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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-24118
CAPITOL FEDERAL FINANCIAL
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 48-1212142
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
700 Kansas Avenue, Topeka, Kansas 66603
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (785) 235-1341
----------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and asked
price of such stock on the Nasdaq National Market as of December 1, 1999, was
$942.2 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
As of December 1, 1999, there were issued and outstanding 91,462,287 shares of
the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the year ended September 30, 1999. Part III of Form 10-K - Portions of the proxy
statement for the Annual Meeting of Stockholders for the year ended September
30, 1999.
1
FORWARD-LOOKING STATEMENTS
Capitol Federal Financial, and its wholly-owned subsidiary, Capitol
Federal Savings Bank, may from time to time make written or oral
"forward-looking statements", including statements contained in their filings
with the Securities and Exchange Commission ("SEC"). These forward-looking
statements may be included in this Annual Report on Form 10-K and the exhibits
attached to it, in Capitol Federal Financial's reports to stockholders and in
other communications by the company, which are made in good faith by us pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the U.S. economy in general and the strength of
the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal
Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o 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;
o the willingness of users to substitute competitors' products and
services for our products and services;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and
regulations, including laws concerning taxes, banking, securities
and insurance;
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not all inclusive. We do not undertake
to update any forward-looking statement, whether written or oral, that may be
made from time to time by or on behalf of Capitol Federal Financial or Capitol
Federal Savings.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Capitol Federal Financial is a federally chartered mid-tier holding
company that completed its initial public offering in March 1999 in the
reorganization of Capitol Federal Savings from a federally chartered mutual
savings and loan association into the federal mutual holding company form of
organization. Pursuant to the reorganization, Capitol Federal Savings converted
to a federally chartered stock savings bank as a wholly-owned subsidiary of
Capitol Federal Financial, which is majority owned by Capitol Federal Savings
Bank MHC, a federally chartered mutual holding company. Capitol Federal
Financial's common stock is traded on the Nasdaq-Amex National Market under the
symbol "CFFN."
Capitol Federal Savings Bank is the only operating subsidiary of Capitol
Federal Financial. Capitol Federal Savings Bank is a federally-chartered and
insured savings bank headquartered in Topeka, Kansas and is examined and
regulated by the Office of Thrift Supervision ("OTS"), its primary regulator. It
is also regulated by the Federal Deposit Insurance Corporation ("FDIC"). We
currently serve primarily the entire metropolitan areas of Topeka, Wichita,
Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the
metropolitan area of greater Kansas City through 25 full service and six limited
service banking offices. At September 30, 1999, we had total assets of $6.54
billion, deposits of $3.90 billion and total equity of $1.05 billion.
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. We also originate a limited
amount of loans secured by first mortgages on nonowner-occupied one-to
four-family residences, consumer loans, permanent and construction loans secured
by commercial real estate, multi-family real estate loans and land acquisition
and development loans. While our primary business is the origination of one-to
four-family residential mortgage loans funded through retail deposits, we
purchase whole loans and invest in certain investment and mortgage-related
securities funded through retail deposits and Federal Home Loan Bank ("FHLB")
advances.
Our revenues are derived principally from interest on loans and
mortgage-related and investment securities.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and non-interest bearing checking
accounts and certificates of deposit with varied terms ranging from 91 days to
96 months. We only solicit deposits in our market areas and we have not accepted
brokered deposits.
3
Our executive offices are located at 700 Kansas Avenue, Topeka, Kansas
66603 and our telephone number at that address is (785) 235-1341.
MARKET AREA
We intend to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We primarily serve the entire metropolitan areas of Topeka, Wichita,
Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the
metropolitan area of greater Kansas City. We may originate loans outside of
these areas on occasion, and we do purchase whole loans secured by properties
located outside of these areas from correspondent lenders, to the extent such
loans meet our underwriting criteria.
LENDING ACTIVITIES
GENERAL. Our primary lending activity is the origination of loans secured
by first mortgages on one- to four-family residential properties. We also make a
limited number of consumer loans and loans secured by multi-family dwellings or
commercial properties and land acquisition and development loans. Our mortgage
loans carry either a fixed or an adjustable rate of interest. Mortgage loans are
generally long-term and amortize on a monthly basis with principal and interest
due each month. At September 30, 1999, our net loan portfolio totaled $4.29
billion, which constituted 65.6% of our total assets.
All originated loans are generated by our own employees, with larger loans
subject to approval by the board of directors. Loans over $450,000 must be
underwritten by two underwriters. Any mortgage loan over $750,000 must be
approved by the asset and liability management committee and loans over $1.5
million must be approved by the board of directors. For loans requiring board
approval, management is responsible for presenting to the board information
about the creditworthiness of the borrower and the estimated value of the
subject property. Information pertaining to creditworthiness of the borrower
generally consists of a summary of the borrower's credit history, employment,
employment stability, net worth and income. The estimated value of the property
must be supported by an independent appraisal report prepared in accordance with
our appraisal policy.
At September 30, 1999, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities was approximately $143.5
million. At that date, we had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount.
Our largest lending relationship to a single borrower or a group of related
borrowers consisted of four loans totaling $27.8 million at September 30, 1999.
The largest of these was a $14.0 million line of credit to be used solely for
the acquisition and development of a 320 acre residential housing community
located in Overland Park, Kansas. The loan balance at September 30, 1999 was
$7.1 million. This loan was originated in 1995, has a term of five years with
one automatic extension of three years, has an adjustable interest rate with a
minimum and maximum rate and had a 100% loan-to-value ratio at origination.
Principal repayments are not on a monthly schedule, but
4
are required from the sale of each building lot. Interest payments are funded
from loan proceeds. The borrowers have provided additional collateral, in the
form of $750,000 in certificates of deposit placed in escrow in Capitol Federal
Savings, in addition to personal guarantees of up to $2.3 million. The loan
terms require additional contingent interest payments to Capitol Federal Savings
of 25% of the net profits of the development, if any. At September 30, 1999,
five of a planned eight phases have been developed, with 264 lots sold. The next
largest loan to one of the partners in this group of borrowers is a $6.2
million, combination two year construction and 10 year permanent loan for the
construction of a 51 unit apartment building located in Kansas City, Missouri.
The loan was originated in 1997, has a fixed interest rate with a 25 year
amortization and a loan-to-value ratio, as completed, of 78%. The loan requires
the payment of interest only during the construction period, which may be funded
from loan proceeds. This loan is fully guaranteed by the borrower, and Capitol
Federal Savings has an assignment of leases. The remaining two loans to this
group of related borrowers each have a balance of $3.0 million or less. Each of
the loans to this group of borrowers was current and performing in accordance
with its terms at September 30, 1999.
The second largest lending relationship at September 30, 1999, consisted
of loans totaling $14.6 million for numerous multi-family and commercial real
estate projects throughout Kansas. No single loan in this group exceeded $3.0
million at that date. All of these loans were current and performing in
accordance with their terms at September 30, 1999.
5
OUR LOAN PORTFOLIO. The following table presents information concerning
the composition of our loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
September 30,
----------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- --------- ----------- ---------- -----------
(Dollars in Thousands)
REAL ESTATE LOANS:
One- to four-family........................... $4,083,148 94.10% $3,504,799 93.47% $3,145,799 93.69%
Multi-family.................................. 31,114 0.72 40,361 1.08 26,688 0.79
Commercial.................................... 11,415 0.26 9,069 0.24 5,924 0.18
Construction and development.................. 56,660 1.30 52,086 1.39 51,157 1.52
------------ -------- ---------- -------- ---------- ------
Total real estate loans.................. 4,182,337 96.38 3,606,315 96.18 3,229,568 96.18
----------- -------- ---------- -------- ---------- ------
OTHER LOANS:
Consumer Loans:
Savings.................................... 15,281 0.35 16,446 0.44 16,314 0.49
Student.................................... 16,424 0.38 20,120 0.54 23,365 0.70
Home improvement........................... 2,072 0.05 2,776 0.07 3,341 0.10
Automobile................................. 7,122 0.16 5,758 0.15 4,120 0.12
Home equity................................ 115,779 2.67 97,829 2.61 80,640 2.40
Other...................................... 330 0.01 420 0.01 294 0.01
------------ -------- ---------- -------- ---------- ------
Total consumer loans..................... 157,008 3.62 143,349 3.82 128,074 3.82
Commercial business loans..................... --- --- 10 --- --- ---
------------ -------- ---------- -------- ---------- ------
Total other loans........................ 157,008 3.62 143,359 3.82 128,074 3.82
------------ ------- ---------- -------- ---------- ------
Total loans receivable 4,339,345 100.00% 3,749,674 100.00% 3,357,642 100.00%
======= ======== ======
LESS:
Loans in process.............................. 29,043 21,690 21,872
Deferred fees and discounts................... 14,607 12,751 12,029
Allowance for losses.......................... 4,407 4,081 1,639
------------ ---------- ----------
Total loans receivable, net................... $ 4,291,288 $3,711,152 $3,322,102
=========== ========== ==========
September 30,
----------------------------------------------
1996 1995
----------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- --------- -----------
(Dollars in Thousands)
REAL ESTATE LOANS:
One- to four-family...........................$2,794,342 93.80% $2,611,554 94.29%
Multi-family.................................. 29,341 0.98 32,795 1.18
Commercial.................................... 4,999 0.17 4,721 0.17
Construction and development.................. 38,488 1.29 14,088 0.51
---------- ------- ---------- ------
Total real estate loans.................. 2,867,170 96.24 2,663,158 96.15
---------- ------- ---------- ------
OTHER LOANS:
Consumer Loans:
Savings.................................... 16,703 0.56 16,016 0.58
Student.................................... 27,703 0.93 32,765 1.18
Home improvement........................... 2,183 0.07 2,221 0.08
Automobile................................. 2,372 0.08 2,183 0.08
Home equity................................ 62,895 2.11 53,107 1.92
Other...................................... 309 0.01 234 0.01
---------- ------- ---------- ------
Total consumer loans..................... 112,165 3.76 106,526 3.85
Commercial business loans..................... --- --- --- ---
---------- ------- ---------- ------
Total other loans........................ 112,165 3.76 106,526 3.85
---------- ------- ---------- ------
Total loans receivable 2,979,335 100.00% 2,769,684 100.00%
======= ======
LESS:
Loans in process.............................. 21,047 5,773
Deferred fees and discounts................... 11,799 10,918
Allowance for losses.......................... 1,583 1,359
---------- ----------
Total loans receivable, net...................$2,944,906 $2,751,634
========== ==========
6
The following table shows the composition of our loan portfolio by fixed-
and adjustable-rate at the dates indicated.
September 30,
------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------ --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- -----------
(Dollars in Thousands)
FIXED-RATE LOANS:
Real estate:
One- to four-family...........................$ 2,618,998 60.35% $2,010,809 53.64% $1,403,790 41.81%
Multi-family.................................. 28,467 0.66 34,266 0.91 19,069 0.57
Commercial.................................... 5,556 0.12 8,208 0.22 4,667 0.14
Construction and development.................. 29,976 0.69 19,829 0.53 9,404 0.28
----------- -------- ---------- ------ ---------- ------
Total real estate loans.................... 2,682,997 61.82 2,073,112 55.29 1,436,930 42.80
Consumer....................................... 33,043 0.76 29,970 0.80 27,335 0.81
Commercial business............................ --- --- 10 --- --- ---
----------- -------- ---------- ------ ---------- ------
Total fixed-rate loans..................... 2,716,040 62.58 2,103,092 56.09 1,464,265 43.61
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family........................... 1,464,150 33.75 1,493,990 39.85 1,742,009 51.88
Multi-family.................................. 2,647 0.06 6,095 0.16 7,619 0.23
Commercial.................................... 5,859 0.14 861 0.02 1,257 0.04
Construction and development.................. 26,684 0.61 32,257 0.86 41,753 1.24
----------- -------- ---------- ------ ---------- ------
Total real estate loans.................... 1,499,340 34.56 1,533,203 40.89 1,792,638 53.39
Consumer....................................... 123,965 2.86 113,379 3.02 100,739 3.00
----------- -------- ---------- ------ ---------- ------
Total adjustable-rate loans................ 1,623,305 37.42 1,646,582 43.91 1,893,377 56.39
----------- -------- ---------- ------ ---------- ------
Total loans................................ 4,339,345 100.00% 3,749,674 100.00% 3,357,642 100.00%
======== ====== ======
LESS:
Loans in process............................... 29,043 21,690 21,872
Deferred fees and discounts.................... 14,607 12,751 12,029
Allowance for loan losses...................... 4,407 4,081 1,639
----------- ---------- ----------
Total loans receivable, net................. $4,291,288 $3,711,152 $3,322,102
=========== ========== ==========
September 30,
---------------------------------------------
1996 1995
-------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- ---------
(Dollars in Thousands)
FIXED-RATE LOANS:
Real estate:
One- to four-family...........................$1,085,992 36.45% $ 817,233 29.51%
Multi-family.................................. 16,113 0.54 18,469 0.67
Commercial.................................... 3,463 0.12 2,734 0.10
Construction and development.................. 6,315 0.21 5,292 0.19
---------- ------ ---------- -------
Total real estate loans.................... 1,111,883 37.32 843,728 30.47
Consumer....................................... 22,585 0.76 21,586 0.78
Commercial business............................ --- --- --- ---
---------- ------ ---------- -------
Total fixed-rate loans..................... 1,134,468 38.08 865,314 31.25
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family........................... 1,708,350 57.34 1,794,322 64.77
Multi-family.................................. 13,228 0.44 14,326 0.52
Commercial.................................... 1,536 0.05 1,987 0.07
Construction and development.................. 32,173 1.08 8,796 0.32
---------- ------ ---------- -------
Total real estate loans.................... 1,755,287 58.91 1,819,431 65.68
Consumer....................................... 89,580 3.01 84,939 3.07
Total adjustable-rate loans................---------- ------ ---------- -------
1,844,867 61.92 1,904,370 68.75
---------- ------ ---------- -------
Total loans................................ 2,979,335 100.00% 2,769,684 100.00%
====== =======
LESS:
Loans in process............................... 21,047 5,773
Deferred fees and discounts.................... 11,799 10,918
Allowance for loan losses...................... 1,583 1,359
---------- ----------
Total loans receivable, net.................$2,944,906 $2,751,634
========== ==========
7
The following schedule illustrates the contractual maturity of our loan
portfolio at September 30, 1999. Mortgages which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
Real Estate
------------------------------------------------------------------------------------------------
Multi-family and Construction
One- to Four-Family Commercial and Development
------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------- ------------ ------------- ------------ ----------- -----------
(Dollars in Thousands)
Due During
Years Ending
September 30,
1999(1)......................... $ 4,898 7.68% $ --- ---% $ 10,688 6.63%
2000............................ 5,937 7.30 --- --- 45,072 7.40
2001............................ 4,577 8.78 --- --- 900 6.88
2002 and 2003................... 15,461 7.74 6,244 9.13 --- ---
2004 to 2005.................... 18,787 7.71 1,176 7.71 --- ---
2006 to 2020.................... 1,152,487 7.10 30,752 7.79 --- ---
2021 and beyond................. 2,881,001 7.01 4,357 7.69 --- ---
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
Commercial
Consumer Business Total
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------------- ------------ ------------- ------------- ------------- -----------
(Dollars in Thousands)
Due During
Years Ending
September 30,
1999(1)......................... $ --- ---% $--- ---% $ 15,586 6.96%
2000............................ 12,317 7.61 --- --- 63,326 7.43
2001............................ 3,650 8.20 --- --- 9,127 8.36
2002 and 2003................... 8,704 8.46 --- --- 30,409 8.23
2004 to 2005.................... 4,451 8.23 --- --- 24,414 7.80
2006 to 2020.................... 90,032 8.68 --- --- 1,273,271 7.23
2021 and beyond................. 37,854 9.06 --- --- 2,923,212 7.04
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
The total amount of loans due after September 30, 2000 which have
predetermined interest rates is $2.7 billion, while the total amount of loans
due after such date which have floating or adjustable interest rates is $1.6
billion.
8
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Residential loan
originations are generated by referrals from real estate brokers and builders,
our marketing efforts and existing and walk-in customers. We focus our lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied one- to four-family residences in our market areas. In order to
generate additional lending volume, we purchase whole loans generally throughout
the Midwest. These purchases allow us to attain geographic diversification and
manage credit concentration risks in the loan portfolio. At September 30, 1999,
one- to four-family residential mortgage loans totaled $4.08 billion, or 94.1%
of our gross loan portfolio.
We generally underwrite our one- to four-family loans based on the
applicant's employment and credit history, and the appraised value of the
subject property. Presently, we lend up to 97% of the lesser of the appraised
value or purchase price for one- to four-family residential loans. For loans
with a loan-to-value ratio in excess of 80%, we require private mortgage
insurance in order to reduce our loss exposure. Properties securing our one- to
four-family loans are appraised by either staff appraisers or independent fee
appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
We currently originate one- to four-family mortgage loans on either a
fixed- or adjustable-rate basis, as consumer demand dictates. Our pricing
strategy for mortgage loans includes setting interest rates that are competitive
with Fannie Mae and Freddie Mac and local financial institutions, and consistent
with our internal needs. Adjustable-rate mortgage ("ARM") loans are offered with
either a one-year, three-year or five-year term to the initial repricing date.
After the initial period, the interest rate for each ARM loan generally adjusts
annually for the remainder of the term of the loan. We use a number of different
indices to reprice our ARM loans. During the 1999 and 1998 fiscal years, we
originated $306.3 million and $198.9 million of one- to four-family ARM loans,
and $905.7 million and $878.6 million of one- to four-family fixed-rate mortgage
loans, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Asset and Liability Management and Market
Risk" in the Annual Report to Stockholders attached as Exhibit 13 to this Annual
Report on Form 10-K.
Fixed-rate loans secured by one- to four-family residences have
contractual maturities of up to 30 years, and are fully amortizing, with
payments due monthly. These loans normally remain outstanding, however, for a
substantially shorter period of time because of refinancing and other
prepayments. A significant change in the current level of interest rates could
alter the average life of a residential loan in our portfolio considerably. Our
one- to four-family loans are generally not assumable, do not contain prepayment
penalties and do not permit negative amortization of principal. Our real estate
loans generally contain a "due on sale" clause allowing us to declare the unpaid
principal balance due and payable upon the sale of the security property.
Our one- to four-family residential ARM loans are fully amortizing loans
with contractual maturities of up to 30 years, with payments due monthly. Our
ARM loans generally provide for specified minimum and maximum interest rates,
with a lifetime cap and floor, and an annual adjustment on the interest rate
over the rate in effect on the date of origination. As a consequence
9
of using caps, the interest rates on these loans may not be as rate sensitive as
is our cost of funds. Our ARM loans are not convertible into fixed-rate loans.
In order to remain competitive in our market areas, we currently originate
ARM loans at initial rates below the fully indexed rate. We qualify borrowers
based on this initial discounted rate for our three and five year ARMs, and at
2% over the initial rate for one-year ARMs.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. We have not experienced difficulty with
the payment history for these loans. See "Asset Quality --Non-performing Assets"
and "-- Classified Assets." At September 30, 1999, our one- to four-family ARM
loan portfolio totaled $1.46 billion, or 33.7% of our gross loan portfolio. At
that date the fixed-rate one- to four-family mortgage loan portfolio totaled
$2.62 billion, or 60.4% of our gross loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. We offer a variety of
multi-family and commercial real estate loans. These loans are secured primarily
by multi-family dwellings, small retail establishments and small office
buildings located in our market areas. At September 30, 1999, multi-family and
commercial real estate loans totaled $42.5 million or 1.0% of our gross loan
portfolio.
Our loans secured by multi-family and commercial real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indices, generally determined
through negotiation with the borrower. Loan-to-value ratios on our multi-family
and commercial real estate loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments and have maximum maturities of 25 years. While maximum maturities may
extend to 30 years, loans frequently have shorter maturities and may not be
fully amortizing, requiring balloon payments of unamortized principal at
maturity.
Loans secured by multi-family and commercial real estate are granted based
on the income producing potential of the property and the financial strength of
the borrower. The net operating income, 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. We generally require
personal guarantees of the borrowers covering a portion of the debt in addition
to the security property as collateral for such loans. We generally require an
assignment of rents or leases in order to be assured that the cash flow from the
project will be used to repay the debt. Appraisals on properties securing
multi-family and commercial real estate loans are performed by independent state
certified fee appraisers approved by the board of directors. See "-- Loan
Originations, Purchases, Sales and Repayments."
We do not generally maintain a tax or insurance escrow account for loans
secured by multi-family and commercial real estate. In order to monitor the
adequacy of cash flows on income-producing properties of $1.0 million or more,
the borrower is notified annually to provide financial
10
information including rental rates and income, maintenance costs and an update
of real estate property tax payments, as well as personal financial information.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.
See "- Asset Quality -- Non-performing Loans."
CONSTRUCTION AND DEVELOPMENT LENDING. We originate construction loans
primarily secured by existing commercial real estate or building lots. We also
make a limited number of construction loans to individuals for the construction
of their residences. Presently, all of these loans are secured by property
located within our market areas. At September 30, 1999, we had $56.7 million in
construction loans outstanding, representing 1.3% of our gross loan portfolio.
Construction loans are obtained principally through continued business
with builders who have previously borrowed from us. The application process
includes submission of accurate plans, specifications and costs of the project
to be constructed. These items are used as a basis to determine the appraised
value of the subject property. Loans are based on the lesser of current
appraised value and/or the cost of construction, including the land and the
building. We also conduct regular inspections of the construction project being
financed.
We occasionally originate acquisition and development loans, primarily to
borrowers having significant experience and longstanding relationships with us.
At September 30, 1999, Capitol Federal Savings had three acquisition and
development loans totaling $12.9 million.
Loans secured by building lots or raw land held for development are
generally granted with terms of up to five years and are available with either
fixed or adjustable interest rates and on individually negotiated terms. During
the development or construction phase, the borrower pays interest only, which
payments may be funded from the loan proceeds. These loans may require monthly
payments or may be established as line of credit loans with no fixed repayment
schedule. On line of credit loans, repayment is required as building lots are
sold. In addition to the agreed upon interest rate on these loans, we may
negotiate a contingent interest payment based on the profitability of the
project.
Loan-to-value ratios on our construction and development loans typically
do not exceed 80% of the appraised value of the project on an as completed
basis, although our largest acquisition and development loan was originated with
a 100% loan-to-value ratio and a 25% contingent interest payment based on net
profits of the project, if any. See "- Lending Activities -- General."
Loans secured by building lots or raw land for development are granted
based on both the financial strength of the borrower and the value of the
underlying property. We generally obtain
11
phase 1 environmental reports on construction loans and acquisition and
development loans of $1.0 million or more, and require personal guarantees from
the borrowers for all or a portion of the debt. We also require updated
financial statements from the borrowers on an ongoing basis.
Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed above regarding multi-family and commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans. In addition, payment of interest from loan proceeds can make it difficult
to monitor the progress of a project.
CONSUMER LENDING. Consumer loans generally have shorter terms to maturity,
which reduces our exposure to changes in interest rates, and carry higher rates
of interest than do one- to four-family residential mortgage loans. In addition,
management believes that offering consumer loan products helps to expand and
create stronger ties to our existing customer base by increasing the number of
customer relationships and providing cross-marketing opportunities. At September
30, 1999, our consumer loan portfolio totaled $157.0 million, or 3.6% of our
gross loan portfolio.
We offer a variety of secured consumer loans, including home equity loans
and lines of credit, home improvement loans, auto loans, student loans and loans
secured by savings deposits. We also offer a very limited amount of unsecured
loans. We currently originate all of our consumer loans in our market areas. Our
home equity loans, including lines of credit, and home improvement loans
comprised approximately 75.1% of our total consumer loan portfolio at September
30, 1999. These loans may be originated in amounts, together with the amount of
the existing first mortgage, of up to 100% of the value of the property securing
the loan. In order to minimize risk of loss, home equity loans in excess of 80%
of the value of the property are partially insured against loss. The term to
maturity on our home equity and home improvement loans may be up to 15 years.
Home equity lines of credit have no stated term to maturity and require the
payment of 2% of the outstanding loan balance per month, which amount may be
reborrowed at any time. Other consumer loan terms vary according to the type of
collateral, length of contract and creditworthiness of the borrower. The
majority of our consumer loan portfolio is comprised of home equity lines of
credit, which have interest rates that adjust based upon changes in the prime
rate.
We do not originate any consumer loans on an indirect basis. Indirect
loans are contracts purchased from retailers of goods or services which have
extended credit to their customers.
Our underwriting standards for consumer loans include a determination of
the applicant's payment history on other debts and an assessment of the ability
to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security in relation to
the proposed loan amount.
12
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles.
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
We originate loans through referrals from real estate brokers and
builders, our marketing efforts, and our existing and walk-in customers. While
we originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon customer demand for loans in our market areas. Demand is
affected by local competition and the interest rate environment. During the last
several years, our dollar volume of fixed-rate, one- to four-family loans has
exceeded the dollar volume of the same type of adjustable-rate loans. While our
primary business is the origination of one- to four-family mortgage loans,
competition from other lenders in our market areas limits, to a certain extent,
the volume of loans we have been able to originate and place in our portfolio.
As a result we have purchased mortgage loans and investment and mortgage-related
securities to supplement our portfolios. Such whole loan purchases also serve to
reduce our risk of geographic concentration. We sell a limited amount of loans
and some of our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, we, like many other
financial institutions, have experienced significant prepayments on loans and
mortgage-related securities due to the low interest rate environment prevailing
in the United States. As a result of the reorganization, we have also expanded
our leverage strategy by increasing our wholesale borrowings and the purchase of
mortgage-related securities.
Purchased whole loans are originated by one or two lenders who have a
regional or national presence. By contractual agreement, the loan product is
originated for us to our specifications. Each loan is underwritten by a third
party contract underwriter who is under contract with us. We set prices for the
loan product once each week. Mortgage servicing for purchased whole loans is
retained by the originating lender.
In periods of economic uncertainty, the ability of financial institutions,
including us, to originate or purchase large dollar volumes of real estate loans
may be substantially reduced or restricted, with a resultant decrease in
interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" in the Annual
Report to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
13
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated.
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
----------- ---------- ---------
(In Thousands)
ORIGINATIONS BY TYPE:
Adjustable rate:
Real estate - one- to four-family........ $ 306,322 $ 198,857 $315,314
- multi-family......... 4,855 --- 6,240
- commercial........... --- --- ---
Non-real estate - consumer............... 96,147 86,848 71,536
- commercial business.. --- 10 ---
---------- ---------- --------
Total adjustable-rate............. 407,324 285,715 393,090
---------- ---------- --------
Fixed rate:
Real estate - one- to four-family........ 905,720 878,567 412,960
- multi-family......... --- --- 250
- commercial........... --- 350 ---
Non-real estate - consumer............... 31,835 26,312 26,514
---------- ---------- --------
Total fixed-rate.................. 937,555 905,229 439,724
---------- ---------- --------
TOTAL LOANS ORIGINATED............ 1,344,879 1,190,944 832,814
---------- ---------- --------
PURCHASES:
Real estate - one- to four-family........ 215,942 124,724 117,424
- multi-family......... --- --- ---
- commercial........... --- --- ---
Non-real estate - consumer............... 17 30 ---
---------- ---------- --------
Total loans purchased............. 215,959 124,754 117,424
Mortgage-related securities available for
sale(excluding REMICs and CMOs) 962,182 256,076 245,102
Mortgage-related securities held to
maturity(excluding REMICs and CMOs) 103,426 --- ---
REMICs and CMOs.......................... 833,166 363,068 112,442
---------- ---------- --------
TOTAL PURCHASED................... 2,114,733 743,898 474,968
---------- ---------- --------
SALES AND REPAYMENTS:
Real estate - one- to four-family........ 15,306 23,160 4,563
Non-real estate - consumer (student loans 12,818 13,620 15,059
---------- ---------- --------
Total loans sold.................. 28,124 36,780 19,622
Mortgage-related securities.............. --- --- ---
---------- ---------- --------
Total sales....................... 28,124 36,780 19,622
PRINCIPAL REPAYMENTS..................... 1,624,735 1,113,628 558,990
---------- ---------- --------
Total reductions.................. 1,652,859 1,150,408 578,612
---------- ---------- --------
Increase in other items, net............. 218,719 202,100 102,532
---------- ---------- --------
Net increase...................... $1,588,034 $ 582,334 $626,638
=========== ========== ========
14
ASSET QUALITY
When a borrower fails to make a payment on a loan on or before the default
date, a late charge notice is mailed 15 days after the due date. When the loan
is 30 days past due, we mail a delinquent notice to the borrower. All delinquent
accounts are reviewed by a collection officer, who attempts to cause the
delinquency to be cured by contacting the borrower. If the loan becomes 60 days
delinquent, the collection officer will generally send a personal letter to the
borrower requesting payment of the delinquent amount in full, or the
establishment of an acceptable repayment plan to bring the loan current within
the next 90 days. If the account becomes 90 days delinquent, and an acceptable
repayment plan has not been agreed upon, the collection officer will generally
refer the account to legal counsel, with instructions to prepare a notice of
intent to foreclose. The notice of intent to foreclose allows the borrower up to
30 days to bring the account current. During this 30 day period, the collection
officer may accept a written repayment plan from the borrower which would bring
the account current within the next 90 days. Once the loan becomes 120 days
delinquent, and an acceptable repayment plan has not been agreed upon, the
collection officer, after receiving approval from the appropriate officer as
designated by our board of directors, will turn over the account to our legal
counsel with instructions to initiate foreclosure.
DELINQUENT LOANS. The following table sets forth our loans delinquent 30 -
89 days by type, number, amount and percentage of type at September 30, 1999.
Loans Delinquent for
30-89 Days
-----------------------------------------
Percent of
Total Delinquent
Number Amount Loans
----------- ----------- ----------------
(Dollars in Thousands)
Real Estate:
One- to four-family... 281 $17,352 97.95%
Multi-family.......... --- --- ---
Commercial............ --- --- ---
Construction or 1 55 0.31
development.............
Consumer................ 26 308 1.74
Commercial business..... --- --- ---
------ ------- -------
Total.............. 308 $17,715 100.00%
====== ======= =======
15
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates. Real estate owned
include assets acquired in settlement of loans.
SEPTEMBER 30,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family............... $ 4,921 $6,048 $4,989 $3,889 $ 3,950
Multi-family...................... --- --- --- --- ---
Commercial real estate............ --- --- 1,042 --- ---
Construction or development....... --- --- --- 100 228
Consumer.......................... 55 181 78 1 23
Commercial business............... --- --- --- --- ---
------- ------ ------ ------ --------
Total.......................... 4,976 6,229 6,109 3,990 4,201
------- ------ ------ ------ --------
Accruing loans delinquent more than
90 days:
One- to four-family............... --- --- --- --- ---
Multi-family...................... --- --- --- --- ---
Commercial real estate............ --- --- --- --- ---
Construction or development....... --- --- --- --- ---
Consumer.......................... --- --- --- --- ---
Commercial business............... --- --- --- --- ---
------- ------ ------ ------ -------
Total.......................... --- --- --- --- ---
------- ------ ------ ------ -------
Real estate owned:
One- to four-family............... 1,073 1,964 2,435 3,552 1,864
Multi-family...................... --- --- --- --- 11,852
Commercial real estate............ --- --- --- --- ---
Construction or development....... --- --- --- --- ---
Consumer.......................... --- --- --- --- ---
Commercial business............... --- --- --- --- ---
------- ------ ------ ------ -------
Total.......................... 1,073 1,964 2,435 3,552 13,716
------- ------ ------ ------ -------
Total non-performing assets......... $ 6,049 $8,193 $8,544 $7,542 $17,917
======= ====== ====== ====== =======
Total as a percentage of total
assets.............................. .09% 0.15% 0.17% 0.17% 0.41%
======= ====== ====== ====== =======
For the year ended September 30, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $151,000. The amount that was included in
interest income on such loans was $70,000 for the year ended September 30, 1999.
NON-PERFORMING LOANS. At September 30, 1999, we had $4.9 million in
non-performing loans, which constituted 0.1% of our gross loan portfolio. At
that date, there were no non-performing loans to any one borrower or group of
related borrowers that exceeded $1.0 million, either individually or in the
aggregate.
16
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above, as of September 30, 1999, there was also an aggregate of
$8.3 million in net book value of loans with respect to which known information
about the possible credit problems of the borrowers have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. These loans have been considered in
management's determination of the adequacy of our allowance for loan losses.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the FDIC,
which may order the establishment of additional general or specific loss
allowances.
In connection with the filing of our periodic reports with the OTS and in
accordance with our assets classification policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets, at September 30, 1999, we had classified $6.1
million of our assets as substandard, none as doubtful and none as loss. The
amount classified substandard represented 0.6% of our retained earnings and 0.1%
of our assets at September 30, 1999.
PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses in
fiscal 1999 of $395,000, compared to $2.5 million in fiscal 1998 and $56,000 in
fiscal 1997. The provision for loan losses is charged to income to bring our
allowance for loan losses to a level deemed appropriate by management based on
the factors discussed below under "-- Allowance for Loan Losses." The provision
for loan losses in fiscal 1999 was based on management's review of such factors
which indicated that the allowance for loan losses was adequate to cover losses
inherent in the loan portfolio as of September 30, 1999.
17
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the formula allowance, specific allowances
for identified problem loans and portfolio segments and the unallocated
allowance. In addition, the allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of such loans or pools
of loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors for loans on residential properties with greater
than four units and loans on construction and development and commercial
properties are computed based on an evaluation of inherent losses on these
loans. Pooled loan loss factors are based on expected net charge-offs for one
year and are applied to loans that are homogeneous in nature, such as one- to
four-family residential loans and consumer loans.
The appropriateness of the allowance is reviewed by management based upon
its evaluation of then-existing economic and business conditions affecting our
key lending areas and other conditions, such as credit quality trends (including
trends in nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry conditions
within portfolio segments and recent loss experience in particular segments of
the portfolio that existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of the loan. Senior
management reviews these conditions quarterly in discussions with our senior
credit officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the loss related to this condition is reflected in
the unallocated allowance. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent in
the loan portfolio. The amounts actually observed in respect of these losses can
vary significantly from the estimated amounts. Our methodology as described
permits adjustments to any loss factor used in the computation of the formula
allowance in the event that, in management's judgment, significant factors which
affect the collectibility of the portfolio as of the evaluation date are not
reflected in the current loss factors. By assessing the estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon any more recent information that
has become available.
18
At September 30, 1999, our allowance for loan losses was $4.4 million or
.10% of the total loan portfolio and approximately 89% of total nonaccrual
loans. This compares with an allowance for loan losses of $4.1 million or .11%
of the total loan portfolio and approximately 66% of the total nonaccrual loans
as of September 30, 1998. At fiscal year end 1999, the unallocated portion of
the allowance for loan losses was $2,000. The allocated portion of the allowance
of $4.4 million is composed of credit losses related to the loan portfolio.
During 1999, changes in assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
affected the assessment of the allocated allowance.
During 1999, our single-family residential loan portfolio increased by
$578.3 million over 1998. In addition, the non-performing single-family loans
decreased by $1.1 million, or 18.3%, from $6.0 million at September 30, 1998 to
$4.9 million at September 30, 1999. The provision for loan losses in fiscal 1999
of $395,000, representing 0.6 % of pretax earnings, was recorded in allocated
allowance to reflect the increase in the single family residential mortgage
loans as a result of the increase in loan originations, which contributed to an
increase in the formula allowance. The provision represents 0.7% of the 1999
increase in the portfolio. We also reviewed the ratio of our non-performing
loans to total loans and compared this to our ratio of allowance for loan losses
to net loans receivable.
During 1999, our multi-family loan portfolio decreased by approximately
23.0% to $30.9 million. This decrease is the result of fewer lending
opportunities in various market areas. We increased our provision for credit
losses to 0.5% of the multi-family loan portfolio. The increase was due to an
increase in the amount of multifamily loans classified as watch. We also
decreased our portfolio of commercial real estate loans by approximately 38.1%
to $5.6 million while maintaining our provision for credit losses to 0.8% of the
commercial real estate loan portfolio. The portfolio of construction and
development loans increased by approximately 3.9% to $32.9 million. However, we
maintained our provision for credit losses at 1.1% of the construction and
development loan portfolio. The increase in the amount of the provision was
partially due to an increase in the amount of construction and development loans
classified as watch. Our consumer loan portfolio increased 13.7% to $156.7
million during 1999 as a result of increased marketing efforts. We maintained
our provision for credit losses on consumer loans to approximately 0.1% of the
consumer loan portfolio. These increases in provision for credit losses properly
allocate the inherent credit loss provision based upon the known risks of the
various loan portfolios in 1999.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance when taken as a whole, is adequate to absorb reasonable estimated loan
losses inherent in our loan portfolios.
Based upon the foregoing analysis of our reserving methodology, it is
management's belief that the increase in the formula allowance provided for the
additional losses inherent in the portfolio. Historical net charge-offs are not
necessarily indicative of the amount of net charge-offs that Capitol
19
Federal Savings will realize in the future related to the increase in the single
family residential loan portfolio.
The following table sets forth an analysis of our allowance for loan
losses.
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period....... $4,081 $1,639 $1,583 $1,359 $3,878
Charge offs:
One- to four-family................ 44 20 --- --- ---
Multi-family....................... --- --- --- 641 2,519
Commercial real estate............. --- --- --- --- ---
Construction or development........ --- --- --- --- ---
Consumer........................... 25 --- --- --- ---
Commercial business................ --- --- --- --- ---
------ ------ ------ ------ ------
Total charge-offs................ 69 20 --- 641 2,519
Recoveries........................... --- --- --- --- ---
--- --- --- ---
------ ------ ------ ------ ------
Net charge-offs...................... 69 20 --- 641 2,519
Provisions (recoveries) charged to
operations.......................... 395 2,462 56 865 ---
------ ------ ------ ------ ------
Balance at end of period........... $4,407 $4,081 $1,639 $1,583 $1,359
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period................... ---% ---% ---% 0.02% 0.10%
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average non-performing
assets.............................. .97% 0.06% ---% 1.26% 4.86%
====== ====== ====== ====== ======
Allowance as a percentage of
non-performing loans................. 88.57% 65.52% 26.83% 39.67% 32.35%
====== ====== ====== ====== ======
Allowance as a percentage of total
loans (end of period)............... .10% 0.11% 0.05% 0.05% 0.05%
====== ====== ====== ====== ======
20
The distribution of our allowance for loan losses at the dates indicated
is summarized as follows:
September 30,
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Amount of Loans Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance By Category Loans Allowance By Category Loans
--------- ------------- ------- --------- ------------ -------
(Dollars in Thousands)
One- to four-family.......... $ 3,635 $4,069,704 94.74% $3,222 $3,496,699 94.12%
Multi-family................. 146 30,889 .72 200 40,091 1.08
Commercial real estate....... 42 5,574 .13 77 9,006 0.24
Construction or
development................ 375 32,856 .76 348 31,610 0.85
Consumer..................... 207 156,672 3.65 174 137,817 3.71
Commercial business.......... --- --- --- --- 10 ---
Unallocated.................. 2 --- --- 60 ---
-------- ---------- ------ ------ ----------
Total................... $4,407 $4,295,695 100.00% $4,081 $3,715,233 100.00%
======== ========== ====== ====== ========== ======
1997 1996 1995
-------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Amount of Loan Category Amount of Loan Category Amount of Loan Category
Loan Loss Amounts to Total Loan Loss Amounts to Total Loan Loss Amounts to Total
Allowance By Category Loans Allowance By Category Loans Allowance By Category Loans
--------- ------------ ------- --------- ------------ ------- --------- ------------ ------
(Dollars in Thousands)
One- to four-family.......... $1,208 $3,137,101 94.38% $1,011 $2,784,247 94.49% 994 $2,602,296 94.53%
Multi-family................. 66 26,416 0.79 427 29,341 1.00 63 32,795 1.19
Commercial real estate....... 18 5,864 0.18 9 4,999 0.17 17 4,646 0.17
Construction or
development................ 67 30,900 0.93 85 17,547 0.60 29 8,333 0.30
Consumer..................... 41 123,460 3.71 42 110,355 3.75 21 104,923 3.81
Commercial business.......... --- --- --- --- --- --- --- --- ---
Unallocated.................. 239 --- --- 9 --- --- 234 --- ---
------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Total................... $1,639 $3,323,741 100.00% $1,583 $2,946,489 100.00% $1,358 $2,752,993 100.00%
====== ========== ====== ====== ========== ====== ====== ========== ======
21
INVESTMENT ACTIVITIES
We are required to maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, we have maintained liquid
assets at levels above the minimum requirements imposed by OTS regulations and
at levels believed to be adequate to meet the requirements of normal operations,
including potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained. At
September 30, 1999, our regulatory liquidity ratio, which is our liquid assets
as a percentage of net withdrawable savings deposits with a maturity of one year
or less and current borrowings, was 62.5%.
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, including callable agency securities, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in investment grade commercial paper and corporate debt securities
and mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly. See
"Regulation --Capitol Federal Savings" and "- Qualified Thrift Lender Test" for
a discussion of additional restrictions on our investment activities.
The Chief Financial Officer has the basic responsibility for the
management of our investment portfolio, subject to the direction and guidance of
the asset and liability management committee. The Chief Financial Officer
considers various factors when making decisions, including the marketability,
maturity and tax consequences of the proposed investment. The maturity structure
of investments will be affected by various market conditions, including the
current and anticipated slope of the yield curve, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The general objectives of our investment portfolio are to provide
liquidity when loan demand is high, to assist in maintaining earnings when loan
demand is low and to maximize earnings while satisfactorily managing risk,
including credit risk, reinvestment risk, liquidity risk and interest rate risk.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk" in the Annual
Report to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
Our investment securities currently consist of U.S. Government and agency
securities. See Note 2 of the Notes to Consolidated Financial Statements. Our
mortgage-related securities portfolio consists of securities issued by
government-sponsored agencies. A portion of the portfolio consists of
collateralized mortgage obligations ("CMOs"). CMOs are special types of pass
through debt securities in which the stream of principal and interest payments
on the underlying mortgages or mortgage-related securities 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
22
possessing different risk characteristics. We do not purchase any residual
interest bonds. See Notes 4 and 5 of the Notes to Consolidated Financial
Statements.
During fiscal year 1999 we increased our portfolio of these securities by
$1.01 billion. In conjunction with the reorganization, we purchased $352.8
million of adjustable rate mortgage-backed securities, with an average yield of
6.51%, funded primarily by the proceeds received in the reorganization. These
securities had various terms to their initial reprice date, but are annually
adjustable following their initial repricing. Following the reorganization, we
implemented our capital utilization plan by purchasing a total of $725.0 million
of these securities, comprised of $621.6 million of fixed rate CMOs and $103.4
million of fixed rate mortgage-backed securities. The CMOs, when purchased, had
an average life of 5.2 years and an average yield of 6.57%. The mortgage-backed
securities, when purchased, had an average life of approximately 8.3 years and
an average yield of 7.35%. The composite average life of these securities was
5.6 years and the average rate was 6.69%. These purchases were completed with a
spread over the cost to fund the purchases of 1.09%. See "Sources of Funds --
Borrowings" for a discussion regarding the funding of these purchases.
The average life of our fixed rate mortgage-related securities is generally
five years at the time of purchase. Premiums associated with mortgage-related
securities purchased are not significant; therefore, the risk of significant
yield adjustments because of accelerated prepayments is limited. Yield
adjustments are encountered as interest rates rise or decline, which in turn
slows or increases prepayment rates and affects the average lives of the
mortgage-related securities. At September 30, 1999, we held CMOs totaling $837.5
million, all of which were secured by underlying collateral issued under
government agency-sponsored programs. All of our CMOs are currently classified
as held to maturity. At September 30, 1999, all but $13.1 million of our CMOs
did not qualify as high risk mortgage securities as defined under OTS
regulations. We do not invest in residual interests of CMOs.
While mortgage-related securities, such as CMOs and REMICs, carry a reduced
credit risk as compared to whole loans, such securities remain subject to the
risk that a fluctuating interest rate environment, along with other factors such
as the geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities.
23
The following table sets forth the composition of our investment and
mortgage-related securities portfolio at the dates indicated. Our investment
securities portfolio at September 30, 1999, contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in excess
of 10% of our retained earnings, excluding those issued by the government or its
agencies.
September 30,
1999 1998 1997
--------------------- --------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
---------- ------- --------- -------- --------- -------
(Dollars in Thousands)
Securities available for sale, at fair value:
Mortgage-related securities............... $1,136,776 100.00% $747,991 100.00% $754,179 100.00%
U.S. government and agency securities..... --- --- --- --- --- ---
---------- ------ -------- ------ -------- ------
Total securities available for sale.... $1,136,776 100.00% $747,991 100.00% $754,179 100.00%
========== ====== ======== ====== ======== ======
Investment securities, at amortized cost:
Mortgage-related securities............... $ 101,977 10.68% --- --- --- ---
U.S. government and agency securities..... 15,000 1.57 $160,469 33.37 $585,294 82.97
CMOs and REMICs........................... 837,515 87.74 320,379 66.61 120,007 17.01
Other investment securities............... 100 .01 100 0.02 100 0.02
---------- ------ -------- ------ -------- ------
Total investment securities............ $ 954,592 100.00% $480,948 100.00% $705,401 100.00%
========== ====== ======== ====== ======== ======
Investment securities, at fair value........ $ 929,574 $479,840 $704,935
========== ======== ========
24
The composition and maturities of the investment securities portfolio,
excluding Federal Home Loan Bank stock, are indicated in the following table.
September 30, 1999
-------------------------------------------------------------------
Less than 1 year 1 to 5 years 5 to 10 years
-------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------
(Dollars in Thousands)
Securities available for sale:
U.S. government and agency securities..... $12,958 5.98% $ 3,582 9.09% $119,898 6.67%
------- ------ ------- ------ -------- -------
Total securities available for sale.... $12,958 5.98% $ 3,582 9.09% $119,898 6.67%
======= ====== ======= ====== ======== =======
Investment securities:
Mortgage Backed securities................ $ --- --- $ --- --- $ --- ---
U.S. government and agency securities..... --- --- --- --- --- ---
Securities purchased under agreement
to resell................................ --- --- --- --- --- ---
CMOs and REMICs........................... --- --- 52,951 6.40 66,286 7.00
Other investment securities............... --- --- 100 1.50 --- ---
------- ----- ------- ------ -------- ------
Total investment securities........... $ --- ---% $53,051 6.39 $ 66,286 7.00%
======= ===== ======= ======= ======== ======
September 30, 1999
-------------------------------------------------------------
Over 10 years Total Securities
-------------------------------------------------------------
Fair
Balance Rate Balance Rate Value
-------------------------------------------------------------
Securities available for sale:
U.S. government and agency securities..... $986,031 6.63% $1,122,469 6.63% $1,136,776
-------- ------ ---------- ----- ----------
Total securities available for sale.... $986,031 6.63% $1,122,469 6.63% $1,136,776
======== ====== ========== ===== ==========
Investment securities:
Mortgage Backed securities................ $101,977 7.50% $ 101,977 7.50% $ 101,033
U.S. government and agency securities..... 15,000 6.13 15,000 6.13 14,654
Securities purchased under agreement
to resell................................ ---
CMOs and REMICs........................... 718,278 6.40 837,515 6.45 813,787
Other investment securities............... --- --- 100 1.50 100
-------- ------ ---------- ----- ----------
Total investment securities........... $835,255 6.53% $ 954,592 6.56% $ 929,574
======== ====== ========== ===== ==========
Sources of Funds
General. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.
Deposits. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and passcard savings
accounts, money market deposit accounts, NOW accounts, non-interest bearing
checking accounts and certificates of deposit. We only solicit deposits in our
market areas and have not accepted brokered deposits. We primarily rely on
competitive pricing policies, marketing and customer service to attract and
retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
25
The variety of deposit accounts we offer has allowed us to be competitive
in obtaining funds and to respond with flexibility to changes in consumer
demand. We have become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. We endeavor to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives. Based on our experience, we
believe that our deposits are relatively stable sources of funds. Despite this
stability, our ability to attract and maintain these deposits and the rates paid
on them has been and will continue to be significantly affected by market
conditions.
The following table sets forth our deposit flows during the periods
indicated.
Year Ended September 30,
----------------------------------------------
1999 1998 1997
------------ ---------- ----------
(Dollars in Thousands)
Opening balance............................. $3,894,180 $3,787,123 $3,740,718
Deposits.................................... 5,154,745 4,725,985 4,367,361
Withdrawals................................. 5,321,757 4,795,516 4,496,198
Interest credited........................... 172,397 176,588 175,242
---------- ---------- ----------
Ending balance.............................. $3,899,565 $3,894,180 $3,787,123
========== ========== ==========
Net increase................................ $ 5,385 $ 107,057 $ 46,405
========== ========== ==========
Percent increase............................ .14% 2.83% 1.24%
=== ==== ====
26
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs we offered for the periods indicated.
Year Ended September 30,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
Transactions and Savings Deposits:
Demand deposits............................ $ 278,722 7.14% $ 260,440 6.68% $ 249,585 6.58%
Passbook and Passcard...................... 123,479 3.16 129,180 3.31 131,854 3.48
Money market select........................ 322,660 8.26 213,181 5.47 30,405 0.80
Cash fund.................................. 201,275 5.16 225,356 5.78 293,108 7.73
----------- -------- ----------- ------ ---------- ------
Total non-certificates..................... 926,136 23.72 $ 828,157 21.24 704,952 18.59
----------- -------- ----------- ------ ---------- ------
Certificates (by rate):
0.00 - 2.99%.............................. 46 --- --- --- --- ---
3.00 - 3.99%.............................. 5,732 .15 5,900 0.15 7,866 0.21
4.00 - 4.99%.............................. 573,440 14.69 429,108 11.01 25,822 0.68
5.00 - 5.99%.............................. 1,644,605 42.13 1,684,996 43.22 2,224,325 58.67
6.00 - 6.99%.............................. 514,167 13.17 715,234 18.34 598,005 15.77
7.00 - 7.99%.............................. 234,901 6.02 227,695 5.84 220,048 5.80
8.00 - 8.99%.............................. 538 .01 2,405 0.06 5,398 0.14
9.00 - 9.99%.............................. --- --- 685 0.02 707 0.02
----------- ----- ----------- ------ ---------- ------
Total certificates......................... 2,973,429 76.17 3,066,023 78.64 3,082,171 81.29
----------- ------ ----------- ------ ---------- ------
Accrued interest........................... 4,404 .11 4,674 0.12 4,718 0.12
----------- ------ ----------- ------- ---------- ------
Total deposits............................. $ 3,903,969 100.00% $ 3,898,854 100.00% $3,791,841 100.00%
=========== ====== =========== ====== ========== ======
27
The following table shows rate and maturity information for our
certificates of deposit as of September 30, 1999.
0.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
------- ------- ------- ------- ------- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
December 31, 1999.............. $ 5,756 $ 325,532 $ 145,983 $ 262 $ 477,533 16.06%
March 31, 2000................. 22 478,915 130,782 46 609,765 20.51
June 30, 2000.................. --- 330,900 158,397 39 489,336 16.46
September 30, 2000............. --- 253,170 110,700 179 365,049 12.28
December 31, 2000.............. --- 124,173 135 12 124,320 4.18
March 31, 2001................. --- 174,382 68 --- 174,450 5.87
June 30, 2001.................. --- 71,948 135 --- 72,083 2.42
September 30, 2001............. --- 107,681 42,877 --- 150,558 5.06
December 31, 2001.............. --- 125,852 52,052 --- 177,904 5.98
March 31, 2002................. --- 55,890 67 --- 55,957 1.88
June 30, 2002.................. --- 31,490 11,795 --- 43,285 1.46
September 30, 2002............. --- 44,321 13,320 --- 57,641 1.94
Thereafter..................... --- 93,791 81,757 --- 175,548 5.90
-------- ---------- -------- ----- ---------- -------
Total....................... $5,778 $2,218,045 $749,068 $ 538 $2,973,429 100.00%
====== ========== ======== ===== ========== ======
Percent of total............ .19% 74.60% 25.19% 0.02%
====== ======= ======== =====
The following table indicates the amount of our certificates of deposit and
other deposits by time remaining until maturity as of September 30, 1999.
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -----
(In Thousands)
Certificates of deposit less than
$100,000.................................... $427,664 $547,120 $765,504 $ 922,051 $2,662,339
Certificates of deposit of $100,000 or
more........................................ 49,869 62,345 88,880 109,695 310,789
Public Funds................................. 301 301
-------- -------- -------- ---------- ----------
Total certificates of deposit................ $477,533 $609,766 $854,384 $1,031,746 $2,973,429
======== ========= ======== ========== ==========
Borrowings. Although deposits are our main source of funds, we utilize
borrowings when they are a less costly source of funds, and can be invested at a
positive rate spread, when we desire additional capacity to fund loan demand or
when they meet our asset/liability management goals. Our borrowings have
historically consisted of advances from the FHLB and securities sold under
agreement to repurchase. See Notes 11 and 12 of the Notes to Consolidated
Financial Statements. Following our reorganization, we borrowed $725.0 million
from the FHLB for the purpose of implementing our capital utilization plan.
These advances carry an average cost of 5.60%, are fixed
28
rate for ten years and each have a call feature which can be exercised on the
fifth anniversary date. If the advances are called by the FHLB, they
automatically convert to a short term variable rate advance. These borrowings
were used because they allow us to lengthen our liability portfolio, which
improves our interest rate risk position, relative to the savings portfolio by
itself. In addition, callable advances typically carry a discounted rate because
of the call option which helps to minimize our cost of funds. At September 30,
1999 we had also utilized $100.0 million of the line-of-credit that we maintain
at the FHLB to fund retail loan production.
We may obtain advances from the Federal Home Loan Bank of Topeka upon the
security of certain of our mortgage loans and mortgage-related securities. Such
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At
September 30, 1999, we had $1.35 billion in Federal Home Loan Bank advances
outstanding.
The following table sets forth the maximum month-end balance and average
balance of Federal Home Loan Bank advances and securities sold under agreement
to repurchase for the periods indicated.
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
-------------- --------------- -----------
(In Thousands)
Maximum Balance:
Federal Home Loan Bank advances......................... $1,345,000 $500,000 $275,000
Securities sold under agreement to repurchase........... 175,000 175,000 175,000
Average Balance:
Federal Home Loan Bank advances......................... $ 789,510 $365,000 $ 24,167
Securities sold under agreement to repurchase........... 175,000 175,000 82,692
The following table sets forth certain information as to our borrowings at
the dates indicated.
September 30,
----------------------------------------------------
1999 1998 1997
------------- ---------------- -------------
(Dollars in Thousands)
Federal Home Loan Bank advances........................... $ 1,345,000 $500,000 $275,000
Securities sold under agreement to repurchase............. 175,000 175,000 175,000
----------- --------- ---------
Total borrowings..................................... $ 1,520,000 $675,000 $450,000
=========== ======== ========
Weighted average interest rate of Federal Home
Loan Bank advances....................................... 5.61% 5.72% 5.76%
Weighted average interest rate of securities sold
under agreement to repurchase............................ 5.73% 5.73% 5.73%
29
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 assets, or $130.8 million at
September 30, 1999, in the stock of, or unsecured loans to, service corporation
subsidiaries. We may invest an additional 1% of our assets in service
corporations where such additional funds are used for inner-city or community
development purposes.
At September 30, 1999, we had one subsidiary, Capitol Funds, Inc., which
has one line of credit loan outstanding for $14.0 million for the acquisition
and development of land for construction of single-family homes in Overland
Park, Kansas. This loan is described and included under "Lending Activities --
General." As of September 30, 1999, our total investment in this subsidiary was
$11.9 million. During fiscal 1999, Capitol Funds, Inc. reported net income of
$462,000 which consisted of interest funded from loan proceeds, net of income
taxes.
REGULATION
General
Capitol Federal Savings, as a federally chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Capitol Federal Savings also is
subject to regulation and examination by the FDIC, which insures the deposits of
Capitol Federal Savings to the maximum extent permitted by law, and requirements
established by the Federal Reserve Board. Federally chartered savings
institutions are required to file periodic reports with the Office of Thrift
Supervision and are subject to periodic examinations by the Office of Thrift
Supervision and the FDIC. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Such regulation and supervision primarily is intended
for the protection of depositors and not for the purpose of protecting
shareholders.
The Office of Thrift Supervision regularly examines Capitol Federal Savings
and prepares reports for the consideration of Capitol Federal Savings' board of
directors on any deficiencies that it may find in Capitol Federal Savings'
operations. The FDIC also has the authority to examine Capitol Federal Savings
in its role as the administrator of the Savings Association Insurance Fund.
Capitol Federal Savings' relationship with its depositors and borrowers also is
regulated to a great extent by both Federal and state laws, especially in such
matters as the ownership of savings accounts and the form and content of Capitol
Federal Savings' mortgage requirements. Any change in such regulations, whether
by the FDIC, the Office of Thrift Supervision or Congress, could have a material
adverse impact on Capitol Federal Savings Bank MHC, Capitol Federal Financial
and Capitol Federal Savings and their operations.
Capitol Federal Savings Bank MHC
Capitol Federal Savings Bank MHC is a federal mutual holding company within
the meaning of Section 10(o) of the Home Owners Loan Act. As such, Capitol
Federal Savings Bank MHC is
30
required to register with and be subject to Office of Thrift Supervision
examination and supervision as well as certain reporting requirements. In
addition, the Office of Thrift Supervision has enforcement authority over
Capitol Federal Savings Bank MHC and its non-savings institution subsidiaries,
if any. Among other things, this authority permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a
serious risk to the financial safety, soundness or stability of a subsidiary
savings bank.
A mutual holding company is permitted to, among other things:
o invest in the stock of a savings institution;
o acquire a mutual institution through the merger of such institution
into a savings institution subsidiary of such mutual holding company
or an interim savings institution of such mutual holding company;
o merge with or acquire another mutual holding company, one of whose
subsidiaries is a savings institution;
o acquire non-controlling amounts of the stock of savings institutions
and savings institution holding companies, subject to certain
restrictions;
o invest in a corporation the capital stock of which is available for
purchase by a savings institution under Federal law or under the law
of any state where the subsidiary savings institution or institutions
have their home offices;
o furnish or perform management services for a savings institution
subsidiary of such company;
o hold, manage or liquidate assets owned or acquired from a savings
institution subsidiary of such company;
o hold or manage properties used or occupied by a savings institution
subsidiary of such company; and
o act as a trustee under deed or trust.
In addition, a mutual holding company may engage in the activities of a
multiple savings and loan holding company which are permissible by statute and
Office of Thrift Supervision regulations and to the activities of bank holding
companies which the Federal Reserve Board has deemed permissible by regulation
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended,
subject to prior approval by the Office of Thrift Supervision.
31
Capitol Federal Financial
Pursuant to regulations of the Office of Thrift Supervision and the terms
of Capitol Federal Financial's federal stock charter, the purpose and powers of
Capitol Federal Financial are to pursue any or all of the lawful objectives of a
federal mutual holding company subsidiary and to exercise any of the powers
accorded to a mutual holding company subsidiary.
If Capitol Federal Savings fails the qualified thrift lender test, Capitol
Federal Financial must obtain the approval of the Office of Thrift Supervision
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure Capitol Federal Savings Bank MHC and Capitol Federal
Financial must register as, and will become subject to, the restrictions
applicable to bank holding companies. The activities authorized for a bank
holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "--Qualified Thrift
Lender Test."
Capitol Federal Savings Bank MHC and Capitol Federal Financial must obtain
approval from the Office of Thrift Supervision before acquiring control of any
other Savings Association Insurance Fund insured institution. Such acquisitions
are generally prohibited if they result in a multiple savings and loan holding
company controlling savings institutions in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.
Capitol Federal Savings
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Capitol Federal
Savings is required to file periodic reports with the Office of Thrift
Supervision and is subject to periodic examinations by the Office of Thrift
Supervision and the FDIC. The last regular Office of Thrift Supervision
examination of Capitol Federal Savings was as of June 30, 1998. Under agency
scheduling guidelines, it is likely that another examination will be initiated
in the fourth quarter of 1999. When these examinations are conducted by the
Office of Thrift Supervision and the FDIC, the examiners may require Capitol
Federal Savings to provide for higher general or specific loan loss reserves.
All savings institutions are subject to a semi-annual assessment, based upon the
savings institution's total assets, to fund the operations of the Office of
Thrift Supervision. Capitol Federal Savings' Office of Thrift Supervision
assessment for the fiscal year ended September 30, 1999 was $750,800.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including Capitol
Federal Savings, Capitol Federal Financial and Capitol Federal Savings Bank MHC.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or 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.
32
In addition, the investment, lending and branching authority of Capitol
Federal Savings is prescribed by federal laws and it is prohibited from engaging
in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Capitol Federal
Savings is in compliance with the noted restrictions.
Capitol Federal Savings' general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1999, Capitol Federal Savings'
lending limit under this restriction was $143.5 million. Capitol Federal Savings
is in compliance with the loans-to-one- borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
Capitol Federal Savings is a member of the Savings Association Insurance
Fund, which is administered by the FDIC. Deposits are insured up to the
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the Savings Association Insurance Fund or the
Bank Insurance Fund. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the Office of Thrift
Supervision an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
33
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
to Stockholders attached as Exhibit 13 to this Annual Report on Form 10-K for an
explanation on the special Savings Association Insurance Fund assessment amount
paid by Capitol Federal Savings in 1996.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions ranges from 0 to 27
basis points. However, Savings Association Insurance Fund insured institutions
are required to pay a Financing Corporation assessment, in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s, equal to
approximately 6 basis points for each $100 in domestic deposits, while Bank
Insurance Fund insured institutions pay an assessment equal to approximately 1
basis point for each $100 in domestic deposits. The Savings Association
Insurance Fund assessment is expected to be reduced to about 2 basis points no
later than January 1, 2000, when Bank Insurance Fund insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits will continue until the bonds mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings institutions, such as Capitol Federal Savings,
are required to maintain a minimum level of regulatory capital. The Office of
Thrift Supervision has established capital standards, including a tangible
capital requirement, a leverage ratio or core capital requirement and a
risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 1999, Capitol Federal Savings did not have any
intangible assets.
At September 30, 1999, Capitol Federal Savings had tangible capital of
$956.8 million, or 14.6% of adjusted total assets, which is approximately $858.2
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
34
The capital standards also require core capital equal to at least 3.0% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4.0% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3.0% ratio. At September 30, 1999,
Capitol Federal Savings had no intangibles which were subject to these tests.
At September 30, 1999, Capitol Federal Savings had core capital equal to
$956.8 million, or 14.6% of adjusted total assets, which is $693.9 million above
the minimum requirement of 3.0% in effect on that date.
The Office of Thrift Supervision also requires savings institutions to have
total capital of at least 8.0% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The Office of Thrift Supervision is also authorized to require a savings
institution to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities. At
September 30, 1999, Capitol Federal Savings had $4.4 million of general loan
loss reserves, which was less than 1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On September 30, 1999, Capitol Federal Savings had total risk-based capital
of $961.2 million and risk-weighted assets of $2.9 billion; or total capital of
33.9% of risk-weighted assets. This amount was $729.2 million above the 8.0%
requirement in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances required, to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until such plan is approved by the Office of Thrift Supervision may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
Office of Thrift Supervision is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.
35
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or has
Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" must be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to reclassify
an institution into a lower capital category and impose the restrictions
applicable to such category if the institution is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any of
these measures on Capitol Federal Savings may have a substantial adverse effect
on its operations and profitability.
Limitations on Dividends and Other Capital Distributions
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions, such as Capitol Federal Savings, that
before and after the proposed distribution remain well-capitalized, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Capitol Federal Savings may pay
dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution need only
submit written notice to the Office of Thrift Supervision 30 days prior to such
distribution. Savings institutions that do not, or would not meet their current
minimum capital requirements following a proposed capital distribution, however,
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "--
Regulatory Capital Requirements."
36
Liquidity
All savings institutions, including Capitol Federal Savings, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the average daily balance of its liquidity base during the
preceding calendar quarter or a percentage of the amount of its liquidity base
at the end of the preceding quarter. For a discussion of what Capitol Federal
Savings includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Commitments" in
the Annual Report to Stockholders attached as Exhibit 13 to this Annual Report
on Form 10-K. This liquid asset ratio requirement may vary from time to time
between 4% and 10% depending upon economic conditions and savings flows of all
savings institutions. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon institutions for violations of the liquid
asset ratio requirement. At September 30, 1999, Capitol Federal Savings was in
compliance with the requirement, with an overall liquid asset ratio of 62.5%.
Qualified Thrift Lender Test
All savings institutions, including Capitol Federal Savings, are required
to meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At September 30, 1999, Capitol Federal Savings met the test and
has always met the test since its effectiveness.
Any savings institution that fails to meet the qualified thrift lender test
must convert to a national bank charter, unless it requalifies as a qualified
thrift lender and thereafter remains a qualified thrift lender. If an
institution does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund insured until the FDIC permits it to
transfer to the Bank Insurance Fund. If such an institution has not yet
requalified or converted to a national bank, its new investments and activities
are limited to those permissible for both a savings institution and a national
bank, and it is limited to national bank branching rights in its home state. In
addition, the institution is immediately ineligible to receive any new Federal
Home Loan Bank borrowings and is subject to national bank limits for payment of
dividends. If such an institution has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding Federal Home Loan Bank borrowings, which may
result in prepayment penalties. If any institution that fails the qualified
thrift lender test is controlled by a holding company, then within one year
after the failure, the holding company must register as a bank holding company
and become subject to all restrictions on bank holding companies. See "- Capitol
Federal Financial."
37
Community Reinvestment Act
Under the Community Reinvestment Act, every FDIC-insured institution has a
continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with the examination of
Capitol Federal Savings, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by Capitol Federal Savings. An unsatisfactory rating may be used as the
basis for the denial of an application by the Office of Thrift Supervision. Due
to the heightened attention being given to the Community Reinvestment Act in the
past few years, Capitol Federal Savings may be required to devote additional
funds for investment and lending in our local communities. Capitol Federal
Savings was examined for Community Reinvestment Act compliance in March 8, 1999,
and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the institution
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of Capitol Federal Savings include Capitol
Federal Financial and any company which is under common control with Capitol
Federal Savings. In addition, a savings institution may not lend to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of most affiliates. The Office of Thrift Supervision has
the discretion to treat subsidiaries of savings institutions as affiliates on a
case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
Federal Securities Law
The stock of Capitol Federal Financial is registered with the SEC under the
Securities Exchange Act of 1934, as amended. Capitol Federal Financial is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Securities Exchange Act of 1934.
Capitol Federal Financial stock held by persons who are affiliates of
Capitol Federal Financial may not be resold without registration or unless sold
in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal stockholders.
38
If Capitol Federal Financial meets specified current public information
requirements, each affiliate of Capitol Federal Financial will be able to sell
in the public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts, primarily checking, NOW and Super NOW checking accounts. At September
30, 1999, Capitol Federal Savings was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the Office of Thrift Supervision. See "- Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require institutions to
exhaust other reasonable alternative sources of funds, including Federal Home
Loan Bank borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Capitol Federal Savings is a member of the Federal Home Loan Bank of
Topeka, which is one of 12 regional Federal Home Loan Banks, that administers
the home financing credit function of savings institutions. Each Federal Home
Loan Bank serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required to be fully secured by sufficient collateral as
determined by the Federal Home Loan Bank. In addition, all long-term advances
are required to provide funds for residential home financing.
As a member, Capitol Federal Savings is required to purchase and maintain
stock in the Federal Home Loan Bank of Topeka. For the year ended September 30,
1999, Capitol Federal Savings had an average outstanding balance of $49.3
million in Federal Home Loan Bank stock, which was in compliance with this
requirement. In past years, Capitol Federal Savings has received substantial
dividends on its Federal Home Loan Bank stock. Over the past three fiscal years
such dividends have averaged 7.16% and were 6.99% for fiscal year 1999.
Under federal law the Federal Home Loan Banks are required to provide funds
for the resolution of troubled savings institutions and to contribute to low-
and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in
39
the future. A reduction in value of Capitol Federal Savings' Federal Home Loan
Bank stock may result in a corresponding reduction in Capitol Federal Savings'
capital.
For the year ended September 30, 1999, dividends paid by the Federal Home
Loan Bank of Topeka to Capitol Federal Savings totaled $3.4 million, which was
an increase over the amount of dividends received in fiscal year 1998.
TAXATION
Federal Taxation
General. We are subject to federal income taxation in the same general
manner as other corporations with some exceptions discussed below. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to Capitol Federal Financial or Capitol Federal Savings. Our
federal income tax returns have been closed without audit as of the close of
business on December 15, 1999 by the IRS through its fiscal year ended September
30, 1996.
We file consolidated federal income tax return using the accrual method of
accounting. To the extent of Capitol Federal's accumulated earnings and profits,
any cash distributions made by Capitol Federal Financial to its stockholders is
considered to be taxable dividends and not as a non-taxable return of capital to
stockholders for federal and state tax purposes.
Bad Debt Reserves. Prior to the Small Business Job Protection Act, Capitol
Federal Savings was permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions could, within specified formula
limits, be deducted in arriving at taxable income. As a result of the Small
Business Job Protection Act, savings associations must now use the specific
chargeoff method in computing bad debt deductions beginning with their 1996
Federal tax return. In addition, federal legislation requires Capitol Federal
Savings to recapture, over a six year period, the excess of tax bad debt
reserves at September 30, 1997 over those established as of the base year
reserve balance as of September 30, 1989. The remaining amount of such reserve
subject to recapture as of September 30, 1999 for Capitol Federal Savings is
approximately $28 million. Capitol Federal Savings continues to utilize the
reserve method in determining its privilege tax obligations to the State of
Kansas.
Taxable Distributions and Recapture. Prior to the Small Business Job
Protection Act, bad debt reserves created prior to the year ended September 30,
1997, were subject to recapture into taxable income should Capitol Federal
Savings fail to meet certain thrift asset and definitional tests. New federal
legislation eliminated these thrift related recapture rules. However, under
current law, pre-1988 reserves remain subject to recapture should Capitol
Federal Savings make certain non-dividend distributions or cease to maintain a
thrift charter.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum
40
taxable income. The alternative minimum tax is payable to the extent such
alternative minimum taxable income is in excess of an exemption amount. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. Capitol Federal Savings has not
been subject to the alternative minimum tax, nor do we have any such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carryback net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years prior to August 6, 1997, the carryback period was three years and the
carryforward period was 15 years. At September 30, 1999, Capitol Federal Savings
had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Capitol Federal Financial may
eliminate from its income dividends received from Capitol Federal Savings as a
wholly-owned subsidiary of Capitol Federal Financial. The corporate
dividends-received deduction is 100% or 80%, in the case of dividends received
from corporations with which a corporate recipient does not file a consolidated
tax return, depending on the level of stock ownership of the payor of the
dividend. Corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct 70% of dividends received or accrued on their
behalf.
State Taxation
Capitol Federal Savings files Kansas privilege tax returns. For Kansas
privilege tax purposes, for taxable years beginning after 1997, the minimum tax
rate is 4.5% of earnings, which is calculated based on federal taxable income,
subject to certain adjustments. The earnings of Capitol Federal Financial may be
combined with Capitol Federal Savings for purposes of the Kansas privilege tax.
If combined Kansas privilege tax returns are not filed, Capitol Federal
Financial will file Kansas income tax returns with other non-thrift members of
the affiliated group.
Competition
We face strong competition in originating real estate and other loans and
in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our branch office system.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions located in the same community, as well as
mutual funds and other alternative investments. We compete for these deposits by
offering superior service and a variety of deposit accounts at competitive
rates.
41
Employees
At September 30, 1999, we had a total of 782 employees, including 143
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Executive Officers
John C. Dicus. Age 66 years. Mr. Dicus is Chairman of the Board of
Directors and Chief Executive Officer of Capitol Federal Savings and Capitol
Federal Financial. He has served in such capacities for Capitol Federal Savings
since 1989 and with Capitol Federal Financial since its inception in March 1999.
He has served Capitol Federal Savings in various capacities since 1959. He also
served as President of Capitol Federal Savings from 1969 until 1996.
John B. Dicus. Age 38 years. Mr. Dicus is President and Chief Operating
Officer of Capitol Federal Savings and Capitol Federal Financial. He has served
in such capacities for Capitol Federal Savings since 1996 and for Capitol
Federal Financial since its inception in March 1999. Prior to that, he served as
the Executive Vice President of Corporate Services for Capitol Federal Savings
for four years. He has been with Capitol Federal Savings in various other
positions since 1985. Mr. John B. Dicus is the son of Mr. John C. Dicus.
Stanley F. Mick. Age 60 years. Mr. Mick has served as Executive Vice
President and Chief Lending Officer of Capitol Federal Savings since 1991. Since
1994, he has also served as President of Capitol Funds Inc., a subsidiary of
Capitol Federal Savings.
Neil F.M. McKay. Age 58 years. Mr. McKay serves as Executive Vice
President, Chief Financial Officer and Treasurer of Capitol Federal Savings and
Capitol Federal Financial. He has served in such positions with Capitol Federal
Savings since 1994 and Capitol Federal Financial since its inception in March
1999. Prior to that, he served as the Chief Operating Officer and Chief
Financial Officer of another savings institution for five years.
Larry K. Brubaker. Age 52 years. Mr. Brubaker has been employed with
Capitol Federal Savings since 1971 and currently serves as Executive Vice
President for Corporate Services of Capitol Federal Savings, a position he has
held since 1997. Prior to that, he was employed by Capitol Federal Savings as
the Eastern Region Manager for seven years.
R. Joe Aleshire. Age 52 years. Mr. Aleshire has been employed with Capitol
Federal Savings since 1973 and currently serves as Executive Vice President for
Retail Operations of Capitol Federal Savings, a position he has held since 1997.
Prior to that, he was employed by Capitol Federal Savings as the Wichita Area
Manager for 17 years.
Kent G. Townsend. Age 38 years. Mr. Townsend serves as Senior Vice
President and Controller of Capitol Federal Financial, a position he has held
since March 1999. He has also served in similar positions with Capitol Federal
Savings since September 1995. Prior to that, he served as the Financial Planning
and Analysis Officer with Capitol Federal Savings for three years.
42
Item 2. Properties
At September 30, 1999, we had 25 full service offices and six limited
service offices. Capitol Federal Savings owns the office building in which its
home office and executive offices are located. At September 30, 1999, Capitol
Federal Savings owned 22 of its other branch offices and the remaining eight
branch offices, including six supermarket locations and a warehouse were leased.
As of September 30, 1999, the net book value of Capitol Federal Savings'
investment in premises, equipment and leaseholds, excluding computer equipment,
was approximately $21.1 million.
Capitol Federal Savings believes that our current facilities are adequate
to meet the present and immediately foreseeable needs of Capitol Federal Savings
and Capitol Federal Financial.
Capitol Federal Savings maintains an on-line data base of depositor and
borrower customer information. The net book value of the data processing and
computer equipment utilized by Capitol Federal Savings at September 30, 1999 was
$2.9 million.
Item 3. Legal Proceedings
Capitol Federal Financial is involved as plaintiff or defendant in various
legal actions arising in the normal course of business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with our counsel representing us in
the proceedings, that the resolution of these proceedings should not have a
material effect on our results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The section entitled "Shareholder Information - Market" of the attached
Annual Report to Stockholders for year ended September 30, 1999 is incorporated
herein by reference.
Item 6. Selected Financial Data
The section entitled "Selected Consolidated Financial Information" of the
attached Annual Report to Stockholders for year ended September 30, 1999 is
incorporated herein by reference.
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the attached Annual Report to
Stockholders for year ended September 30, 1999 is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The section entitled "Management Discussion of Financial Condition and
Results of Operations - Asset/Liability Management" of the attached Annual
Report to Stockholders for year ended September 30, 1999 is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
The section entitled "Consolidated Financial Statements" of the attached
Annual Report to Stockholders for year ended September 30, 1999 is incorporated
herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of Capitol Federal Financial is
incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Shareholders to be held in January 2000, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Executive Officers
Information concerning executive officers of Capitol Federal Financial is
set forth under the caption "Executive Officers of Capitol Federal Financial"
contained in Part I of this Form 10-K.
44
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires Capitol Federal Financial's
directors and executive officers, and persons who own more than 10% of a
registered class of Capitol Federal Financial's equity securities, to file with
the SEC reports of ownership and reports of changes in ownership of common stock
and other equity securities of Capitol Federal Financial. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish
Capitol Federal Financial with copies of all Section 16(a) forms they file.
To Capitol Federal Financial's knowledge, based solely on a review of the
copies of such reports furnished to Capitol Federal Financial and written
representations that no other reports were required during the fiscal year ended
September 30, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive proxy statement for the Annual Meeting of
Shareholders to be held in January 2000, except for information contained under
the heading "Compensation Committee Report on Executive Compensation" and
"Shareholder Return Performance Presentation", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held in January 2000,
except for information contained under the heading "Compensation Committee
Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Shareholders to be held in January 2000, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are included under Part II, Item 8 of this
Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheet as of September 30, 1999 and 1998.
3. Consolidated Statements of Income for the Years ended September 30, 1999,
1998 and 1997.
4. Consolidated Statements of Equity for the Years ended September 30, 1999,
1998 and 1997.
5. Consolidated Statements of Cash Flows for the Years ended September 30,
1999, 1998 and 1997.
6. Notes to Consolidated Financial Statements for the Years ended September
30, 1999, 1998 and 1997.
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
(3) Exhibits:
See Index to Exhibits.
(b) Reports on Form 8-K:
1. No reports on Form 8-K have been filed for the three months ended
September 30, 1999.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITOL FEDERAL FINANCIAL
Date: December 29, 1999 By: /s/ John C. Dicus
----------------- ---------------------------------------------
John C. Dicus
Chairman of the Board and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John C. Dicus By: /s/ Kent G. Townsend
------------------------------------------- ----------------------------------------
John C. Dicus, Chairman of Kent G. Townsend, Senior Vice
the Board and Chief Executive Officer President and Controller
(Principal Executive Officer) (Principal Accounting Officer)
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ John B. Dicus By: /s/ B. B. Andersen
----------------------------------------- ---------------------------------------
John B. Dicus, President, Chief B. B. Andersen, Director
Operating Officer and Director
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ Neil F. M. McKay By: /s/ Robert B. Maupin
----------------------------------------- ---------------------------------------
Neil F.M. McKay, Executive Vice Robert B. Maupin, Director
President and Chief Financial Officer
(Principal Financial Officer)
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ Frederick P. Reynolds By: /s/ Marilyn S. Ward
----------------------------------------- ---------------------------------------
Frederick P. Reynolds, Director Marilyn S. Ward, Director
Date: December 29, 1999 Date: December 29, 1999
----------------- -----------------
By: /s/ Carl W. Quarnstrom
-----------------------------------------
Carl W. Quarnstrom, Director
Date: December 29, 1999
-----------------
INDEX TO EXHIBITS
Exhibit
Number Document
2.0 *Plan of Reorganization and Stock Issuance Plan
3(i) *Federal Stock Charter of Capitol Federal Financial
3(ii) *Bylaws of Capitol Federal Financial
4 *Form of Stock Certificate of Capitol Federal Financial
10 Registrant's Employee Stock Ownership Plan
11 Statement re: computation of per share earnings
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule (electronic filing only)
- --------------
*Incorporated by reference from Capitol Federal Financial's Registration
Statement on Form S-1 (File No. 333-68363) filed on February 11, 1999, as
amended and declared effective on the same date.