY)
|
NASDAQ
|
Montebello,
NY
|
$ | 2,936 | ||||
|
Brookline
Bancorp, Inc. (BRKL)
|
NASDAQ
|
Brookline,
MA
|
$ | 2,639 | ||||
|
Danvers
Bancorp, Inc. (DNBK)
|
NASDAQ
|
Danvers,
MA
|
$ | 2,455 | ||||
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 March 31, 2010, stock price
information as of May 28, 2010, as reflected in RP Financial, LC.’s appraisal
report, dated May 28, 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
premium of 83.6% on a price-to-core earnings basis and a discount of 23.0% on a
price-to-tangible book value 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
|
27.38 | x | 92.00 | % | ||||
|
Midpoint
|
31.27 | x | 98.04 | % | ||||
|
Maximum
|
34.95 | x | 103.09 | % | ||||
|
Valuation
of peer group companies,
as
of May 28, 2010
|
||||||||
|
Average
|
19.04 | x | 133.93 | % | ||||
|
Median
|
16.84 | x | 133.17 | % | ||||
|
(1)
|
Information
is derived from the RP Financial, LC. appraisal report and is based upon
estimated core earnings for the twelve months ended March 31,
2010. 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 junior subordinated debentures (debentures).
11
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 Contribution to the Charitable
Foundation.”
RP
Financial, LC. will update the independent appraisal prior to the completion of
the conversion. If the estimated appraised value changes to either
below $2.05 billion
or above $2.77 billion,
then, after consulting with the Office of Thrift Supervision, we may: terminate
the offering and promptly return all funds; set a new offering range, promptly
return all funds and give all subscribers updated information and the
opportunity to place a new order; 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.”
How
We Intend to Use the Proceeds From the Offering
Assuming
we sell 195,500,000 shares
of common stock in the stock offering, equal to the maximum of the offering
range, and we have net proceeds of $1.88 billion,
we intend to distribute the net proceeds as follows:
|
●
|
$941.8
million (50.0% of the net proceeds) will be invested in Capitol Federal
Savings Bank;
|
|
●
|
$78.2 million
(4.2% 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
(2.1% of the net proceeds) will be contributed by Capitol Federal
Financial, Inc. to the Capitol Federal
Foundation;
|
|
●
|
$53.6
million (2.8% of the net proceeds) will be used by Capitol Federal
Financial, Inc. to repay outstanding debentures;
and
|
|
●
|
$770.0 million
(40.9% 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, including loan purchases, 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.
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 7,820,000 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 6.2% of
the shares outstanding following the conversion. 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 7,820,000
shares in the offering, 4.0% of the maximum of the offering range, we will
recognize additional compensation expense, after tax, of approximately $1.6
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.
12
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
3,910,000 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 9,775,000 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. We intend to
fund the stock-based incentive plan through open market purchases rather than
through the issuance of authorized but unissued shares of common stock, subject
to future market conditions and regulatory limitations described
below. 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.
|
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
|
5,780,000 | 7,820,000 | 4.00 | % |
NA
|
% | $ | 57,800 | $ | 78,200 | ||||||||||||||
|
Restricted
stock awards
|
2,890,000 | 3,910,000 | 2.00 | 1.39 | % | 28,900 | 39,100 | |||||||||||||||||
|
Stock options
|
7,225,000 | 9,775,000 | 5.00 | 3.41 | % | 17,557 | 23,753 | |||||||||||||||||
|
Total
|
15,895,000 | 21,505,000 | 11.00 | % | 4.71 | % | $ | 104,257 | $ | 141,053 | ||||||||||||||
|
(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 $2.43 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 3.84%; and a volatility rate of 23.90%. 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.
|
13
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 March 31, 2010 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 277,120,351 shares are outstanding
after the offering, which includes the sale of 195,500,000 shares in the
offering at the maximum of the offering range, and the issuance of shares in
exchange for shares of CFF common stock using an exchange ratio of
3.7457. It also assumes that the value of the stock is $10.00 per
share.
|
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
|
Employees
|
9,317,425 | (1) | $ | 93,174,250 | 3.36 | % | |||||||
|
New
employee stock ownership plan
|
Employees
|
7,820,000 | 78,200,000 | 2.82 | ||||||||||
|
Total
employee stock ownership plan
|
Employees
|
17,137,425 | 171,374,250 | 6.18 | ||||||||||
|
Existing
shares of restricted stock
|
Directors,
Officers and Employees
|
593,645 | (2) | 5,936,448 | 0.21 | |||||||||
|
New
shares of restricted stock
|
Directors,
Officers and Employees
|
3,910,000 | 39,100,000 | (3) | 1.41 | |||||||||
|
Total
shares of restricted stock
|
Directors,
Officers and Employees
|
4,503,645 | 45,036,448 | 1.62 | ||||||||||
|
Existing
stock options
|
Directors,
Officers and Employees
|
4,706,082 | (4) | 11,435,780 | 1.70 | |||||||||
|
New
stock options
|
Directors,
Officers and Employees
|
9,775,000 | 23,753,250 | (5) | 3.53 | |||||||||
|
Total
stock options
|
Directors,
Officers and Employees
|
14,481,082 | 35,189,030 | 5.23 | ||||||||||
|
Total
of stock-based incentive plans
|
36,122,152 | $ | 251,599,728 | 13.03 | % | |||||||||
|
(1)
|
As
of March 31, 2010, CFF’s existing employee stock ownership plan held
2,487,499 shares, of which 1,680,943 shares 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 underlying options 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 $2.43 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, 23.90%; and interest rate,
3.84%.
|
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.
14
|
Value
of Grants
|
|||||||||||||
|
2,890,000
Shares
Awarded
at Minimum of
|
3,400,000
Shares
Awarded
at Midpoint of
|
3,910,000
Shares
Awarded
at Maximum of
|
|||||||||||
|
Share
Price
|
Range
|
Range
|
Range
|
||||||||||
| $ | 8.00 | $ | 23,120,000 | $ | 27,200,000 | $ | 31,280,000 | ||||||
| 10.00 | 28,900,000 | 34,000,000 | 39,100,000 | ||||||||||
| 12.00 | 34,680,000 | 40,800,000 | 46,920,000 | ||||||||||
| 14.00 | 40,460,000 | 47,600,000 | 54,740,000 | ||||||||||
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.
|
Value
of Grants
|
|||||||||||||||||
|
Exercise
Price
|
Option
Value
|
7,225,000
Options
at
Minimum
of
Range
|
8,500,000
Options
at
Midpoint
of
Range
|
9,775,000
Options
at
Maximum
of
Range
|
|||||||||||||
| $ |
8.00
|
$ | 1.94 | $ | 14,016,500 | $ | 16,490,000 | $ | 18,963,500 | ||||||||
|
10.00
|
2.43 | 17,556,750 | 20,655,000 | 23,753,250 | |||||||||||||
|
12.00
|
2.92 | 21,097,000 | 24,820,000 | 28,543,000 | |||||||||||||
|
14.00
|
3.40 | 24,565,000 | 28,900,000 | 33,235,000 | |||||||||||||
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 proxy statement/prospectus carefully, including, but not limited to,
the section entitled “Risk Factors” beginning on page
[ ].
Our
Dividend Policy
During
the three months ended March 31, 2010, 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 per share. It is currently anticipated that
the dividend yield will be 3.0%, based on the $10.00 per share offering
price. We intend to continue our prior practice and pay a special
year-end dividend when earnings are sufficient to support the special dividend
payment. We expect that the timing of quarterly and special dividend
payments will be consistent with our current practice. 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 5,460,090 and 7,314,728 shares of common
stock, or 2.67% and 2.64% of our total outstanding shares of common stock, at
the minimum and the maximum of the offering range, respectively.
15
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.
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. 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.
Changes
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 all of its stockholders. The differences in
stockholder rights in the articles of incorporation and bylaws of Capitol
Federal Financial, Inc. include the following: (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
certain provisions of new business or to nominate directors; (iii) limitation on
voting rights of stockholders owning more than 10% of the outstanding shares of
Capitol Federal Financial, Inc.; and (iv) approval by at least 80% of
outstanding shares 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.
We
Intend to Contribute 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 $40
million in cash to the Capitol Federal Foundation as part of the
conversion. As a result of the cash contribution, we expect to record
an after-tax expense of $24.7 million
during the quarter in which the conversion is completed.
“See Proposal 2 -
Contribution to the Charitable Foundation.”
Dissenters’
Rights
Stockholders
of CFF do not have dissenters’ rights in connection with the conversion and
offering.
Important
Risks in Owning Capitol Federal
Financial, Inc.’s
Common Stock
Before
you decide to purchase stock, you should read the “Risk Factors” section
beginning on page [ ] of this proxy
statement/prospectus.
16
You
should consider carefully the following risk factors when deciding how to vote
on the conversion and before purchasing shares of Capitol Federal Financial,
Inc. common stock.
Risks
Related to Our Business
[same
as pages 19-23 of the offering prospectus]
Risks
Related to the Offering and Exchange
The
market value of Capitol Federal Financial, Inc. common stock received in the
share exchange may be less than the market value of CFF common stock
exchanged.
The
number of shares of Capitol Federal Financial, Inc. common stock you receive
will be based on an exchange ratio that will be determined as of the date of
completion of the conversion and offering. The exchange ratio will be
based on the percentage of CFF common stock held by the public prior to the
completion of the conversion and offering and the number of shares of common
stock sold in the offering. The exchange ratio will ensure that
existing public shareholders of CFF will own approximately the same percentage
of Capitol Federal Financial, Inc. common stock after the conversion and
offering as they owned of CFF common stock immediately prior to completion of
the conversion and offering, exclusive of the effect of their purchase of
additional shares in the offering and the receipt of cash in lieu of fractional
shares. The exchange ratio will not depend on the market price of CFF
common stock.
The exchange ratio ranges
from a minimum of 2.7686 to a maximum of 3.7457 shares of Capitol Federal
Financial, Inc. common stock per share of CFF common stock. Shares of
Capitol Federal Financial, Inc. common stock issued in the share exchange will
have an initial value of $10.00 per share. Depending on the exchange
ratio and the market value of CFF common stock at the time of the exchange, the
initial market value of the Capitol Federal Financial, Inc. common stock that
you receive in the share exchange could be less than the market value of the CFF
common stock that you currently own. Based on the most recent closing
price of CFF common stock prior to the date of this proxy statement/prospectus,
which was $[ ], unless at least
[ ] shares of Capitol Federal Financial, Inc.
common stock are sold in the offering (slightly [above][below] the [midpoint] of
the offering range), the initial value of the Capitol Federal Financial, Inc.
common stock you receive in the share exchange would be less than the market
value of the CFF common stock you currently own. See “Proposal
1—Approval of the Plan of Conversion and Reorganization—Share Exchange Ratio for
Current Stockholders.”
[same
as pages 23-26 of the offering prospectus]
17
General
This
proxy statement/prospectus is being furnished to you in connection with the
solicitation by the Board of Directors of CFF of proxies to be voted at the
special meeting of stockholders to be held at
[ ]
Topeka, Kansas, on
[ ],
2010, at [ ],
Central Time, and any adjournment or postponement thereof.
The
purpose of the special meeting is to consider and vote upon:
|
●
|
The
Plan of Conversion of Capitol Federal Savings Bank MHC,
and
|
|
●
|
The
contribution of $40 million in cash to the charitable
foundation.
|
In
addition, stockholders will vote on a proposal to approve the adjournment of the
special meeting, if necessary, to solicit additional proxies in the event that
there are not sufficient votes at the time of the special meeting to approve the
plan of conversion and/or the contribution to the Capitol Federal
Foundation. Stockholders also will vote on informational proposals
with respect to the articles of incorporation and bylaws of Capitol Federal
Financial, Inc.
The plan
of conversion provides for a series of transactions, referred to as the
conversion and offering, which will result in the elimination of the mutual
holding company. The plan of conversion will also result in (i) the
creation of a new stock holding company, referred to in this document as Capitol
Federal Financial, Inc., which will own all of the outstanding shares of Capitol
Federal Savings Bank, (ii) the exchange of shares of common stock of CFF by
stockholders other than Capitol Federal Savings Bank MHC, who are referred to as
the “public stockholders,” for shares of Capitol Federal Financial, Inc., and
(iii) the issuance and the sale of additional shares to depositors and certain
borrowers of Capitol Federal Savings Bank and others in an
offering.
We cannot
complete the conversion unless:
|
●
|
The
plan of conversion 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
whose loan remains outstanding on the voting record
date);
|
|
●
|
The
plan of conversion 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 71% 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 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;
|
|
●
|
We
sell at least the minimum number of shares of common stock offered;
and
|
|
●
|
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 by that
agency.
|
18
Voting
for or against the plan of conversion includes a vote for or against the
conversion of Capitol Federal Savings Bank MHC to a stock holding company as
contemplated by the plan of conversion. Voting in favor of the plan
of conversion will not obligate you to purchase any shares of common stock in
the offering and will not affect the balance, interest rate or federal deposit
insurance of any deposits at Capitol Federal Savings Bank.
Who
Can Vote at the Meeting
You are
entitled to vote your CFF common stock if our records show that you held your
shares as of the close of business on [ ],
2010. If your shares are held in a stock brokerage account or by a
bank or other nominee, you are considered the beneficial owner of shares held in
street name and these proxy materials are being forwarded to you by your broker
or nominee. As the beneficial owner, you have the right to direct
your broker or nominee how to vote.
As of the
close of business on May 28, 2010, there were 73,990,478
shares of CFF common stock outstanding. Each share of common
stock has one vote.
Attending
the Meeting
If you
are a stockholder as of the close of business on [ ],
2010, you may attend the meeting. However, if you hold your shares in
street name, you will need proof of ownership to be admitted to the
meeting. A recent brokerage statement or a letter from your bank or
broker, are examples of proof of ownership. If you want to vote your
shares of CFF common stock held in street name in person at the meeting, you
will have to get a written proxy in your name from the broker, bank or other
nominee who holds your shares.
Quorum;
Vote Required
The
special meeting will be held only if there is a quorum. A quorum
exists if a majority of the outstanding shares of common stock entitled to vote,
represented in person or by proxy, is present at the meeting. If you
return valid proxy instructions or attend the meeting in person, your shares
will be counted for purposes of determining whether there is a quorum, even if
you abstain from voting. Broker non-votes also will be counted for
purposes of determining the existence of a quorum. A broker non-vote
occurs when a broker, bank or other nominee holding shares for a beneficial
owner does not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received voting
instructions from the beneficial owner.
Proposal
1: Approval of the Plan of Conversion and Reorganization. We
must obtain the affirmative vote of the holders of (i) two-thirds of
the total number of votes entitled to be cast by CFF stockholders at the special
meeting, including shares held by Capitol Federal Savings Bank MHC, and
(ii) a majority of the total number of votes entitled to be cast by CFF
stockholders at the special meeting other than Capitol Federal Savings Bank
MHC. Abstentions, broker non-votes and the failure to vote on this
proposal will have the same effect as a vote against the
proposal.
Proposal
2: Approval of the Contribution to the Charitable Foundation. The $40
million cash contribution to the Capitol Federal Foundation must be approved by
at least a majority of the total number of votes entitled to be cast at the
special meeting by CFF stockholders, and by at least a majority of the total
number of votes entitled to be cast at the special meeting by CFF stockholders
other than Capitol Federal Savings Bank MHC.
Proposal
3: Approval of the Adjournment of the Special Meeting. We must
obtain the affirmative vote of a majority of the votes cast by CFF stockholders
entitled to vote at the special meeting to adjourn the special meeting, if
necessary, to solicit additional proxies in the event that there are not
sufficient votes at the time of the special meeting to approve the plan of
conversion and/or the proposal to fund the Capitol Federal
Foundation. Abstentions from voting on this proposal will have the
same effect as a vote against the proposal. Broker non-votes have no
effect on this proposal.
Informational
Proposals 4a through 4d. The provisions of Capitol Federal
Financial, Inc.’s articles of incorporation and bylaws which are summarized as
informational proposals were approved as part of the process in which the Board
of Directors of CFF approved the plan of conversion. These proposals
are informational in nature only, because the Office of Thrift Supervision’s
regulations governing mutual-to-stock conversions do not provide for separate
votes on these matters apart from the vote on the plan of
conversion. While we are asking you to vote with respect to each of
the informational proposals listed above, the proposed provisions for which an
informational vote is requested will become effective if stockholders approve
the plan of conversion, regardless of whether stockholders vote to approve any
or all of the informational proposals.
19
Shares
Held by Our Directors and Executive Officers and Capitol Federal Savings Bank
MHC
As of
May
28, 2010, the directors, chairman emeritus and executive officers of CFF
beneficially owned 2,073,629
shares, or 2.8%
of the outstanding shares of CFF common stock, and Capitol Federal Savings Bank
MHC owned 52,192,817 shares, or 71% of the outstanding shares of CFF common
stock. Capitol Federal Savings Bank MHC intends to vote all of its
shares in favor of proposals set forth in this proxy
statement/prospectus.
Voting
by Proxy; Revocability of Proxies
Our Board
of Directors is sending you this proxy statement/prospectus to request that you
allow your shares of CFF common stock to be represented at the special meeting
by the persons named in the enclosed proxy card. All shares of CFF
common stock represented at the meeting by properly executed and dated proxies
will be voted according to the instructions indicated on the proxy
card. If you sign, date and return a proxy card without giving voting
instructions, your shares will be voted as recommended by our Board of
Directors. Our Board of Directors recommends that you vote “FOR”
approval of the plan of conversion, “FOR”
approval of the contribution to the charitable foundation, “FOR”
approval of the adjournment of the special meeting if necessary, and “FOR”
each of the Informational Proposals 4a through 4d.
If any
matters not described in this proxy statement/prospectus are properly presented
at the special meeting, the Board of Directors will use their judgment to
determine how to vote your shares. We do not know of any other
matters to be presented at the special meeting.
You may
revoke your proxy at any time before the vote is taken at the special
meeting. If you are a registered stockholder, you may revoke your
proxy and change your vote at any time before the polls close at the meeting
by:
|
●
|
signing
another proxy with a later date;
|
|
●
|
voting
by telephone or on the Internet -- your latest telephone or Internet vote
will be counted;
|
|
●
|
giving
written notice of the revocation of your proxy to the Secretary of CFF
prior to the special meeting; or
|
|
●
|
voting
in person at the special meeting. Attendance at the special
meeting will not in itself constitute revocation of your
proxy.
|
If you
have instructed a broker, bank or other nominee to vote your shares, you must
follow directions received from your nominee to change those
instructions.
Solicitation
of Proxies
This
proxy statement/prospectus and the accompanying proxy card are being furnished
to you in connection with the solicitation of proxies for the special meeting by
the Board of Directors. CFF will pay the costs of soliciting proxies
from its stockholders. To the extent necessary to permit approval of
the plan of conversion and the other proposals being considered, Regan &
Associates, Inc., our proxy solicitor, directors, officers or employees of CFF
and Capitol Federal Savings Bank may solicit proxies by mail, telephone and
other forms of communication. We will reimburse such persons for
their reasonable out-of-pocket expenses incurred in connection with such
solicitation. For its services as information agent and stockholder
proxy solicitor, we will pay Regan & Associates, Inc., $40,000 plus
out-of-pocket expenses and charges for telephone calls in connection with the
solicitation.
20
We will
also reimburse banks, brokers, nominees and other fiduciaries for the expenses
they incur in forwarding the proxy materials to you.
Participants
in the Employee Stock Ownership Plan
If you
participate in our Employee Stock Ownership Plan (the “ESOP”) you will receive a
voting instruction form that reflects all shares you may direct the trustees to
vote on your behalf under the plan. Under the terms of the ESOP, each
participant instructs the trustee of the plan how to vote the shares of CFF
common stock allocated to his or her account. If a participant
properly executes the voting instruction card distributed by the trustee, the
trustee will vote the participant’s shares in accordance with the
instructions. Where properly executed voting instruction cards are
returned to the trustee with no specific instruction as to how to vote at the
special meeting, the trustee will vote the shares “FOR” each of the proposal’s
set forth in this proxy statement/prospectus. If a participant fails
to give timely voting instructions to the trustee with respect to the voting of
the common stock that is allocated to his or her ESOP account, the trustee will
vote such shares in the same proportion as shares of CFF common stock
for which the ESOP trustee has received timely voting instructions from ESOP
participants. The ESOP trustee, subject to the exercise of its fiduciary duties,
will vote all unallocated shares of CFF common stock held by the ESOP in the
same proportion as the allocated shares for which it has received timely voting
instructions.
The
Boards of Directors of CFF and Capitol Federal Savings Bank MHC have approved
the plan of conversion and reorganization, referred to herein as the plan of
conversion. The plan of conversion 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 and a special meeting of stockholders have been called for
this purpose. The Office of Thrift Supervision has conditionally
approved the plan of conversion; however, such approval does not constitute a
recommendation or endorsement of the plan of conversion by that
agency.
General
Pursuant
to the plan of conversion, 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 merged into 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. A diagram of
our corporate structure before and after the conversion is set forth in the
“Summary” section of this proxy statement/prospectus. Under the plan
of conversion, 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 as described
below.
Capitol
Federal Financial, Inc. intends to contribute between $695.4 million and $941.8
million of net proceeds to Capitol Federal Savings Bank and to retain between
$543.9 million and $770.0 million of the net proceeds (excluding the portion of
the net proceeds loaned to our employee stock ownership plan, the cash
contributed to the charitable foundation and the repayment of our subordinated
debentures). 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.
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 2.7686
exchange shares for each publicly held share of CFF at the minimum of the
offering range to 3.7457 exchange shares for each publicly held share of CFF at
the maximum of the offering range.
21
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 CFF common stock
issued and outstanding as of March 31, 2010. 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
|
144,500,000 | 70.6 | % | 60,328,085 | 29.4 | % | 204,828,085 | 2.7686 | 276 | |||||||||||||||||||
|
Midpoint
|
170,000,000 | 70.6 | % | 70,974,218 | 29.4 | % | 240,974,218 | 3.2572 | 325 | |||||||||||||||||||
|
Maximum
|
195,500,000 | 70.6 | % | 81,620,351 | 29.4 | % | 277,120,351 | 3.7457 | 374 | |||||||||||||||||||
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. 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.
22
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 require 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.
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, 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.
23
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.
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 are
paid.
Under the
plan of conversion, 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 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 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
(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, 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.”
24
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.
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.
25
The independent valuation states that as of May 28, 2010, the estimated pro
forma market value of Capitol Federal Financial, Inc. was $2.41
billion. Based on regulations, the market value is the midpoint of a
range with a minimum of $2.05 billion and a maximum of $2.77
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 71% 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 144,500,000
shares, the midpoint of the offering range will be 170,000,000 shares and the
maximum of the offering range will 195,500,000 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.
|
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 $2.05 billion or more than $2.77 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 $2.77 billion and
a corresponding increase in the offering range to more than 195,500,000 shares,
or a decrease in the minimum of the valuation range to less than $2.05 billion
and a corresponding decrease in the offering range to fewer than 144,500,000
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, return
all funds with interest, and all subscribers will be provided with updated
information and given the opportunity to place a new order.
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. 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.
26
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.”
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) $70.0 million
(7,000,000 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.
27
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) $70.0 million (7,000,000 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.
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 whose loan remains outstanding on the voting
record 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 $70.0 million (7,000,000
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.
28
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:
(i)
Natural
persons residing in the counties and metropolitan statistical areas in which we
have a home or branch office;
(ii)
CFF’s public stockholders as of [ ],
2010; and
(iii) Other
members of the general public.
Purchasers in the
community offering may purchase up to $70.0 million (7,000,000 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.
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 will begin at the same time as
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
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 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
offering, any person may purchase up to $70.0 million (7,000,000 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 offering. Unless the Office of
Thrift Supervision permits otherwise, accepted orders for Capitol Federal
Financial, Inc. common stock in the syndicated 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 offering begins during the community offering, the syndicated
offering will begin as soon as possible after the completion of the subscription
and community offerings.
29
If a
syndicated 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 offering. The syndicated
offering will be conducted in accordance with certain Securities and Exchange
Commission rules applicable to best efforts offerings. Under these rules,
Sandler O’Neill & Partners, L.P., Keefe Bruyette & Woods, Inc. or the
other broker-dealers participating in the syndicated offering generally will
accept payment for shares of common stock to be purchased in the syndicated
offering through a sweep arrangement, provided we have received subscriptions to
meet the minimum of the offering range, under which a customer’s brokerage
account at the applicable participating broker-dealer will be debited in the
amount of the purchase price for the shares of common stock that such customer
wishes to purchase in the syndicated offering on the settlement date.
Participating broker-dealers will only sell to customers who have accounts at
the participating broker-dealer and who authorize the broker-dealer to debit
their accounts. Customers who authorize participating broker-dealers to debit
their brokerage accounts are required to have the funds for the payment in their
accounts on, but not before, the settlement date. Certain investors may pay
Sandler O’Neill & Partners, L.P. or Keefe, Bruyette & Woods, Inc. for
shares purchased in the syndicated offering on the settlement date through the
services of the Depository Trust Company on a delivery versus payment basis. The
closing of the syndicated 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 offering, less fees and commissions payable, will be delivered
promptly to us. Normal customer ticketing will be used for order
placement.
If for
any reason we cannot affect a syndicated 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.
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:
|
(i)
|
No
person may purchase fewer than 25 shares of common
stock;
|
|
(ii)
|
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 7,000,000
shares;
|
|
(iii)
|
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;
|
|
(iv)
|
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 $70.0 million
(7,000,000 shares) of common stock in all categories of the offering
combined;
|
|
(v)
|
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
|
30
|
(vi)
|
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.
|
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:
|
(i)
|
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;
|
|
(ii)
|
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
|
|
(iii)
|
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.
|
The term
acting in concert means:
|
(i)
|
knowing
participation in a joint activity or interdependent conscious parallel
action towards a common goal whether or not pursuant to an express
agreement; or
|
|
(ii)
|
a
combination or pooling of voting or other interests in the securities of
an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or
otherwise.
|
A person
or company 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.
31
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:
|
●
|
consulting
with us as to the financial and securities market implications of the plan
of conversion and reorganization;
|
|
●
|
consulting
with us as to the financial and securities market implications of proposed
or actual changes in laws or regulations affecting
us;
|
|
●
|
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;
|
|
●
|
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);
|
|
●
|
assisting
in the design and implementation of a marketing strategy for the
offering;
|
|
●
|
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
|
|
●
|
providing
such other general advice and assistance we may request to promote the
successful completion of the
offering.
|
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 offering, we will pay (i) a management fee of
1.00% of the aggregate dollar amount of the common stock sold in the syndicated
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 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 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.
32
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.
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.
33
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.
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. 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.
34
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:
|
(i)
|
personal
check, bank check or money order, made payable to Capitol Federal
Financial, Inc.; or
|
|
(ii)
|
authorization
of withdrawal from the types of Capitol Federal Savings Bank deposit
accounts designated on the stock order
form.
|
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 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.
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.
35
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
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. 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, within five business days following consummation of the
conversion.
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.
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.
36
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.
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.
37
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 Deloitte Tax LLP 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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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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38
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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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39
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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
reasoning in support of items 16 and 19 is set forth below. 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.
40
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
reasoning in support of the tax opinion as to item 17 is set forth
below. Silver, Freedman & Taff, L.L.P. understands
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.
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.
41
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.
The
Board of Directors recommends that you vote “FOR” the Plan of Conversion and
Reorganization of Capitol Federal Savings Bank MHC.
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 $14.4 million
in cash and other assets and 1,462,287 shares of CFF common stock, which will be
converted into 4,762,961 shares
of Capitol Federal Financial, Inc. common
stock based on the exchange ratio at the midpoint of the offering range, held by
the Capitol Federal Foundation at May 28, 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.
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.
42
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 has 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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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.
43
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.
Comparison
of Valuation and Pro Forma Data With and Without the Contribution to 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 $2.05 billion, $2.41
billion and $2.77 billion with the charitable foundation, as compared to
$2.10 billion, $2.47 billion and $2.84 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 six months ended March 31, 2010 at the
minimum, midpoint and maximum of the offering range, assuming the stock offering
was completed at the beginning of the six-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
|
$
|
1,445,000
|
$
|
1,483,250
|
$
|
1,700,000
|
$
|
1,745,000
|
$
|
1,955,000
|
$
|
2,006,750
|
||||||||||||
|
Estimated full
value
|
2,048,281
|
2,102,500
|
2,409,742
|
2,473,529
|
2,771,204
|
2,844,559
|
||||||||||||||||||
|
Total assets
|
9,711,184
|
9,770,532
|
9,942,354
|
10,007,821
|
10,173,525
|
10,245,111
|
||||||||||||||||||
|
Total
liabilities
|
7,485,783
|
7,485,783
|
7,485,783
|
7,485,783
|
7,485,783
|
7,485,783
|
||||||||||||||||||
|
Pro forma
stockholders’ equity
|
2,225,867
|
2,285,215
|
2,457,037
|
2,522,504
|
2,688,208
|
2,759,794
|
||||||||||||||||||
|
Pro forma net
income
|
41,611
|
42,094
|
42,730
|
43,242
|
43,848
|
44,390
|
||||||||||||||||||
|
Pro
forma stockholders’ equity per share
|
10.87
|
10.87
|
10.20
|
10.20
|
9.70
|
9.70
|
||||||||||||||||||
|
Pro forma net income
per share
|
0.21
|
0.21
|
0.18
|
0.18
|
0.16
|
0.16
|
||||||||||||||||||
|
Pro
forma pricing ratios:
|
||||||||||||||||||||||||
|
Offering
price as a percentage of pro forma
stockholders’
equity per share
|
92.00
|
%
|
92.00
|
%
|
98.04
|
%
|
98.04
|
%
|
103.09
|
%
|
103.09
|
%
|
||||||||||||
|
Offering
price to pro forma net income per share
|
23.81
|
x
|
23.81
|
x
|
27.78
|
x
|
27.78
|
x
|
31.25
|
x
|
31.25
|
x
|
||||||||||||
|
Pro
forma financial ratios:
|
||||||||||||||||||||||||
|
Return on assets
(annualized)
|
0.86
|
%
|
0.86
|
%
|
0.86
|
%
|
0.86
|
%
|
0.86
|
%
|
0.87
|
%
|
||||||||||||
|
Return on equity
(annualized)
|
3.74
|
3.68
|
3.48
|
3.43
|
3.26
|
3.22
|
||||||||||||||||||
|
Equity to
assets
|
22.92
|
23.39
|
24.71
|
25.21
|
26.42
|
26.94
|
||||||||||||||||||
44
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:
|
|
●
|
the
Office of Thrift Supervision may examine the charitable foundation at the
foundation’s expense;
|
|
|
●
|
the
charitable foundation must comply with all supervisory directives imposed
by the Office of Thrift
Supervision;
|
|
|
●
|
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;
|
|
|
●
|
the
charitable foundation must operate according to written policies adopted
by its board of directors, including a conflict of interest
policy;
|
|
|
●
|
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
|
|
|
●
|
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.
|
Within
six months of completing the conversion and stock offering, the foundation must
submit to the Office of Thrift Supervision a three-year operating
plan.
The
board of directors recommends that you vote “FOR” the contribution to the
Capitol Federal Foundation.
45
If there
are not sufficient votes to approve the plan of conversion or the contribution
to the Capitol Federal Foundation at the time of the special meeting, the
proposal may not be approved unless the special meeting is adjourned to a later
date or dates in order to permit further solicitation of proxies. In
order to allow proxies that have been received by CFF at the time of the special
meeting to be voted for an adjournment, if necessary, CFF has submitted the
question of adjournment to its stockholders as a separate matter for their
consideration. The Board of Directors of CFF recommends that
stockholders vote “FOR” the adjournment proposal. If it is necessary
to adjourn the special meeting, no notice of the adjourned special meeting is
required to be given to stockholders (unless the adjournment is for more than
30 days or if a new record date is fixed), other than an announcement at
the special meeting of the hour, date and place to which the special meeting is
adjourned.
The
Board of Directors recommends that you vote “FOR” the adjournment of the special
meeting, if necessary, to solicit additional proxies in the event that there are
not sufficient votes at the time of the special meeting to approve the plan of
conversion and/or the contribution to the Capitol Federal
Foundation.
By their
approval of the plan of conversion as set forth in Proposal 1, the Board of
Directors of CFF has approved each of the informational proposals numbered 4a
through 4d, all of which relate to provisions included in the articles of
incorporation or bylaws of Capitol Federal Financial, Inc. Each of
these informational proposals is discussed in more detail below.
As a
result of the conversion, the public stockholders of CFF, whose rights are
presently governed by the charter and bylaws of CFF, will become stockholders of
Capitol Federal Financial, Inc., whose rights will be governed by the articles
of incorporation and bylaws of Capitol Federal Financial, Inc. The
following informational proposals address the material differences between the
governing documents of the two companies. This discussion is
qualified in its entirety by reference to the charter and bylaws of CFF and the
articles of incorporation and bylaws of Capitol Federal Financial,
Inc. See “Where You Can Find Additional Information” for procedures
for obtaining a copy of those documents.
The
provisions of Capitol Federal Financial, Inc.’s articles of incorporation and
bylaws which are summarized as informational proposals 4a through 4d were
approved as part of the process in which the Board of Directors of CFF approved
the plan of conversion. These proposals are informational in nature
only, because the Office of Thrift Supervision’s regulations governing
mutual-to-stock conversions do not provide for a separate vote on these matters
apart from the vote on the plan of conversion. CFF’s stockholders are
not being asked to approve these informational proposals at the special
meeting. While we are asking you to vote with respect to each of the
informational proposals set forth below, the proposed provisions for which an
informational vote is requested will become effective if stockholders approve
the plan of conversion, regardless of whether stockholders vote to approve any
or all of the informational proposals. The provisions of Capitol
Federal Financial, Inc.’s articles of incorporation and bylaws which are
summarized as informational proposals may have the effect of deterring or
rendering more difficult attempts by third parties to obtain control of Capitol
Federal Financial, Inc., if such attempts are not approved by the Board of
Directors, or may make the removal of the Board of Directors or management, or
the appointment of new directors, more difficult.
Informational
Proposal 4a — Approval of a Provision in Capitol Federal Financial, Inc.’s
Articles of Incorporation and Bylaws to Limit the Ability of Stockholders to
Remove Directors. The articles of incorporation of Capitol
Federal Financial, Inc. provide that any director may be removed by stockholders
only for cause upon the affirmative vote of the holders of at least a majority
of the shares entitled to vote in the election of directors. Capitol
Federal Financial, Inc.’s bylaws provide that a special meeting of the
stockholders shall be called at the request of stockholders only on the written
request of stockholders entitled to cast at least a majority of all the votes
entitled to be cast at the meeting. These provisions, along with the
prohibition against any beneficial owner voting more than 10% of the outstanding
voting stock, which is discussed below, will make it extremely difficult for
anyone that acquires beneficial ownership, directly or indirectly, of a majority
of the outstanding shares from voting shares in excess of the 10% limit to call
a special meeting to remove directors.
CFF’s
bylaws provide that any director may be removed only for cause by a vote of the
holders of a majority of the outstanding voting shares at a meeting of
stockholders called for such purpose. This has provided an adequate
degree of protection under the mutual holding company structure, in which the
mutual holding company owns a majority of all voting shares and can prevent a
third party from seeking removal of one or more directors in order to promote an
agenda that may not be in the best interests of all other
stockholders.
46
The
majority voting requirement for the removal of directors for cause, together
with the 10% voting limit and the provision regarding the calling of special
meetings, is intended to prevent sudden and fundamental changes to the
composition of the board of directors except in the case of director
misconduct. This provision does not prevent the replacement of one or
more directors at an annual meeting of stockholders, and will not prevent
replacement of the entire Board over the course of three years. This
provision is intended to reduce the ability of anyone to coerce members of the
board of directors by threatening them with removal from office, in cases where
the directors are acting in good faith to discharge their duties to the
corporation and to all stockholders as a group. This provision will
not prevent a stockholder from conducting a proxy contest with respect to the
election of directors at a meeting of stockholders.
The
higher vote threshold may make it more difficult to bring about a change in
control of Capitol Federal Financial, Inc. One method for a hostile
stockholder to take control of a company is to acquire a majority of the
outstanding shares of the company through a tender offer or open market
purchases and then use its voting power to remove the existing
directors.
The Board
of Directors believes that it is desirable to adopt this provision so that a
director’s continued service will be conditioned on his or her ability to serve
and discharge his or her duties to the corporation and the stockholders in good
faith, rather than his or her position relative to a dominant
stockholder.
The
Board of Directors recommends that you vote “FOR” the approval of a provision in
Capitol Federal Financial, Inc.’s articles of incorporation and bylaws to limit
the ability of stockholders to remove directors.
Informational
Proposal 4b — Approval of a Provision in Capitol Federal Financial, Inc.’s
Articles of Incorporation Requiring a Super-Majority Vote to Approve Certain
Amendments to Capitol Federal Financial, Inc.’s Articles of
Incorporation. No amendment of the charter of CFF may be made
unless it is first proposed by the board of directors, then approved by the
Office of Thrift Supervision and approved by the holders of a majority of the
total votes eligible to be cast at a legal meeting. The articles of
incorporation of Capitol Federal Financial, Inc. generally may be amended by the
holders of a majority of the shares entitled to vote; provided, however, that
any amendment of Section C, D and E of Article Five (Preferred Stock,
Restrictions on Voting Rights of the Corporation’s Equity Securities, Majority
Vote), Article 7 (Directors), Article 8 (Bylaws), Article 9
(Approval of Certain Business Combinations), Article 11 (Acquisitions of
Equity Securities from Interested Persons), Article 12 (Indemnification, etc. of
Directors and Officers), Article 13 (Limitation of Liability) and Article
14 (Amendment of the Charter) must be approved by the affirmative vote of the
holders of at least 80% of the outstanding shares entitled to
vote.
These
limitations on amendments to specified provisions of Capitol Federal Financial,
Inc.’s articles of incorporation are intended to ensure that the referenced
provisions are not limited or changed upon a simple majority
vote. While this limits the ability of stockholders to amend those
provisions, Capitol Federal Savings Bank MHC, as a 71% stockholder, currently
can effectively block any stockholder proposed change to the
charter.
The
requirement of a super-majority stockholder vote to amend specified provisions
of Capitol Federal Financial, Inc.’s articles of incorporation could have the
effect of discouraging a tender offer or other takeover attempt where the
ability to make fundamental changes through amendments to the articles of
incorporation is an important element of the takeover strategy of the potential
acquiror. The Board of Directors believes that the provisions
limiting certain amendments to the articles of incorporation will put the Board
of Directors in a stronger position to negotiate with third parties with respect
to transactions potentially affecting the corporate structure of Capitol Federal
Financial, Inc. and the fundamental rights of its stockholders, and to preserve
the ability of all stockholders to have an effective voice in the outcome of
such matters.
The
Board of Directors recommends that you vote “FOR” the approval of a provision in
Capitol Federal Financial, Inc.’s articles of incorporation requiring a
super-majority vote to approve certain amendments to Capitol Federal Financial,
Inc.’s articles of incorporation.
47
Informational
Proposal 4c — Approval of a Provision in Capitol Federal Financial, Inc.’s
Articles of Incorporation Requiring a Super-Majority Vote of Stockholders to
Approve Stockholder Proposed Amendments to Capitol Federal Financial, Inc.’s
Bylaws. An amendment to CFF’s bylaws proposed by stockholders
must be approved by the holders of a majority of the votes cast at a legal
meeting subject to applicable approval by the Office of Thrift
Supervision. The articles of incorporation of Capitol Federal
Financial, Inc. provide that stockholders may only amend the bylaws if such
proposal is approved by the affirmative vote of the holders of at least 80% of
the outstanding shares entitled to vote.
The
requirement of a super-majority stockholder vote to amend the bylaws of Capitol
Federal Financial, Inc. is intended to ensure that the bylaws are not limited or
changed upon a simple majority vote of stockholders. While this
limits the ability of stockholders to amend the bylaws, Capitol Federal Savings
Bank MHC, as a 71% stockholder, currently can effectively block any stockholder
proposed change to the bylaws. Also, the board of directors of both
CFF and Capitol Federal Financial, Inc. may by a majority vote amend either
company’s bylaws.
This
provision in Capitol Federal Financial, Inc.’s articles of incorporation could
have the effect of discouraging a tender offer or other takeover attempt where
the ability to make fundamental changes through amendments to the bylaws is an
important element of the takeover strategy of the potential
acquiror. The Board of Directors believes that the provision limiting
amendments to the bylaws will put the Board of Directors in a stronger position
to negotiate with third parties with respect to transactions potentially
affecting the corporate structure of Capitol Federal Financial, Inc. and the
fundamental rights of its stockholders, and to preserve the ability of all
stockholders to have an effective voice in the outcome of such
matters.
The
Board of Directors recommends that you vote “FOR” the approval of the provision
in Capitol Federal Financial, Inc.’s articles requiring a super-majority vote of
stockholders to approve stockholder proposed amendments to Capitol Federal
Financial, Inc.’s bylaws.
Informational
Proposal 4d — Approval of a Provision in Capitol Federal Financial,
Inc.’s Articles of Incorporation to Limit the Voting Rights of Shares
Beneficially Owned in Excess of 10% of Capitol Federal Financial, Inc.’s
Outstanding Voting Stock. The articles of incorporation of
Capitol Federal Financial, Inc. provide that in no event shall any person, who
directly or indirectly beneficially owns in excess of 10% of the
then-outstanding shares of common stock as of the record date for the
determination of stockholders entitled or permitted to vote on any matter, be
entitled or permitted to any vote in respect of the shares held in excess of the
10% limit. Beneficial ownership is determined pursuant to the federal
securities laws and includes, but is not limited to, shares as to which any
person and his or her affiliates (i) have the right to acquire pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options and (ii) have or share
investment or voting power (but shall not be deemed the beneficial owner of any
voting shares solely by reason of a revocable proxy granted for a particular
meeting of stockholders, and that are not otherwise beneficially, or deemed by
Capitol Federal Financial, Inc. to be beneficially, owned by such person and his
or her affiliates).
The
foregoing restriction does not apply to any employee benefit plans of Capitol
Federal Financial, Inc. or any subsidiary or a trustee of a plan.
The
charter of Capitol Federal Savings Bank provides that, for a period of five
years from the effective date of Capitol Federal Savings Bank’s mutual holding
company reorganization, no person, other than Capitol Federal Savings Bank MHC,
shall directly or indirectly offer to acquire or acquire more than 10% of the
then-outstanding shares of common stock. The foregoing restriction
does not apply to:
|
●
|
the
purchase of shares by underwriters in connection with a public offering;
or
|
|
●
|
the
purchase of shares by any employee benefit plans of CFF or any
subsidiary.
|
48
The
provision in Capitol Federal Financial, Inc.’s articles of incorporation
limiting the voting rights of beneficial owners of more than 10% of Capitol
Federal Financial, Inc.’s outstanding voting stock is intended to limit the
ability of any person to acquire a significant number of shares of Capitol
Federal Financial, Inc. common stock and thereby gain sufficient voting control
so as to cause Capitol Federal Financial, Inc. to effect a transaction that may
not be in the best interests of Capitol Federal Financial, Inc. and its
stockholders generally. This provision will not prevent a stockholder
from seeking to acquire a controlling interest in Capitol Federal Financial,
Inc., but it will prevent a stockholder from voting more than 10% of the
outstanding shares of common stock unless that stockholder has first persuaded
the board of directors of the merits of the course of action proposed by the
stockholder. The Board of Directors of Capitol Federal Financial,
Inc. believes that fundamental transactions generally should be first considered
and approved by the board of directors as it believes that it is in the best
position to make an initial assessment of the merits of any such transaction and
that its ability to make the initial assessment could be impeded if a single
stockholder could acquire a sufficiently large voting interest so as to control
a stockholder vote on any given proposal. This provision in Capitol
Federal Financial, Inc.’s articles of incorporation makes an acquisition, merger
or other similar corporate transaction less likely to occur, even if such
transaction is supported by most stockholders, because it can prevent a holder
of shares in excess of the 10% limit from voting the excess shares in favor of
the transaction. Thus, it may be deemed to have an anti-takeover
effect.
The
Board of Directors recommends that you vote “FOR” the approval of a provision in
Capitol Federal Financial, Inc.’s articles of incorporation to limit the voting
rights of shares beneficially owned in excess of 10% of Capitol Federal
Financial, Inc.’s outstanding voting stock.
As of the
date of this document, the board of directors is not aware of any business to
come before the special meeting other than the matters described above in the
proxy statement/prospectus. However, if any matters should properly
come before the special meeting, it is intended that the holders of the proxies
will act in accordance with their best judgment.
49
[same
as pages 27-29 of the offering prospectus]
This
proxy statement/prospectus contains forward looking statements which are made in
good faith by us.
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;
|
50
| ● |
the
willingness of users to substitute competitors’ products and services for
our products and services;
|
| ● |
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 [ ].
[same
as pages 31-32 of the offering prospectus]
[same
as page 33 of the offering prospectus]
[same
as pages 33-34 of the offering prospectus]
[same
as page 35 of the offering prospectus]
[same
as pages 36-37 of the offering prospectus]
[same
as pages 38-43 of the offering prospectus]
51
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
[same
as pages 45-76 of the offering prospectus]
[same
as pages 101-105 of the offering prospectus]
[same
as pages 105-106 of the offering prospectus]
[same
as pages 107-122 of the offering prospectus]
[same
as pages 123-124 of the offering prospectus]
STOCKHOLDERS
OF CFF
[same as pages 155-159 of
the offering prospectus]
DESCRIPTION
OF CAPITAL STOCK OF CAPITOL FEDERAL
FINANCIAL, INC.
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.
52
The
discussions related to state income taxes included under the “Material Income
Tax Consequences” heading of the Conversion and Offering Section were prepared
by Deloitte
Tax LLP, and have been included herein upon the authority of said
firm.
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.
In order
to be eligible for inclusion in CFF’s proxy materials for next year’s annual
meeting of shareholders, any shareholder proposal to take action at the meeting
must be received at CFF’s executive office at 700 S. Kansas Avenue, Topeka,
Kansas 66603 no later than August 23, 2010. All shareholder proposals
submitted for inclusion in CFF’s proxy materials will be subject to the
requirements of the proxy rules adopted under the Securities Exchange Act of
1934, as amended, and, as with any shareholder proposal (regardless of whether
included in CFF’s proxy materials), CFF’s charter and bylaws.
To the
extent the conversion and offering are not completed prior to the next annual
meeting of shareholders, in order for a shareholder proposal to be considered
for presentation at next year’s annual meeting, although not included in the
proxy materials for that meeting, any shareholder proposal must be received at
CFF’s executive office at least five days prior to next year’s annual
meeting.
If the
conversion and offering are completed prior to the next annual meeting of
shareholders, notice by the shareholder to be timely must be so received by not
later than the close of business on the 90th day prior to the first anniversary
of the date of the last annual meeting of shareholders of CFF (the Final CFF
Annual Meeting) and not earlier than the close of business on the 120th day
prior to the first anniversary of the date of the Final CFF Annual Meeting;
provided, further, that in the event that the date of the annual meeting is
advanced by more than 20 days, or delayed by more than 60 days, from the
anniversary date of the preceding year’s annual meeting (or, in the case of the
first annual meeting of shareholders of Capitol Federal Financial, Inc., from
the first anniversary of the Final CFF Annual Meeting), notice by the
stockholder to be timely must be so received not earlier than the close of
business on the 120th day prior to the date of such annual meeting and not later
than the close of business on the later of (A) the 90th day prior to the date of
such annual meeting or (B) the tenth day following the first to occur of (i) the
day on which notice of the date of the annual meeting was mailed or otherwise
transmitted or (ii) the day on which public announcement of the date of the
annual meeting was first made by Capitol Federal Financial, Inc.
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.
53
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 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, Capitol Federal Financial, Inc.
has undertaken that it will not terminate such registration for a period of at
least three years following the offering.
54
CAPITOL FEDERAL FINANCIAL AND
SUBSIDIARY
[The
financial statements of Capitol Federal Financial and subsidiary to be included
in the proxy
statement/prospectus will be identical to those included in the offering prospectus included in this
Registration Statement.]
statement/prospectus will be identical to those included in the offering prospectus included in this
Registration Statement.]
F-1
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 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
|
1,010 ,000
|
|
Appraisal
Fees and Expenses
|
385,000
|
|
Business
Plan Preparation Fees and Expenses
|
85,000
|
|
Marketing
Agent Commission and Records Management Fees(1)
|
65,379,000
|
|
Proxy
Solicitation Fees
|
100 ,000
|
|
Printing,
EDGAR, Postage and Mailing
|
1,575,000
|
|
Filing
Fees (FINRA, Nasdaq, SEC and OTS)
|
310 ,000
|
|
Blue
Sky Fees
|
5,000
|
|
Transfer
Agent and Registrar Fees and Expenses
|
100,000
|
|
Other
|
10,000
|
|
TOTAL
|
$ 71,359 ,000
|
(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 of the
offering range, assuming 30% of the shares are sold in the Subscription and
Community Offering (including approximately 4. 1 % to
directors, executive officers and tax-qualified employee benefit plans) and the
remaining 70% of the shares are sold in the Syndicated 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;
(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.
3
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 June 22 , 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: | June 22 , 2010 | Date: | June 22 , 2010 | |
| By: | /s/ Michael T. McCoy, M.D. | By: | /s/ Kent G. Townsend | |
| Michael T. McCoy, M.D., Director | Kent G. Townsend, Executive Vice President | |||
| and Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
| Date: | June 22 , 2010 | Date: | June 22 , 2010 | |
| By: | /s/ Marilyn S. Ward | By: | /s/ Jeffrey R. Thompson | |
| Marilyn S. Ward, Director | Jeffrey R. Thompson, Director | |||
| Date: | June 22 , 2010 | Date: | June 22 , 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: | June 22 , 2010 | Date: | June 22 , 2010 | |
| By: | /s/ Morris J. Huey II | |||
| Morris J. Huey, Director | ||||
| Date: | June 22 , 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
|
Amended 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 of
Deloitte
Tax LLP 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 *
|
|
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
Tax LLP (contained in opinion included as Exhibit
8.2)
|
|
23.3
|
Consent
of RP Financial, LP *
|
|
23.4
|
Consent
of Deloitte & Touche, LLP
|
|
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
|
|
|
________
|
|
|
*
Previously
filed.
|