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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, amo